Residents' willingness to travel increased, with traffic recovery driving a year-on-year increase in profit, and Anhui Express released its semi-annual report. In 2023, H1 achieved revenue of 2.32 billion yuan (yoy -17.5%), net profit of 840 million yuan (yoy +26.1%), net profit of 848 million yuan (yoy +33.3%) after deducting non-net profit of 888 million yuan (yoy +33.3%). Net profit is basically in line with our expectations (800 million yuan). The difference between the two is mainly due to changes in the fair value of REIT funds and losses higher than expected. The company's profit improved year-on-year, mainly due to a recovery in residents' travel. Considering the impact of market price fluctuations on financial asset income, we lowered the company's net profit forecast for 2023/2024 by 3.6/ 1.1% to 17.3/1.95 billion yuan; considering the decline in interest rates on LPR and corporate bonds, we raised Xuanguang's profit after rapid transformation and expansion, and raised the company's net profit forecast for 2025 by 5.5% to 1.94 billion yuan. We used the DDM valuation method to give 600012CH/995HK a target price of RMB 11.59/HK$11.25 (previous value: RMB 9.23/HK$8.95). Based on CAPM, we calculated the discount rate Ke=8.2/ 9.2% (previous value: 8.9/ 10.3%). Maintain the “buy”.
The number of buses resumed growth in the first half of the year, and trucks were relatively weak
The company's 23H1 toll revenue increased 14.3% year on year, costs decreased 3.2% year on year, and gross profit increased 27.3% year on year. On a quarterly basis, the company's 1Q/2Q toll revenue increased 14/ 15% year-on-year, mainly due to: 1) increased residents' willingness to travel; 2) lower base; and 3) positive changes in the road network. According to the Planning Institute of the Ministry of Transport, traffic on the Yangtze River Delta Expressway increased by 9%/39% year-on-year in 1Q/2Q23; the road network in Anhui is close to the Yangtze River Delta. Last year, the 2Q traffic base affected by the epidemic was relatively small. Compared with the same period in '21, the company's 1Q/2Q toll revenue increased by 14%/3%, and the 2Q performance was weaker than 1Q, mainly due to weakening corporate profit expectations, and the growth rate of trucks slowed down. According to the Ministry of Transport, 1Q/2Q road freight volume in Anhui Province changed +8%/-4% compared to the same period in '21. In the first half of the year, all of the company's highways accounted for less than 1H21 in truck traffic.
Core road production benefits from road network penetration
Looking at road sections, the Hening, Gaojie, Xuanguang & Guangci, Anqing Bridge, and Ning Xuanhang Expressway contributed 33/23/16/8/ 5% of toll revenue in the first half of the year. Toll revenue for each section changed +25/+6/-3/+2/ +185% over the same period last year. Among them, benefiting from the completion of the renovation and expansion of the Chuhe Bridge (July '22) and the Heluye Expressway (end of '22) on the adjacent road sections, vehicles flowed back to the Hening Expressway; the parallel road, the Ningluo Expressway was remodeled and expanded, and the vehicles were diverted to the Hening Expressway. The Ningxuanhang Expressway benefited from the completion of the entire line. The connecting Jiangsu section (September '22) and the Zhejiang section (December '22) were opened and operated, attracting traffic to Ningxuanhang. The Xuanguang/Guangci Expressway has diverted some vehicles due to its renovation, expansion, and improved traffic conditions on parallel roads.
The plan is to issue shares to buy Liubu Expressway and increase the dividend ratio
Anhui Express announced on 4/18 and 6/21 that it intends to acquire 100% of the shares of Liuwu Expressway and raise supporting capital from Anhui Traffic Control, the majority shareholder, by issuing A-shares and paying cash; if this transaction is implemented, the company's 7/22 announcement promises to increase the dividend ratio to 75% for 2023-2025 (60% commitment for 2021-2023). Since the matter still needs to be approved by the shareholders' meeting and regulators, our model has not yet been reflected.
Risk warning: willingness to travel has declined, road network changes have exceeded expectations, capital expenditure has exceeded expectations, and rates have been lowered.