Key points of investment

Incident: Shenzhen Express released its 2022 annual report: the company achieved operating income of 9.373 billion yuan in 2022, a year-on-year decrease of 13.93% (after adjustment); the net profit of the mother was 2,014 billion yuan, a year-on-year decrease of 22.92% (after adjustment); the basic EPS in 2022 was 0.84 yuan/share; net profit and loss after deduction was 1,216 billion yuan, down 47.40% from the previous year. The non-recurring profit and loss mainly came from capital cuts from associated companies. The company plans to pay a cash dividend of 4.62 yuan (tax included) for every 10 shares in 2022, with a dividend ratio of 55%, corresponding to the closing price of 8.64 yuan on March 27, 2023, with a dividend rate of 5.35%.

Comment:

The decline in transportation demand caused by the epidemic was compounded by the impact of truck toll exemptions, and the decline in traffic flow and toll revenue: by the end of 2022, the company operated and invested in 16 highway projects, with a controlling interest mileage of about 643 kilometers, mainly located in Shenzhen and the Guangdong-Hong Kong-Macao Greater Bay Area and economically developed regions. It has a good location advantage. The scale and profitability of road production is at the forefront of the industry. In 2022, the company achieved toll revenue of 4.978 billion yuan, accounting for 53.12% of the company's total revenue, a year-on-year decline of 15.52% (after adjustment), mainly due to the decline in short-term travel intentions compounded by the opening and diversion of the Guanglian Expressway. Among them, the Outer Ring Expressway achieved operating revenue of 955 million yuan, an increase of 3.65% over the previous year, benefiting from the opening of Outer Ring Phase II to traffic on January 1, 2022; the Qinglian Expressway achieved operating revenue of 615 million yuan, a year-on-year decrease of 29.73%, mainly due to the official opening of the Guanglian Expressway, which is basically parallel to its line at the end of 2021, which diverted traffic at the Qinglian Expressway.

In terms of gross profit, the company's toll roads achieved gross profit of 2,178 billion yuan in 2022, accounting for 72.2% of the company's total gross profit, a year-on-year decrease of 24.66%.

It also shows the development of the Bay Area to further expand the scale of high-quality highway assets: the company completed the acquisition of 100% of the shares of Shenzhen Investment and Control Infrastructure on January 11, 2022, thereby indirectly holding about 71.83% of Bay Area Development's shares. Bay Area Development indirectly enjoyed 50% of the profit distribution interests of the Western Line Expressway and 45% of the Guangzhou-Shenzhen Expressway. The average daily toll revenue of the Guangzhou-Shenzhen Expressway and the West Line Expressway in 2022 was 6.1864 million yuan and 2,8624 million yuan respectively, far higher than the revenue of other affiliated highways of the company, effectively consolidating the main business advantages of toll roads and enhancing the company's performance.

The airborne highway renovation and expansion is expected to help the company's main toll road business revenue and performance grow in the future: in October 2022, the board of directors of Shenzhen Expressway deliberated and passed the bill for the airborne highway renovation and expansion project PPP project. The project converted 6 lanes of the original road into a two-way three-dimensional “8+8” lane. The construction period is expected to be 4 years, and the grace period is no more than 1 year. The renovation and expansion project is a PPP project, with a total investment of 43.29 billion yuan, government investment subsidies of 15 billion yuan during the construction period, the introduction of cooperative investors to jointly invest 15.3 billion yuan, and the investment amount of the Shenzhen Expressway was controlled at 12.987 billion yuan. After the completion of the renovation and expansion of the project, it is expected that the cargo speed franchise will be extended for 25 years. Although the renovation and expansion project had an adverse impact on traffic, there was little impact on Guimu's net profit as a whole. During the operation period, the project is initially expected to achieve an average annual revenue of about 1.6 billion yuan and profit before tax of about 800 million yuan. Therefore, after the project is completed and put into use, it is expected to help the company's main toll road business revenue and performance increase. Subsequent projects are still subject to approval by Shenzhen Expressway and Shenzhen International Shareholders' Meeting. In December 2022, the company announced that the plan would be adjusted.

