Incident: The company publishes its 2022 annual report. The company achieved operating income of about 9.37 billion yuan in 2022, a decrease of 13.9% over the previous year; achieved net profit of about 2.010 billion yuan, a year-on-year decrease of 22.9% (after adjustment); and achieved net profit of about 1.23 billion yuan after deducting non-return to the mother, a decrease of 47.4% over the previous year (after adjustment). The company plans to distribute a cash dividend (before tax) of 0.462 yuan/share, with a cash dividend ratio of about 55%. The cash dividend rate has remained above 45% in the past three years.

Due to the negative impact of the epidemic, revenue from the toll road business declined year-on-year. Affected by domestic prevention and control measures, the company's toll road business was negatively impacted. In 2022, the average daily traffic on toll roads held by the company (excluding the Wuhuang Expressway) fell 7.8% compared to the same period in '21. However, the average daily traffic on toll roads held by the company (excluding the Ring Project and Longda Expressway) in 2022 still increased 4.8% compared to the same period in '19. Considering the impact of the 10% reduction in truck tolls in the fourth quarter of '22, the company's average daily toll revenue in '22 (excluding the Wuhuang Expressway) fell 14.7% from the same period in '21 and 14.3% from the same period in '19 (the company confirmed toll compensation revenue for the Changsha Ring Road, Yichang Expressway, and Wuhuang Expressway in '21). Taken together, the company's toll road business achieved revenue of 4.98 billion yuan in '22, a decrease of 15.5% over '21 and an increase of 8.9% over '19.

Costs are rigid, and the gross margin of the toll road business declined year over year. The gross margin of the company's toll road business in 2022 was 43.8%, down 5.3 pct from the same period in 2021 and 6.6 pct from the same period in 2019.

The toll road business has been steadily expanding, and the acquisition of the Bay Area has raised the level of profitability. The company's preliminary design plan (8+8 double-layer composite channel) and estimate for the renovation and expansion of the cargo highway have been approved by the Ministry of Transport. The company has signed a PPP contract and investment cooperation joint construction agreement; the company's outer ring phase II was opened to traffic on January 1, 2022, and preliminary work on the outer ring phase III phase has begun; by the end of 22, the Yanjiang Phase II project has completed a total of about 78.4% of the project progress; in addition, the company has completed preliminary work on the Shenzhen-Shantou Second Expressway (Shenzhen-Shanwei); in addition, the company has completed the development of the Bay Area (07.H7.73) K) 71.83% control With the equity acquisition, Bay Area Development completed a 51% increase in Yanjiang Company's equity in '22, further expanding the scale of its high-quality highway assets. At the same time, in collaboration with Guangzhou-Shenzhen-Pearl Company and cooperative shareholders, they actively promoted the preliminary application of the Guangzhou-Shenzhen Expressway renovation and expansion project and the collection and storage of land owned by Guangzen-Shenzhu Company. An agreement was signed for the Luogang Interchange (about 295,000 square meters) in '22, and Guangshenzhu Company can recover 317 million yuan of compensation.

The overall environmental protection business is stable. The company's clean energy business and solid waste resource management business achieved revenue of 800 million yuan and 550 million yuan respectively in '22, up +13.3% and -36.3% respectively. The main reason was that the progress of Lande Environmental Protection projects under construction was lagging behind and some projects were not transferred to commercial operation as planned. Furthermore, by the end of '22, the cumulative installed capacity of the company's wind power projects reached 648 MW, and wind power contributed about 690 million yuan in revenue in '22, an increase of 19.2% over the previous year. The company's environmental protection business contributed a total gross profit of about 4.7 billion yuan in 2022, the same as the previous year.

Investment suggestions: The company's toll road reserve projects are abundant, and environmental protection business is rising steadily. With the optimization of domestic prevention and control measures, the company's toll road profits will return to a growth trajectory. Considering that the company's various businesses are still in the expansion period, financial costs will rise accordingly. We lowered the company's 23-24 net profit forecast by 20%/6% to 2.3 billion yuan/2.8 billion yuan respectively, adding a 25-year net profit forecast of 3.3 billion yuan to maintain the company's A and H “increase holdings” ratings.

Risk warning: The construction of a new road network in the region diverted the company's toll road business; toll road toll standards declined; the company's environmental protection and other business revenue fell short of expectations.