Beijing Capital International Airport (BJCHF on Pink Sheets), operates China's principal airport for passenger traffic.  In 2005, Beijing Capital handled a total of 41 million passengers, up from 34.9 million the previous year.  The current price is $.59 U.S. per share.

Shares of BJCHF trade in North America on the pink sheets, and are listed on the Hong Kong Stock exchange.  The firm became a public company in 2000.  Beijing is majority owned by the government of China (65%), with about 7% held by Aeroports de Paris.  The remaining shares are in public hands.

There are 3.86 billion shares outstanding.  In 2005, revenues were roughly $387 million U.S. and EBITDA was roughly $231 million U.S, a margin of 59.7%. With approximately $36 million of long term debts on December 31st, 2005, the EV was about $2.3 billion U.S. 

BALANCE SHEET & ACCOUNTING CONSIDERATIONS.   Beijing has a very strong balance sheet, and there are no concerning accounting issues that I see. Despite a 17% increase in traffic, one should note that 2005 operating results indicate a decline in revenues of 1%, and a decline in expenses of 12%.  This is due to Beijing's decision to franchise out its food and concession business.  The revenues and expense disappear, and are replaced by franchise fees.  While the fees are lower, they are also net of operating expenses.

The statutory tax rate for 2005 was 33%.

COMPANY TRANSFORMING EXPANSION UNDERWAY.  The Beijing airport is literally busting at the seams.  Airlines wanting to add new routes into this airport must presently accept landing slots between the hours of midnight to 2 am.  Daily traffic is completely sold out.  Demand is so brisk, that traffic is anticipated to climb to 1200 flights per day for 2006, up from 1000 flights per day in 2005.

http://www.chinadaily.com.cn/english/doc/2005-11/03/content_490426.htm

To handle future growth, a third terminal and runway are presently being built. This is due for completion in 2007.  At a cost of $3 billion U.S, completion should enhance revenues by more than 100% upon full utilization.  At the end of 2005, more than $700 million U.S. had already been spent on this project.  A $625 million loan with a 25 year term was agreed to in late 2005.  This represents about 20% of the total estimated project cost.

http://www.airports.org/aci/aci/file/ADN%20-%20Momberger/ACI-ADN%20Dec%202005.pdf

At present, the existing terminals at Beijing have a total of 44 gates (terminal two was recently expanded).  The new terminal 3 will add an additional 66 gates and more than 4.2 million square feet of terminal space.

For the balance of 2006-2007, remaining capital expenditures on terminal 3 are budgeted to exceed $2.3 billion U.S.  This effectively doubles the size of the firm, based upon assets.  The project will increase debts by an estimated $2.15 billion in the short term.   However, full utilization of the new terminal may ultimately add far more than $300 million of yearly EBITDA on a go forward basis.  There will be significantly more premium retail space to be leased out, and demand for the space is anticipated to be high. Airlines will have additional flexibility and will be able to land at more favorable times.  Beijing will be Asia's largest airport once the expansion is complete (at least for now).  With the ability to handle up to 75 million passengers per year, capacity should be adequate until about 2015.

FINANCIAL FORECAST.   2005 EV/EBITDA was 10X.  Beijing is guiding analysts towards 20% growth rates in traffic for 2006.  So far in 2006, traffic is growing exactly as forecast. 

In 2006, I estimate that EBITDA will increase to $280 million.  I also estimate that $1.05 billion of debts will be added towards the expansion program.  This brings the EV to $3.4 billion (with capitalized interest). 

In 2007, the capital expansion program at Beijing airport should be complete. EBITDA may rise to $336 million U.S. A remaining $1.1 billion of debts will be added , bringing the EV up to $4.5 billion.

In 2008 (the Olympic year), the additional revenue from the terminal and runway will show up squarely on the top and bottom lines.  I forecast EBITDA of more than $504 million, and EV declining to $4.3 billion.

DIVIDENDS.  Beijing Capital has traditionally increased its dividends commensurate with earnings growth.  For fiscal 2005, the dividend was about $.014 per share.  The massive capex program should slow the rate of dividend growth somewhat until 2008.

RISKS.  China is not a first world country.  There are great risks in owning any shares of public companies in developing nations.  Accordingly, one should make investment decisions in emerging markets with eyes wide open; to the point where physicians may misdiagnose one with Graves eye disorder.

In addition to the pertinent emerging markets investment risks, there is currency risk.  China has long been criticized for a perceived currency undervaluation.  An appreciating Chinese yuan should have very positive implications for an investment in Beijing Capital airport.  However, the collective thinking does not always prove to be right.  A depreciating yuan would have negative implications for investments in Beijing Capital.

CONCLUSION.    The forecast growth rate of Beijing Capital is high, and the EV/EBITDA is considerably lower than the expected growth rate.  Over time, I agree with the concensus view regarding an appreciating Chinese yuan.  This, if correct, would greatly add to the appeal of an investment in BJCHF.

I consider the balance sheet to be strong, and corporate governance to be good.  Unlike much of the third world, China does not have an overtly kleptocratic government.  Experience has taught me that officers and directors of prestigious, state sponsored public companies in China are also typically not kleptocrats.  Generous stock option packages are not common with state controlled companies, and salaries are modest in relation to U.S and European standards.  When profits don't get doled out in in the boardroom, more remains for the common shareholder.  It appears that larger Chinese companies are taking the high road in terms of ethical conduct.  Beijing Capital Airport compares very well to the other public airports that I have mentioned in previous posts, and many U.S. companies could learn a thing or two from Chinese state sponsored firms..

Within the next 36 months, Beijing's EBITDA may grow by over 118%. While total capital spending may exceed $2.3 billion U.S within the next 18 months, this should be easily handled by the estimated $1.12 billion U.S  of EBITDA to be earned through 2008..  Completion of the terminal and runway 3 will represent the end of a multiyear capital spending program. Starting in 2008, debt reduction could be material.

Beijing Capital should represent a core long term investment for those who wish to participate in the growth of China. While shares of BJCHF are more richly priced than other public airports, the forecast growth rate of this company is far higher than any of the airports that I have covered.

Those who are somewhat more risk averse may wish to consider owning Aeroports de Paris, which has an effective 7% interest in BJCHF. 

Full financial reports are available on the company website.  The site is available in English.

 http://www.bcia.com.cn/en/investor_page.html

Additional information on the present terminal operations and the new terminal #3 may be found here.

http://www.answers.com/main/ntquery;jsessionid=3sk36e9f0lf0?tname=beijing-capital-international-airport&sbid=lc07a