Non-net profit after deducting non-net profit in '22 was in line with expectations, and Q1 traffic resumed strong growth. Zhejiang, Shanghai, Hangzhou, and Ningbo released their 2022 results: total revenue of 19.9 billion yuan (-8.4% YoY) and net profit of 5.38 billion yuan (+12.9% YoY). The company issued private REITs on the Shenjiahuhang Expressway, generating disposal revenue of 1.88 billion yuan. Net profit after excluding this matter (approximately $3.5 billion) is basically in line with our expectations ($3.46 billion). The decline in net profit after deducting net profit was mainly due to: 1) the decline in willingness to travel due to the impact of the epidemic; 2) the decline in securities profits due to market influence; and 3) foreign currency loan exchange losses. Considering the strong recovery in toll revenue in January-January, we raised the 2023/2024 net profit forecast by 10.3/0.4% to 4.88 billion/5.20 billion yuan, and introduced the 2025 forecast of 5.65 billion yuan. We raised the target price by 14% to HK$8.10 (previous value: HK$7.10). The valuation is still based on the segmented valuation method, where the toll road discount rate WACC was 7.97%. The company plans to distribute a 2022 dividend of 0.375 yuan/share (unchanged from year on year), with a dividend rate of 6.90%. Maintain a “buy” rating.

The pandemic, road network changes, and truck exemptions dragged down toll road business companies' '22 toll road/securities/other business segment profits (not excluding minority shareholders' profit and loss) by +26.5/-27.9/ +3.9% year-on-year. The profit of the three business segments accounted for 62/26/ 12%. The company issued a private equity REIT for the Shenjiahuhang Expressway, thereby confirming the disposal revenue of 1.88 billion yuan; in '23, the Shenjiahu-Hangzhou Expressway was not consolidated, which had an impact of about 50 billion yuan on net profit. Excluding this matter, toll road revenue/segment profit fell 10%/32% year on year, mainly due to: 1) the decline in willingness to travel due to the epidemic; 2) the 10% reduction in truck tolls in Q22; 3) Since the opening of the Hangzhou-Taiwan High Speed Rail in January '22, and the Hangzhou-Shaotai Expressway was fully opened to traffic in February '22, diverting vehicles to the three highways. Furthermore, starting in 2022, the Chajia-Su Expressway implemented a 15% ETC toll discount for trucks in Zhejiang Province, which also had a negative impact.

Affected by a high base and market adjustments, the net profit of the securities business declined in '22 and the A-share market was drastically adjusted in 2022. At the same time, due to the high base, the profit of the company's securities business segment fell 28% year on year to 1.71 billion yuan. In particular, securities investment income fell 63% year on year to 680 million yuan. Exchange gains and losses also caused profit fluctuations. Due to fluctuations in the RMB exchange rate, the company recorded foreign currency loan exchange losses of 230 million yuan in '22, compared with exchange earnings of 230 million yuan for the same period in '21.

Traffic has resumed growth in January-January, and Q1 may have become an inflection point in fundamentals. Since this year, highway traffic has recovered strongly. In January-January, toll revenue for the section controlled by the company increased 12% year-on-year, up 16% over the same period in '21. Among them, toll revenue for the core section of the Shanghai-Hangzhou/Hangzhou/Shangsan Expressway in 1-2 months changed +18%/+12%/-7% year-on-year, and +21%/+11%/-5% over the same period in 2021. Although the upper three highways are still affected by diversion, traffic on the Shanghai-Hangzhou-Ningbo Expressway has resumed strong growth. In summary, Q1 may become an inflection point in the company's fundamentals.

Risk warning: Traffic growth is lower than expected, A-share market turnover is lower than expected, road network diversion is higher than expected, and fees have been lowered.