The writer is an invited researcher at Alpha Workshop
Introduction: this situation is not for a long time, only day and night.
The highway industry (excluding construction companies) can be regarded as another series of industries with "local characteristics", following previous analysisFuling mustard(SZ:002507) andSea and sky flavor industry(SH:603288) after that, the author thinks that you can pay attention to this often forgotten industry in the near future.
The first difficulty of public utilities is the difficulty of financing. In highway construction in the United States, through the levy of fuel tax, China uses a more direct way to charge fees, one is that the money is quick, and the other is that it is more reasonable, and the logic of "users pay" is more fair. As a result, China has also given birth to a number of listed companies that rely on highway rights to charge fees.
Of course, overseas, such as the Australian highway company Transurban Group also belongs to the highway industry, but this major local feature of our country is not controversial.
The toll highway is an industry that few people pay attention to. Due to the lack of concepts and stories, and there is not much room for imagination, the industry is not sexy at all, even boring. The reason behind this is that the domestic highway network has been basically formed, the capital expenditure such as new roads has maintained low single-digit growth every year, and the industry has entered a mature period.
For listed companies in this sector, there is no complex business model, which is simply charging to make money. Similarly, there is no magnificent competition pattern in the industry, local state-owned enterprises carry out regional monopolies, and everyone is at peace with each other.
The unsexy of the industry and the lack of competition among companies also reflect that the valuation of the highway industry is much lower than that of the airport plate, which also belongs to transportation. At present, the valuation of Shenwan airport plate is 29 times, and that of Shenwan highway plate is 10 times. The ten-year average annualized return of A-share companies is 5.4%, which is close to that of bonds, but the differentiation of different stocks is significant.
Fig. 1 annualized rate of return of highway A-share listed companies in 2008-2018
Source: Wind, Guotai Junan Securities Research, click to see the big picture.
01 行业介绍
[1] the industry is not small.
Although this plate is "deserted", it is actually not small. There are more than 20 listed companies in A-shares, with a total market capitalization of more than 200 billion yuan.
Among them, the market capitalization is relatively large.Nanjing-Shanghai Expressway(latest market capitalization of SH:600377;: 52.7 billion),Investment promotion highway(latest market capitalization of SZ:001965;: 50.6 billion),Shandong highway(SH:600350: latest market capitalization of 22.6 billion),Deep highway(latest market capitalization of SH:600548;: 20.5 billion),Guangdong Expressway A(SZ:000429: latest market capitalization: 18.1 billion).
Without exception, they are all in the economically developed areas of the country.
Figure 2: Shenwan Expressway Index constituent stocks
Source: Wind, click to see a larger picture.
[2] the business model is simple
The main business model of this industry is extremely simple, which is to charge tolls. Because the toll period of a single highway is not sustainable, the main business of the industry can use the DCF (discounted cash flow model) method for absolute valuation.
There is also part of the income related to the main business of toll collection, that is, supporting service income, which is also easy to understand. after all, everyone has been to the service area of expressways.
Because the industry does not have growth and may even have zero exit value, companies have the incentive to make use of their spare funds (which happens to be excellent cash flow in this industry) to carry out extension development. will enter areas such as real estate, advertising, environmental protection and so on.
Figure 3: typical business model (represented by revenue split of Nanjing-Shanghai Expressway)
Source: Wind, click to see a larger picture.
[3] the profit model is clear
As the profit model is extremely clear, the author only extracts the obvious financial characteristics of this industry, that is: high net interest rate, strong cash generation ability, high dividend.
The industry's net interest rate is about 30%, while all A shares are about 10%. The operating cash flow of the highway industry accounts for more than 40% of the income, which is one of the highest segments of A-shares. (the whole A-share is about 20%)
At the same time, because the reinvestment of highway enterprises is difficult and the uncertainty is high, investors like to see the high dividends of highway companies.
Figure 4: the Nanjing-Shanghai Expressway has maintained a very high dividend level since its listing.
Source: Wind, click to see a larger picture.
[4] risk points of the industry: governance risk and charging cycle
Highway is a typical regional monopoly industry, and listed companies are generally subsidiaries of local trading groups, so the market is often worried about its governance, which is also a major reason for low valuation.
For its main business, the focus of the market is how long the toll can last. In history, the uncertainty of toll policy has had a significant impact on investors in highway stocks.
In the short term, considering that local governments are short of money, they have no incentive to cut fees. And highway construction as a whole is unable to make ends meet, the policy guidance of "loans to build roads, charge to repay loans" leads to a growing gap between income and expenditure scissors, so there is no room to reduce fees.
