Key points of investment

“One master and three wings” went hand in hand, and revenue and profit grew rapidly. The company is a listed highway enterprise controlled by the Hunan Provincial State-owned Assets Administration Commission. Its business structure is “one main and three wings”. The first mainly operates four expressways: Tanqian, Changyong, Changtan, and Xuhuai. “Three Wings” is an auxiliary business including supply chain, environmental protection, small loans, etc. The company's 2016 revenue was 9.5 billion yuan and net profit was 8.3 billion yuan, of which the company's main business revenue was 2.3 billion yuan, net profit was about 660 million yuan. The growth rate of net profit attributable to the company in 2015/2016/2017 Q1 was 38%/45%/44%, and the revenue growth rate was 50%/46%/75%. “One master and three wings” went hand in hand to drive the company's revenue and profit growth.

The positive scissor gap between income and expenditure is driving up the gross margin of the main business, and profit is expected to increase by 20%. Truck revenue accounts for more than 60% of the company's model structure, which is sensitive to macroeconomics and overload management. Two major factors are expected to drive revenue from the main business to accelerate: (1) truck traffic increased dramatically under the steady recovery of the economy, and oversized trucks 16Q4 and 17Q1 increased 78%/48% respectively; (2) the overload control base effect was eliminated. Hunan Province initiated supermanagement in September 2014, compounded by the Ministry of Transport, which began national overregulation in September last year. Within three years, the three-wheel overrun caused the company's oversized truck traffic and bicycle cargo volume to decline step by step. Objectively, it drastically dragged down road cost growth. Objectively, it drastically dragged down road cost growth in the fourth quarter of this year. We judge that in the fourth quarter of this year, the high base figure for overloading was exceeded. The effect will be eliminated, and future travel expenses will rise back to double-digit growth. On the cost side, road surface conditions on the Hunan Expressway have fundamentally improved after three years of management. As a result, road operation and maintenance costs have remained low or decreased. The provincial highway company 15/16/17Q1, which operates 64% of the province's miles, was -6%/+4%/-8% compared to the same period last year, and the operating costs of Hyundai Investment's main business in 2016 and 2017 Q1 fell 11% and 8%. Taken together, it is expected that the positive scissor gap between income and expenditure in 2017-19 will drive the gross margin of the main business to rise from 55% to 61%, and the net profit of the main business is expected to continue to increase by around 20%.

A reasonable valuation of 12.9 billion yuan, 42% of the current market capitalization. We used 2018 as the base period for a segmented valuation of the company. Tan Lei Road, which expires from 2020 to 2023, calculated a DCF valuation of 5.68 billion yuan using a 10.9% discount rate; the net profit of the “Changyong Road Changtan Road+Three Wings Business” was 560 million yuan, valued at 5.6 billion yuan based on 10 times PE; although Xuhuai Road lost money, considering the completion of the 13th Xiangxi Road network, especially after the opening of the Longlang Expressway, S16 and Guanxin Expressway, there was a big boost in traffic on Xihuai Road, which is expected to be profitable in 2022. Xuhuai Road: 1.55 billion yuan Valuation. After adding up the three parts, the company's reasonable valuation should be 12.9 billion dollars, corresponding to 11.6 times PE in 2018, 42% of the current market value.

The expiration of Tan Lei Road forced national reform to speed up, and bullish options were strong if their value did not change. We believe that the expiration of Tanlei Road will not only not affect the value of the company, but will also force the country's reform to speed up. The first is the national reform of Hunan to form a number of provincial enterprise groups by merging similar items, and the second is to inject high-quality assets into the listing platform. *ST Valin's proposed acquisition of financial assets and the transfer of shares in Xinwufeng are benchmarks. We speculate that companies are more likely to inject high-quality assets in the future. Currently, the majority shareholders are operating a number of mature sections of the provincial highway. Considering that the company is involved in various fields such as environmental protection and finance, the possibility of injecting other non-delivery assets is not ruled out. There is huge room for imagination over a reasonable valuation of 12.9 billion dollars, and the nature of bullish options is strong.

risk factors. In the economic downturn, truck traffic fell short of expectations, road operation and maintenance costs were higher than expected, and national improvements fell short of expectations.

Profit forecasts, valuations, and investment ratings. Assuming a 7.3%/10%/11.4% increase in road expenses from 2017 to 2019, the company's net profit from 2017 to 2019 is estimated to be 8.8/11.1/1.32 billion yuan, or EPS 0.87/1.1/1.31 yuan respectively. The PE corresponding to the current stock price is 10X/8X/7X respectively. The company's reasonable valuation is 12.9 billion yuan per share, corresponding to the price of 12.71 yuan per share, covering the “buy” rating for the first time.