Core business recovered quickly, profits fell year-on-year due to one-time earnings Shenzhen International Holdings (Shenzhen International) 1H21 net profit fell 44.0 per cent year-on-year to HK $961 million, while revenue rose 99.8 per cent to HK $7.062 billion. The decline in net profit is mainly affected by the one-time income related to the transfer of land use rights in the third phase of the 1H20 Qianhai project (RMB 3.551 billion). However, Shenzhen International's core business recorded strong growth in 1H21. We believe that the transformation and business upgrading of the logistics park (projects such as Qianhai, Meilinguan and South China Logistics Park) will continue to drive steady profit growth. Taking into account the recent recurrence of the epidemic and the progress of the transformation and upgrading of the logistics park, we will adjust the 2023 net profit forecast of 2021Universe 2022max by 22% to HK $3.655 billion / 4.25 billion / 3.992 billion, and reduce our target price based on the SOTP valuation method by 4% to HK $17.40. Maintain "buy".

Turnaround in toll roads and logistics

With the decline of the impact of the epidemic in the first half of the year, Shenzhen's international core business rebounded rapidly. Revenue from the toll road sector reached HK $4.838 billion, an increase of 154% over the same period last year, mainly driven by the free highway policy for part of the same period last year, the launch of the Shenzhen Outer Ring Project and the development of environmental protection business at the end of 2020. The profit attributable to Shenzhen International has increased from HK $59 million to HK $749 million. Logistics revenue and profit were HK $2.224 billion (up 37 per cent year-on-year) and HK $1.23 billion (up 766 per cent year on year). In the logistics sector, the business profit of the logistics park rose 296 per cent year-on-year to HK $316 million, mainly due to a low base affected by the rent waiver scheme in the same period last year and strong demand for logistics facilities in the first half of this year. In addition, after the delivery of Qianhai Phase I residential project, the transformation and upgrading business of the Logistics Park recorded a profit of HK $854 million (compared with zero in the same period last year).

The growth rate of net profit was dragged down by one-off income in the same period last year, but there is potential in the future. Shenzhen International's first-half net profit fell by 44.0% compared with the same period last year, mainly because the transfer of land use rights in the third phase of Qianhai project recorded an one-time profit of 3.551 billion yuan in the same period last year. 1H21 Shenzhen International's share of Shenzhen Airlines' loss was HK $811 million, down 34% from a year earlier, but still affected the company's net profit performance. Looking to the future, the Ping-Hunan integrated logistics hub project and the transformation and business upgrading of the logistics park (Qianhai, Meilinguan, South China Logistics Park project) may drive steady profit growth. We believe that Shenzhen International has rich land resources and potential profit growth.

Risk tips: 1) economic downturn; 2) the impact of the epidemic is more serious than we expected; 3) the transformation and business upgrading of the logistics park are not as good as we expected.