Summary:
Raise the profit forecast, maintain the target price, and reiterate the increase in holdings. Since 2019, the company's road business revenue has been growing slightly, and the profits of the brokerage business have increased by 90% in the first three quarters compared with the same period last year. We raise the forecast of 2019-21 net profit to 3.77 billion yuan (3.95 billion yuan) (the last forecast is 3.25 billion yuan in 2019-20).
The company's dividend follows the changes in the road business. We assume that the company's dividend in 2019 is the same as that in 2018, and the current dividend yield is 5.8%. The company is still undervalued and reiterated to increase its holdings and maintain its target price of HK $8.19.
The profits of securities firms have recovered and the contribution of profits has increased. The company is the actual controller of Zheshang Securities, and the periodic fluctuations of the profits of the brokerage business will greatly affect the overall profits of the company. In 2015, the brokerage business accounted for 46% of the company's profits, which shrank to 12% in 2018. In 2019, with the growth and recovery of market trading volume, the share of profits in the securities business returned to 20% in the first half of the year, driving the company's performance to grow faster than expected.
The main highway industry has been affected by the trade war and ETC policy, and its income has increased only slightly. In 2019, the company's core road production, the Shanghai-Hangzhou section of the Shanghai-Hangzhou-Ningbo Expressway, showed negative growth due to the macroeconomic impact. The upper three expressways are affected by the surrounding roads free of charge, and the traffic flow has declined. Coupled with the slight impact of the ETC discount policy, the company's road business revenue grew by just 2 per cent in the first three quarters.
The newly acquired Shenjia-Hu-Hangzhou Expressway is still in the stage of cultivation. At the end of 2018, the company acquired the Shenjia-Hu-Hangzhou Expressway produced by the Group at a consideration of 2.9 billion yuan. As the post-acquisition interest-free debt is replaced by interest-bearing debt, it is difficult for Shenjia-Hu-Hangzhou Expressway to contribute profits to the company in 2019. However, the company is one of the few highway companies that use the straight-line depreciation method, the profit margin is low before and after the high characteristic is more significant, the overall long-term discount value of the company's road products is still underestimated.
Risk factors. Hangzhou-Shaotai Expressway will be opened to traffic at the end of 2020, Hangzhou-Shaotai Expressway will be opened to traffic in 2022, or diversion will be brought to the company's Shangsan Expressway and Hangzhou-Ningbo Expressway; although we expect dividends to be linked to the road production business to remain stable, the company has not promised a minimum dividend ratio; the remaining life of the Shanghai-Hangzhou-Ningbo Expressway is 9 years, and the reinvestment pressure will continue in the next decade.