This "Refinancing the Western Harbour Crossing, Hong Kong" case study seeks to identify whether Western Harbour Crossing, Hong Kong is a desirable portfolio investment for GW Energy and Infrastructure Holdings Limited (GW).
Mary Ho and Frederik Pretorius
Harvard Business Review (HKU648-PDF-ENG)
April 17, 2007
Case questions answered:
- Construct a financial model for the Western Harbour Crossing venture and estimate the value of the venture as a going concern using multiples scenarios.
- Estimate the debt capacity of the WHC and recommend a loan structure for the potential purchase.
- Comment on the nature and desirability of the WHC as a portfolio investment. Sophie was aware that the valuation of an infrastructure project that had been in full operation was quite different from that of a green-field project. Sophie was concerned that the sunk costs associated with the WHC venture could seriously weaken the attractiveness of the project to the GW Group.
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Case answers for Refinancing the Western Harbour Crossing, Hong Kong
This case solution includes an Excel file with calculations.
Executive Summary – Refinancing the Western Harbour Crossing, Hong Kong
GW Energy and Infrastructure Holdings Limited (GW) is a company based in Stuttgart, Germany, that develops and operates international infrastructure projects. Its current regional investment focus is on Europe and Australia, where it operates over 700 kilometers of toll roads, bridges, and tunnels. It also has an energy business unit, which includes water and electricity supply. GW needs to diversify and has the financial capacity to do so. For example, it has had revenues of HKD 980 bn. and assets of HKD 2,920 bn. in 2005. However, the investing in the Western Harbour Crossing is unconventional for GW as it is a brownfield project, rather than a green-field one, which the company has been known to invest in.
To diversify its portfolio, even more, GW announced a new strategy stating that the future focus should include more transportation projects in the Asia-Pacific region (APAC). Currently, three key issues must be addressed to determine whether the WHC is the best investment opportunity. This includes answering the following three questions:
- What is the value of the venture (inclusive of a financial model with multiple scenarios)?
- What is the debt capacity of the Western Harbour Crossing, and an ideal loan structure?
- How desirable is the WHC as a portfolio investment?
In this report, we analyze this project’s infrastructure investment opportunity, the Western Harbour Crossing, for GW. Our evaluation will include analyzing the WHC project from a financial perspective taking into account additional scenarios and key performance indicators (KPIs).
Finally, we will provide our recommendation on whether GW should invest in the WHC project at present.
About Western Harbour Crossing (WHC)
There are three tunnels, Western Harbour Crossing (WHC), Cross Harbour Tunnel (CHT), and Eastern Harbour Crossing (EHC), which connect Mainland-Hong Kong to Hong Kong Island (Lantau Island) via Victoria Harbour. The WHC is the youngest of the three tunnels, having started its operation in 1997 after 45 months of construction, which began in 1993.
Like the other tunnels, the WHC provides a connection from West Kowloon via the expressway to the international airport of Hong Kong. Therefore, the whole Western Harbour Crossing project was not planned in isolation, but rather as a part of the new airport project which took place n the 1990s.
Besides the airport connection, the WHC should provide an alternative to the other two tunnels to ease overall traffic. With two kilometers of length and three lanes in each direction, the WHC has the largest capacity of all three tunnels.
The Western Harbour Crossing is operated by an SPV that has some special characteristics to keep in mind when evaluating it as a potential investment opportunity. Some of the key characteristics that stand out include that at year 30 concession stating that the current owner must transfer the company to the government at no cost, the inflated toll prices, while other tunnels have much lower costs or are, and payments into the toll stability fund, which must be deducted from.
The current challenge the current shareholders face is that compared to the CHT and EHC, the Western Harbour Crossing has by far the lowest daily utilization, measured by daily vehicle traffic. This is mainly caused by the different tolls charged. The CHT and EHC can charge far lower tolls because they were built on another cost basis and planned profitability, respectively.
Caused by having the highest tolls but not the best location, the Western Harbour Crossing ran into a bad financial performance since it started its operation in 1997. Additional initiatives have been taken to help improve profits, such as the creation of marketing space. However, they have failed to change the current state.
As of now, 2006, the operator entity is profitable, but the project currently carries a negative IRR of -32.48% due to the bad historical performance since the start of operations.
I. Assessment of Western Harbour Crossing as a portfolio investment for GW
In general, the WHC fulfills the GW qualitative criteria given to Paul Klein’s analysis team; it is a toll road and a tunnel investment opportunity Hong Kong, one of China’s largest cities. Since it was only an expectation but not a requirement of the management to come up with a green-field project, the WHC as a brown-field project could be an option.
Without considering the financial details, the Western Harbour Crossing’s investment opportunity is assessed in the following from a purely strategic perspective. Financially validity will be proven in Part II of this report.
Key Stakeholder analysis:
Government: From the Government’s perspective, the project must be transferred to them in 2023 free of charge. The current operator must solve the financial problems that the project may bring before making the transfer since the problems arising from the project could create tension for the government. Furthermore, the Government currently operates the Cross Harbour Tunnel.
The Bank: Regarding the Bank tranches/creditors, debt holders must be paid, either by the operator or by the government. Debt financing currently represents 68% of the total project budget. HSBC is the advisor and the company responsible for organizing the financing of the private consortium. HSBC decided to finance the debt through an agreement between 22 different bank entities.
Shareholders: The ownership of the project is divided between different shareholders. The Western Harbour Crossing is…