The net profit report was basically in line with expectations. The main highway industry benefited from the recovery of travel and the Shenzhen Expressway published its semi-annual report. In 2023, H1 achieved revenue of 4.125 billion yuan (yoy +0.75%), net profit of 929 million yuan (yoy +9.49%), deducting non-net profit of 805 million yuan (yoy +5.99%). Net profit is basically in line with our expectations (969 million yuan). By business, highway revenue resumed year-on-year growth due to travel recovery; wind power generation revenue was relatively stable; solid waste construction revenue declined year-on-year; and net profit from subsidiary Bay Area development declined. Considering the solid waste business and the weakening profitability of the Bay Area development, we lowered our net profit forecast for 2023/24/25 by 6/5/4% to RMB 22.7/25.9/2.69 billion. The company plans to implement a fixed increase in A-shares to raise capital for the construction of the third phase of the outer ring. This matter still needs to be considered by the shareholders' meeting and regulators, and our model has not yet been reflected. Based on the segmental valuation method, we gave 600548 CH/548 HK a target price of RMB 10.22/HK$8.32 (previous value: RMB 10.14/HK$8.33). Maintain the “buy”.

The public's willingness to travel by car has increased, and toll revenue has returned to the 21-year level. The company's 1H23 toll revenue (63% of total revenue) increased 8% year on year, excluding the Wuhuang Expressway (which expires at the end of the 22nd), and increased 17% year on year after excluding the Wuhuang Expressway (which expires at the end of the 22nd). The main reasons are: 1) travel recovery; 2) low base. Compared with the same period in '21, 1H23 toll revenue (excluding the influence of the Wuhuang Expressway) increased by 1%. By project, 1) the 1H23 toll of the Outer Ring Expressway increased by 36% compared to 1H21, mainly due to the opening of the Outer Ring Road Phase II (early '22) driving the overall traffic flow increase; 2) the Qinglian Expressway 1H23 toll decreased by 24% compared to 1H21, mainly due to the diversion effect of the opening of the Guanglian Expressway (end of '21); 3) The toll of the 1H23 airlift highway dropped 4% compared to 1H21, affected by the diversion of the Outer Ring Expressway; 4) The overall toll for other projects (excluding Wu Huang) recovered to 1H21.

Wind power operations are relatively stable, and 2Q solid waste construction projects are slowing down

The company's 1H23 wind power generation revenue (accounting for 9% of total revenue) fell 3% year on year, and operations were relatively steady.

1H23 Food waste disposal revenue (7% of total revenue) fell 5.5% year on year, mainly due to the slowdown in new solid waste projects, and a decrease in construction revenue and equipment sales revenue from Lande Environmental Protection; organic waste operating revenue from completed projects increased 32% year on year. Main reasons: 1) The acquisition of Lisai Environmental Protection in April '22; 2) the recovery of dine-in restaurants, which stimulated an increase in food waste collection and transportation volume. The net profit of Chongqing Water/Sanfeng Environmental 1H23, a subsidiary of the participating company Derun Environmental, changed -24%/+7% year-on-year. The subsidiary's Bay Area Development Net Profit fell 16% year on year (after restatement), mainly due to increased depreciation and amortization and increased financial expenses due to higher interest rates on Hibor.

The plan is to implement a fixed increase in A-shares. It is proposed to use Yichang Express to apply for the issuance of public REITs. The company plans to implement a fixed increase of A-shares. The number of shares to be issued will not exceed 30% of the total share capital, and no more than 6.5 billion yuan in capital raised for the Outer Ring Phase III project (4.6 billion yuan) and loan repayment (1.9 billion yuan) (7/15 announcement). At the same time, the company plans to apply for the issuance of a public REIT using the Hunan Yichang Expressway as the underlying project (8/19 announcement). Yichang issues or generates disposal revenue at a high speed. The company's highways and environmental protection businesses are both in a period of expansion, and future capital expenses will still be heavy. Both equity and REIT financing help strengthen the company's main business and control debt risk.

Risk warning: Traffic growth was lower than expected, environmental protection projects and road property acquisitions fell short of expectations, capital expenditure was higher than expected, and fees were lowered.