Key points of investment
The high increase in the traffic of oversized trucks and the investment income of agricultural and commercial banks contributed to a 30% increase in performance after deduction. The company completed revenue of 4.58 billion yuan in the first half of the year, an increase of 17.8% over the previous year, and achieved net profit of 401 million yuan, an increase of 18.8% over the previous year. Net profit after deduction was 394 million yuan, an increase of nearly 30% over the previous year, mainly due to non-operating income of more than 48 million yuan in the first half of last year. The significant increase in the company's performance that exceeded our expectations was mainly due to the high growth in oversized truck traffic driven by macroeconomic sentiment and the combined contribution of investment income.
The traffic of oversized trucks has increased rapidly, and gross margin on major road sections has increased by more than 2%. The company's overall traffic increased by 9.8% in the first half of the year. Among them, oversized truck traffic, which accounted for the highest share, increased 47%, and toll revenue increased 5%. The main reason that toll revenue is lower than the increase in traffic is that Hunan Province imposed full weight charges on trucks, and the decline in the average load weight of trucks dragged down revenue performance after the Ministry of Transport carried out nationwide overload and overload control in September last year, but it is expected that the growth rate of the company's road toll revenue will increase significantly after 2017Q4 by eliminating the high base effect. Three years of overhaul led to a fundamental improvement in road surface conditions in Hunan. The maintenance cost of road operation and maintenance remained low in the first half of the year, increasing gross margins of Tanlei Road and Changtan Road in Changyong by more than 2%.
Investment returns and supply chain contributions from agricultural and commercial banks have increased, and weather and floods have temporarily hampered environmental protection business.
The company's investment income increased by 80 billion yuan in the first half of the year, an increase of 119%, mainly due to the merger of many agricultural and commercial banks that participated in the second half of last year to contribute investment income, and the net profit of the supply chain was 119 million yuan, an increase of 160%.
Profits from auxiliary industries other than bank investment and supply chain were generally flat. Although no specific profits were disclosed in the environmental protection sector, we speculate that Hyundai Environmental Technology's profit declined in the first half of the year based on negative minority shareholders' interests. The main reason was that flooding and rain in Hunan in the first half of the year made it difficult to carry out environmental protection operations such as landfill, which affected revenue recognition. It is expected that the second half of the year will return to normal. Next year, Hyundai Environmental Technology will centrally put into operation a number of waste-to-energy projects, which is expected to contribute tens of millions of dollars to the company's profitable growth. Furthermore, the strict financial supervision environment in the first half of the year also affected the company's small loan and financing guarantee business.
If Tan Lei Road Expansion Company's valuation is expected to be drastically revised. We believe that the company's current low valuation level fully reflects the worst expectations that Tanlei Road on the Hunan section of the Beijing-Hong Kong-Macao Expressway, which is produced as a main line, will expire in 2020 to 2023. However, considering that the Hubei and Guangdong sections of the Beijing-Hong Kong-Macao Expressway currently have eight lanes and only the Hunan section has four lanes, the expansion of Tanlei Road is beneficial to local governments, car owners, companies, and investors. If Tanlei Road is finally expanded, its operating life may be extended by more than 20 years, the company's valuation is expected to be drastically revised, and since the depreciation and amortization base of Tanlei Road is high, we judge that the expansion and consolidation will not put much pressure on the company's short-term performance.
Risk warning. In the economic downturn, truck traffic fell short of expectations, road operation and maintenance costs were higher than expected, and the expansion of Tan Lei Road fell short of expectations.
Profit forecasting and valuation. Considering the rapid increase in large truck traffic and the company's proposed investment in Qidong Agricultural Commercial Bank and the investment holding Yueyang Baling Agricultural Commercial Bank, which will contribute to the increase in performance after the merger, we raised the 2017-2019 EPS forecast to 0.62/0.80/0.96 yuan (the original forecast was 0.58/0.73/0.87 yuan). Conservatively assuming that after the expiration of Tan Leilu Road, the company's reasonable valuation of the company's DCF was 12.9 billion yuan, or 8.5 yuan per share, maintaining the “buy” rating.