The strategic layout of the big environmental protection industry was initially realized, and the profit contribution gradually became apparent: the company focused on the “toll road+big environmental protection” business field. In the context of the toll road industry entering the stock era, entering the big environmental protection industry contributed to the company's sustainable development. In 2022, the company's environmental protection business achieved revenue of 1,757 billion yuan, accounting for 18.75% of total revenue, a year-on-year decrease of 2.98%. Among them, clean energy achieved revenue of 808 million yuan, an increase of 13.32% over the previous year, mainly due to the fact that the Zhongwei Gantang and Yongcheng Fueneng wind power projects were included in the scope of the group merger in September 2021 and December 2021 respectively; revenue from vehicle scrapping and comprehensive battery utilization increased 226.72% year-on-year, mainly due to Qiantai, Shenzhen-Shantang actively exploring the industrial market, establishing cooperation with downstream enterprises and online car-hailing companies, etc., and successfully winning bids for recycling vehicle waste disposal projects in Shenzhen. In terms of gross profit, the gross profit of the company's environmental protection business in 2022 was 468 million yuan, up 1.53% year on year (after adjustment). Among them, clean energy contributed 431 million yuan to gross profit, accounting for 91.98% of the environmental protection business, with a gross margin of 53.31%; the recycling of solid waste contributed 21 million yuan to the gross profit of Chinese food waste treatment, a year-on-year decrease of 67.82%. Mainly due to delays in the progress of Lander Environmental Protection projects under construction, new project expansion fell short of expectations. Although some equipment orders were completed but not accepted as scheduled, revenue could not be confirmed as scheduled.

The contract construction and management business continued to be exported, and real estate revenue declined: in 2022, the company's commissioned construction and management sector achieved operating income of 888 million yuan, down 14.11% from the previous year, and gross profit of 197 million yuan, a decrease of 7.46% from the previous year. The number of projects implemented in the Longli River Bridge (formerly known as “Flower Bridge”) project and the Bimeng project decreased compared to last year, and the commissioned construction revenue confirmed according to schedule declined. The revenue of the real estate sector was 165 million yuan, down 45.56% year on year, and gross profit was 45 million yuan, down 71.86% year on year, mainly due to a decrease in the number of housing projects handed over in Guilong.

Investment income contributed mainly to non-recurring profit and loss, mainly from capital cuts from associated companies: in 2022, the company achieved investment income of 1,534 million yuan, accounting for 61.74% of total profit, an increase of 58.50% over the previous year. Mainly because the joint venture, which holds 34.3% of the company's shares, transferred its book capital reserve balance of about 2,686 million yuan to increase its paid-in capital, then reduced capital by RMB 3.3 billion simultaneously according to the shareholders' shareholding ratio, of which the company reduced capital by about RMB 1,131.9 billion. The company achieved investment income of 921 million yuan after tax, which affected the company's net profit by 921 million yuan after tax. The amount is approximately $691 million.

Investment strategy: We expect that from 2023 to 2025, the company's main highway business will stabilize as the epidemic eases, the outer ring phase II project, which was newly opened to traffic in early 2022, will continue to release performance, and the core regional layout of the Guangdong-Hong Kong-Macao Greater Bay Area will increase regional market share and enhance future performance. Furthermore, the company will continue to promote investment in the environmental protection sector. As stock projects continue to mature, the stress level in the environmental protection sector is expected to rise steadily in the next few years.

We adjusted our profit forecast. It is estimated that the company can achieve net profit of 2,217 billion yuan, 2,372 billion yuan, and 2,498 billion yuan in 2023-2025, with EPS of 1.02, 1.09, and 1.15 yuan; the corresponding PE for the closing price on March 27 was 8.5, 7.9, and 7.5 times, respectively. If the 55% dividend rate is maintained, compared to the closing price of 8.64 yuan on March 27, 2023, the dividend rates for A-shares are 6.5, 7.0%, and 7.3% respectively; the dividend rates for H shares are 9.2%, 9.8%, and 10.4% respectively, and the dividend rate is in a leading position in the high dividend sector. Maintain a “buy” rating.

Risk warning: The economic downturn, the epidemic, etc. have led to a decline in traffic traffic, the industry has been affected by changes in control policies, environmental protection development falls short of expectations, etc.