The epidemic dragged down expressway traffic in the first quarter
On April 29, 2022, Zhejiang, Shanghai, Hangzhou, and Ningbo announced 1Q22 net profit of RMB 1,085 million (down 11.8% year on year), accounting for 21.7% of our previous full-year forecast (RMB 5 billion). The main reason for the decline in profits was the recurrence of the epidemic in the Yangtze River Delta region and the general decline in the securities market. Considering the recurrence of the epidemic in Shanghai since March or the suppression of highway traffic in Zhejiang Province, we lowered our forecast net profit for 2022/2023/2024 by 4.7/3.6/ 3.5% to RMB 4,766/52.28/RMB 5.388 billion (previous value: RMB 50.00/54.23/RMB 5.583 billion). We lowered the target price by 7% to HK$8.67 (previous value: HK$9.33), which was still based on the segmented valuation method (toll road WACC was 7.63%). We expect Zhejiang, Shanghai, Hangzhou, and Ningbo to have a dividend ratio of 6.9/7.2/2022/2026 for 2022/2023/2024. Maintain a “buy” rating.
Traffic increased steadily in January-January, but March was greatly affected by the pandemic
Toll revenue from Zhejiang Shanghai-Hangzhou-Ningbo (excluding the Chajia-Su Expressway) increased 4.0% year-on-year in January-February, but fell 19.7% in March. Despite steady demand for freight, repeated epidemics in the Yangtze River Delta region have led to a decline in residents' willingness to travel, causing toll revenue to drop. The value added and export value of industries above the scale of Zhejiang Province increased 9.9% and 28.3%, respectively, in the first quarter, indicating strong demand for freight. After merging and merging with Jiaxing Company in the first quarter, Longli Lilong Expressway Company used previously unconfirmed income tax losses to partially offset the decline in the company's toll road performance in the first quarter. According to our estimates, net profit attributable to the company's toll roads and other businesses (excluding securities and banks) fell 12% in 1Q22.
The decline in the A-share market led to a decline in securities business performance
According to our forecast, the contribution of the company's 1Q22 securities/bank/toll road and other businesses to total profit was approximately 12/14/ 74%, respectively. We expect net profit attributable to the securities business to fall 28% year over year. The company's securities investment income turned into a loss, falling from 1Q21 earnings of RMB 318 million to 1Q22 losses of RMB 18.9 million, mainly due to the general decline in the A-share market. The Shanghai Composite Index fell 11% in the first quarter. We expect the profit contribution of participating banks to increase by 16% in 1Q22.
Wait for traffic to recover after the pandemic
We believe that the recovery in highway traffic in Zhejiang is related to the implementation of epidemic control measures. We believe that if the Shanghai epidemic clears up by the end of June, family outings and travel may drive a recovery in demand during the peak summer season in July and August, and highway traffic is expected to rebound.
Risk warning: 1) Traffic growth is slower than we expected; 2) A-share market transaction volume is lower than our expectations; 3) Unexpected fee reductions.