Key points of investment
Wantong Expressway plans to increase A-shares to the majority shareholders and pay cash for acquisition. The transaction consideration will not exceed 4 billion yuan: On April 17, 2023, the company announced that it intends to issue A-share shares to the majority shareholder Anhui Traffic Control and pay cash to purchase 100% of its shares in Anhui Liuwu Expressway Co., Ltd. and raise supporting capital. The estimated price of the underlying asset is not expected to exceed 4 billion yuan. Of these, 85% of the transaction consideration will be paid by the listed company by issuing shares, and 15% of the transaction consideration will be paid in cash by the listed company. Assuming the transaction consideration of 4 billion yuan, the PE of this transaction is about 15.87X and the PB is about 1.55X. Based on DCF calculation, the intrinsic value of the subject of this transaction is about 47-6 billion yuan.
The Liuwu Expressway has obvious location advantages, excellent profitability, and a long remaining period. In the long run, the acquisition is expected to achieve the company's sustainable development and profit growth: the Liuwu Expressway is an important part of the G42 Shanghai-Rong Expressway in the national highway network. The total toll mileage is 92.7 kilometers, and the remaining toll period is about 16.75 years. In 2021, Liuwu Expressway achieved toll revenue of 577 million yuan, single-kilometer toll revenue of 6.22 million yuan, and net profit of 252 million yuan. Profitability is excellent. If this acquisition is completed, it is expected to increase the company's performance in the long run.
The entire Ning-Xuan-Hangzhou Expressway was opened to traffic, and this year's traffic is expected to exceed expectations: the Ningxuan section in Jiangsu was completed and opened to traffic on September 10, 2022, and the Ningqian section of Zhejiang was completed and opened to traffic on December 30 of the same year, and the entire line was completed. Before the full line was completed, the daily traffic on the Anhui section was only 4,000 cars. After the completion of the entire line, daily traffic had doubled to 8,700 vehicles, with daily traffic peaking at about 18,000 during the 2023 Spring Festival travel season. Considering that early 2023 was still affected by the epidemic, traffic is expected to continue to grow rapidly throughout this year.
In response to this transaction, the dividend rate was increased to 70%, and shareholders were positively rewarded: if the transaction was implemented, the profit distributed by the company in the form of cash each year from 2023 to 2025 was no less than 70% of the net profit of the parent company owner in the consolidated statement achieved that year.
Investment strategy: The Wan-Tongtong Expressway is connected to many interprovincial highways in Anhui Province. The core road production is highly profitable, and the main road industry is continuously strengthened through renovation, expansion and acquisition. Regarding the original road production, we raised our profit forecast. It is estimated that the company can achieve net profit of 1,797 billion yuan, 1,904 million yuan, 2,083 billion yuan from 2023 to 2025, and EPS of 1.08 yuan, 1.15 yuan, and 1.26 yuan. Corresponding to the closing price on March 31 before the suspension of trading, PE valuations are 8.2X, 7.8X, 7.1X; assuming the company's dividend ratio remains 60%, 2023-2025 A dividend rates are 7.28%, 7.71%, 8.44%, respectively. 9.40%, 9.95%, 10.89%.
Assuming that the acquisition is successfully completed, the transaction consideration is 4 billion yuan, with a fixed increase of 473 million shares. The company is expected to achieve net profit of 2,094 billion yuan, 2,245 million yuan, and EPS of 0.98 yuan, 1.05 yuan, and 1.15 yuan from 2023 to 2025; corresponding to the closing price on March 31 before the suspension of trading (considering the purchase consideration of 4 billion yuan), PE valuation was 8.5X, 8.0X, 7.3X; after the transaction was implemented, the company's dividend rate increased to 70% from 2023 to 2025. The dividend ratios for A were 8.23%, 8.80%, and 9.61%, respectively, and the dividend rates for H shares were 9.94%, 10.63%, and 11.6%, respectively. In summary, we upgraded our rating to “buy”.
Risk warning: local regional epidemic disturbances, falling traffic due to economic downturn, changes in charging policies, failure of the shareholders' meeting of this transaction, etc.