Main points of investment
Wantong Expressway plans to increase A shares to major shareholders and pay cash to buy Liuwu Expressway, with a transaction consideration of 3.666 billion yuan: the company previously announced on April 17 that it planned to acquire Liuwu Expressway, a high-quality asset of major shareholders, and the plan landed on June 21, with a transaction consideration of 3.666 billion yuan, lower than the previous forecast of no more than 4 billion yuan. Among them, the cash consideration is 550 million yuan (15% of the underlying asset price), and 469 million additional A shares are issued at the price of 6.64 yuan per share to pay the share consideration of 3.116 billion yuan (85% of the underlying asset price). The increase will be fully subscribed by Anhui Jiaotong Control Group, a major shareholder, and the proportion of major shareholders will rise from 31.63% to 46.71% after the completion of the transaction.
Using the income method to calculate the valuation of Liuwu Expressway, the valuation of this transaction of WACC=9%, is reasonable: when the company evaluates the consideration of the transaction with the income method (DCF), the discount rate WACC is 9%, which is a higher discount rate for current acquisitions in the same industry, and the forecast for future traffic is relatively neutral, so we believe that the consideration of this transaction is reasonable and there is no premium acquisition.
Major shareholders make commitments and compensation agreements for the performance of the acquisition target in 2023-2026: major shareholders make performance commitments, if the delivery of the underlying assets of the transaction is completed in 2023, the net profit of Liuwu Expressway Company shall be no less than 2.25,2.13 and 222 million yuan in 2023-2025; if the delivery of the underlying assets of the transaction is completed in 2024, Liuwu Expressway Company shall complete the net profit of not less than 2.13,2.22 and 226 million yuan in 2024-2026. If it is not completed, the listed company will repurchase and cancel the shares obtained by the major shareholders in this restructuring to recover the compensation, and the insufficient majority shareholders will use cash compensation. With reference to Liuwu Company's net profit of 259 million yuan in 2021 and 42.76 million yuan in January-February 2023, with the dissipation of the impact of the epidemic and the natural growth of traffic flow, we think that it is very likely to fulfill the performance promise in 2023.
The company raised the dividend rate to 75% and positively rewarded shareholders: as this acquisition and subsequent supporting funds all involve the issuance of additional equity, it will have a diluted impact on EPS in the short term. In order to protect the rights and interests of minority shareholders, in 2023-2025, if the company meets the conditions of cash dividend, the annual distribution of profits in the form of cash is not less than 75 per cent of the net profit of the consolidated statements realized in that year, which is higher than the 70 per cent previously announced.
Investment strategy: Wantong Expressway owns a number of inter-provincial trunk lines in Anhui Province, the core road production profitability is strong, through reconstruction, expansion and acquisition to become the main road industry. Considering this acquisition, we adjust our profit forecast. It is estimated that the net profit of the company from 2023 to 2025 will be 1.978 billion yuan, 2.226 billion yuan and 2.416 billion yuan, and the EPS will be 0.93,1.05,1.14 yuan. Corresponding to the closing price on July 21, the PE valuation is 9.9x, 8.8x, 8.1x. Suppose the dividend rate of the company is 75%. From 2023 to 2025, the A dividend yield is 7.56%, 8.51% and 9.24% respectively. The dividend yield of H-share is 10.55%, 11.88% and 12.89% respectively.
Risk tips: macroeconomic impact on truck traffic; Reits price fluctuations on the company's performance and so on.