2022 results are in line with our expectations
The company announced its 2022 results: revenue of 5.21 billion yuan, up 29.2% year on year; Guimu's net profit was 1.45 billion yuan, down 4.4% year on year, in line with our expectations. The increase in revenue was mainly due to the confirmation of Xuanguang's renovation and expansion construction revenue of 1.42 billion yuan on a zero gross profit basis, which fell 6.0% after excluding this influence.
The decline in profitability in 2022 was mainly due to the use of linear amortization. Profits came under further pressure when traffic weakened. The gross margin in 2022 was 43.2%, down 17.5 ppt from the previous year.
Looking at the fourth quarter alone, the 4Q22 company achieved revenue of 1.22 billion yuan, a year-on-year decrease of 15.7%; Guimu's net profit was 270 million yuan, a year-on-year decrease of 35.4%, mainly due to the impact of the epidemic and truck fee reductions in 4Q22.
Development trends
The Hening Expressway was less affected by the epidemic, and traffic from newly acquired road products bucked the trend. In 2022, the company achieved toll revenue of 3.68 billion yuan, a year-on-year decline of 4.0%. Among them, the company's main road production was Henning/Gaojie/Xuanguang Expressway traffic of -9.7%/+4.0%/-20.7%, respectively, and toll revenue was -0.2%/+3.8%/-19.6% year-on-year respectively. Except for the Xuanguang Expressway, which declined markedly due to diversion of neighboring national highways and upstream road construction, Hening and Gaojie Expressway showed resilience. Furthermore, the company's new road production performance in 2021 was impressive. Under the influence of the epidemic, traffic on the Anhui section of the Anqing Yangtze River Highway Bridge and Yuewu Expressway in 2022 was +3.4%/+3.2%, respectively, compared to the same period last year, achieving contrarian growth.
Growth was gradually unleashed, benefiting from the restoration of core road production and the reversal of losses on lost sections of roads. We believe that the company's performance is expected to achieve a high growth of 23.7% this year, mainly from: 1) The Hening Expressway has benefited from the recovery in overall traffic, and the expansion of the East-West connecting section may bring additional growth. According to the company's annual report, the opening of the Chuhe Bridge at the end of June 2022 has brought some benefits to traffic growth in Hening; 2) The Ning Xuanhang Expressway has been fully completed and is expected to reverse losses this year; 3) According to Anhui Traffic Control Group, the Yuewu Expressway East Extension Line's Wuwei to Yuexi section is expected to open to traffic this year. Furthermore, the company uses a straight-line method of amortization, which has a higher leverage effect on profits in the context of a sharp recovery in traffic flow this year.
High-quality road targets that are both offensive and defensive have long-term configuration value. In terms of growth, in the medium to long term, important road properties held by the company, such as Xuanguang, Gaojie, and Guangci, will be renovated and expanded one after another, bringing a second impetus to the company's main business. The company's balance ratio in 2022 was 36.6%, lower than the industry average. There is plenty of room for asset expansion, and the company's road production is located on an important cross-provincial highway in Anhui Province, benefiting from the Yangtze River Delta integration and the construction of the Yangtze River Economic Belt for a long time. On the defensive side, in 2022, the company's DPS was 0.55 yuan, and the dividend ratio reached 63.1%. It is at a high level in the highway sector, and the dividend yield is attractive.
Profit forecasting and valuation
Profit forecasts for 2023 and 2024 remain essentially unchanged. The current H-share price corresponds to the 2023/2024 price-earnings ratio of 5.9 times/5.2 times. Maintaining an outperforming industry rating and a target price of HK$8.92, corresponding to 7.0/6.1 times the price-earnings ratio of 2023/2024, there is room for an increase of 18.3% from the current stock price.
risks
Due to the impact of the epidemic, the progress of the renovation and expansion fell short of expectations.