Figure 5: scissors difference between revenue and expenditure of toll roads (left) and income and expenditure difference of operating roads (right)
Source: Ministry of TransportGuotai JunanSecurities, click to see the big picture.
02 Model Angle
DCF valuation can be made
The income of highway stocks comes from endogenous profit growth + dividend income. For this industry, because the business model is simple and depends on the right of way with a length of time, DCF can be used for valuation.
Assuming that the new investment of the company has the same rate of return on invested capital (ROIC), the DCF formula can be simplified.
Figure 6: DCF formula
Source:Guangfa SecuritiesClick to see the big picture
Combined with the above formula, we can know that the DCF idea of endogenous profit growth in this industry is to pay attention to g (growth rate), ROIC (return on investment) and WACC (required rate of return on capital). Equity value is the monotone increasing function of the first two variables and the monotonous decreasing function of WACC.
For the main industry, the driving force of income comes from traffic flow (income = toll mileage * toll standard * traffic flow). The biggest impact of traffic flow is vehicle retention and freight transport, and it is mainly passenger cars and non-trucks. The toll mileage comes from the mileage now available, as well as from new construction / mergers and acquisitions.
For WACC, the stronger the company's operational stability, the lower the equity risk premium, the lower the WACC, and the higher the discounted value. The stability of the operation mainly comes from the quality of the road rights of the main business and the prudence of the expansion of the auxiliary industry.
Figure 7:DCF valuation logic
Source: GF Securities Co., LTD., click to see the big picture.
03 how to invest: short-term defense, long-term difficult to have excess returns
[1] there is basically no Alpha with long-term investment
According to the above analysis, it is not difficult to understand the essential reason for the low long-term investment value of expressways.
From 2014 to 2019, the highway sector (Shenwan Expressway Index) slightly outperformed the market (CSI 300 Index and Wanderquan A), and it did not have Alpha for a long time.
Figure 8:5, Expressway refers to the plate slight loss index (2014-2019).
Source: Wind, click to see a larger picture.
[2] short-term investment is organically available
Although it does not have long-term overmatch value, the short-term is usually a good short-term defense variety in the period when the market risk appetite is low.
From July to December 2018, when the whole A-share mood was low and risk appetite was extremely low. During this period, the highway plate run-win index of about 15 points, representative stocks such as Shenzhen high-speed run-win index 30 points.
Therefore, the timing of short-term layout of expressways and stock selection are equally important.
Figure 9: from July to December 2018, the outperformance index of the highway sector and the excess income of the leading companies are more obvious.
Source: Wind, click to see a larger picture.
(1) timing-market style
However, the highway plate is an extremely high-quality defense plate, because of its low volatility, there are often excess returns in the market pullback. You can consider giving priority to configuration when switching from market style to defense.
(2) timing-industry valuation level
Since the starting point is defense, the safety pad comes from the valuation level. It can be seen that the current valuation level of the road sector has returned to the historic low of 10 times PE (price-to-earnings ratio), so it has become attractive again.
Figure 10: sector valuations are back to historic lows when the market started in November last year.
Source: Wind, click to see a larger picture.
(3) Stock selection
The author feels that it is relatively easy to select stocks in this industry because it is basically out of competition.
In line with the previous DCF modeling ideas, we should choose companies whose road rights are in the developed economic regions of the Yangtze River Delta and Pearl River Delta, and require priority to select companies with high dividend rate and no significant risk in the auxiliary industry. Such as Shenzhen Expressway,Zhejiang, Shanghai, Hangzhou and Ningbo(HK:0576), Guangdong Expressway A, Nanjing-Shanghai Expressway and other leading companies.
Another factor at the transaction level is the size of the circulation market and the proportion of the circulation market, because as the overall position turns to the defensive style, it will inevitably lead to a rush market. Therefore, the circulation market is not small (can accommodate a certain amount of positions) while the circulation market accounts for a low proportion of individual stocks, may obtain higher returns.
According to the standard that the market value of circulation is 30-5 billion yuan, and the circulation market accounts for less than 20%, it meets the standards of Nanjing-Shanghai Expressway, China Merchants Highway, Guangdong Expressway An and Shenzhen Expressway.
Figure 11: Shenwan Expressway Index constituent stocks
Source: Wind, click to see a larger picture.
Finally, summarize the investment ideas of the toll road industry with local characteristics in one sentence: this situation is not for a long time, only day and night.
Source: https://www.arfgc.com/news-detail-19605.html