Reported net profit is in line with expectations; high dividend yield is attractive and maintains "buy"
Zhejiang Shanghai, Hangzhou and Ningbo announced that the net profit of 1H21 is 2.514 billion yuan (an increase of 865% over the same period last year; 27% higher than 1H19), which is in line with our expectations (2.567 billion yuan). Toll roads and securities businesses have performed well. Due to the low base caused by the free access policy of 1H20, the profit of toll road 1H21 became regular year-on-year.
As the stock market rebounded, 1H21 profits in the securities business rose 37 per cent year-on-year. We raised our annual net profit forecast for 2021-22-23 by 0.7% to RMB 4.6 billion / 5.2 billion / 5.5 billion to reflect our forecast for strong traffic growth and to take into account the impact of the company's acquisition of new road products. We raised the target price by 0.1% to HK $8.84 based on segment valuation. We expect the 2021-22-23 annual dividend yield to be attractive, reaching 8.4, 9.7, 10.2% (historical average: 5.7%). Maintain "buy".
Strong growth of vehicle flow in Zhejiang Province; Stock Market picks up
Zhejiang Shanghai-Hangzhou-Ningbo 1H21 toll road / securities business accounts for 61x38% of revenue and profit share of 58prime 29%. Driven by a high domestic manufacturing boom and a recovery in Zhejiang exports, profits of the toll road 1H21 division are up 20 per cent compared with 1H19. 1H21 toll revenue of Shanghai-Hangzhou-Ningbo Expressway / Shanghai-Hangzhou-Ningbo Expressway / Shanghai-Hangzhou-Ningbo Expressway increased by 5.6% 3.4% compared with 1H19; toll revenue of the company's other toll roads (except the newly acquired Longlilong and Zha Jiasu Expressway) increased by about 15%. At the same time, the company acquired shares in Hangning Expressway and long Lilong Expressway in January 2021 and Chajasu Expressway in May, which boosted its 1H21 net profit. The net profit of 1H21 in securities business increased 37% year-on-year and 89% higher than 1H19, mainly due to the increase in A-share trading volume.
With the expansion of the main business of road property acquisition, the asset-liability ratio has increased.
The company's asset-liability ratio rose from 72.6% at the end of December 2020 to 74.5% at the end of June 2021, mainly due to the acquisition of three toll roads. In a low-interest market environment, the company issued 230 million euros of zero-coupon convertible bonds in January and $470 million in July at 1.638% interest.
We expect the company's comprehensive lending rate to fall as a result.
Raise the target price to HK $8.84 based on segment valuation method
The target price of HK $8.84 is a 30% discount to the total intrinsic value of Zhejiang merchants' toll roads, securities and banking businesses in Shanghai, Hangzhou and Ningbo. Our valuation of the toll road business is based on the DCF model (assuming a WACC of 7.58 per cent) and the valuation of the securities / banking business is based on 7.0Compact 6.9 times the 2021 forecast PE (equivalent to the respective industry average).
Risk hints: downside risks: 1) the growth rate of traffic flow is lower than we expected; 2) the trading volume of China's A-share market is lower than we expected; and 3) unexpected toll preferential policies.