Key points of investment

Incident: Wantong Expressway released its report for the first quarter of 2023: in the first quarter of 2023, the company achieved revenue of 1,145 million yuan, an increase of 18.51% over the previous year; the net profit of Gumo was 459 million yuan, an increase of 13.15% over the previous year; the net profit of Gumo after deduction was 499 million yuan, an increase of 14.89% over the previous year; the basic EPS for the first quarter of 2023 was 0.277 yuan/share.

Comment:

Focusing on highway operation and management, the economic benefits of the road network are highlighted: the Wantong Expressway is the only listed highway company in Anhui Province. As of the end of 2022, it operated 10 toll road projects, with an operating highway mileage of about 609 kilometers. The road sections it belongs to are the main transit routes that cross the Anhui region, with superior geographical location and obvious location advantages. In the first quarter of 2023, toll roads achieved toll revenue of 1,112 billion yuan, an increase of 13.70% over the previous year.

The effects of the Hening Expressway renovation and expansion continue to be realized: the Hening Expressway is the core section of the company. The renovation and expansion ended and opened to traffic at the end of 2019. Traffic traffic is still growing rapidly, and traffic growth was favorable after the opening of the entire Chuhe Bridge line at the end of June 2022. In the first quarter of 2023, Hening Expressway achieved toll revenue of 361 million yuan, an increase of 18.19% over the previous year.

The opening of the guillotine road brought incremental traffic: the total length of the Ning-Xuanhang Expressway is 117 kilometers, divided into three sections: the Xuancheng section in Anhui (101.78 km), the Gaochun section in Jiangsu (19.4 km), and the Lin'an section in Zhejiang (24 km). It is one of the company's important road products. However, before September 2022, only the Anhui section was open to traffic. The Anhui section of the Ningxuan Hangzhou Expressway was first completed and opened to traffic on December 30, 2017, the Ningxuan section in Jiangsu was completed and opened to traffic on September 10, 2022, and the Ningqian section of Zhejiang was completed and completed on December 30 of the same year. Traffic and efficiency of the Lixuan section under the company's management increased steadily. 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.

In the first quarter of 2023, the Ning Xuanhang Expressway achieved toll revenue of 60.589 million yuan, an increase of 146.19% over the previous year.

The Xuanguang Expressway renovation and expansion PPP project was successfully implemented to help the company's sustainable development: The Xuanguang Expressway is one of the important road sections owned by the company, but the remaining toll period is short, and renovation and expansion is needed to ensure the company's sustainable development. The total length of the Xuanguang Expressway renovation and expansion project is 91.2 kilometers. Of these, six new lanes will be built on the Guangde North Line, and the rest of the road will be “four to eight” remodeled and expanded. It is expected to be completed in 2024. After completion of the project, the traffic capacity and service level of the Xuanguang Expressway will be increased, and the toll period will be extended. It is expected that the toll period will be re-approved for 30 years.

It is proposed to increase A-shares and pay cash to the majority shareholders to acquire Liuwu Expressway, which is expected to achieve the company's sustainable development and profit growth: On April 17, 2023, the company announced that it intends to issue A-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 is an important part of the national highway network G42 Hurong Expressway. 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.

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. Anhui Province has benefited from the integration of the Yangtze River Delta region and the development of emerging industries. The GDP growth rate is fast. The industrial development process will spawn traffic, especially truck traffic, which is expected to support the company's performance. The company increased its dividend ratio to 60% in 2021, and the dividend rate and dividend ratio are among the highest in the high-speed sector; if it successfully acquires Liuwu Expressway, the company's dividend rate from 2023 to 2025 will increase to 70%.

Excluding the acquisition of Liuwu High Speed, we expect the company to achieve net profit of 1,794 billion yuan, 1,980 million yuan, and 2.194 billion yuan from 2023 to 2025, with EPS of 1.08 yuan, 1.19 yuan, and 1.32 yuan, corresponding to the closing price of 9.61 yuan on April 27, and PE valuations of 8.9X, 8.0X, 7.3X. Assuming that the company's dividend ratio remains 60%, the 2023-2025 A dividend rates are 6.75%, 7.54%, and 8.26%, respectively, and the H share dividend rates are 9.12%, 10.06%, and 11.15%, respectively. Maintain a “buy” rating.

Risk warning: regional epidemic disturbances, falling traffic due to economic downturn, changes in charging policies, reinvestment risks, etc.