1H23 results in line with our expectations
Shandong Hi-speed announced its 1H23 results. Revenue rose 20.9% YoY to Rmb9.71bn, and net profit attributable to shareholders rose 14.8% YoY to Rmb1.77bn, in line with our expectations. In 2Q23, revenue increased 18.3% YoY to Rmb5.29bn, and net profit attributable to shareholders grew 16.4% YoY to Rmb957mn.
Trends to watch
Renovation and expansion of road assets boost toll revenue;
investment income grows steadily. By segment: 1) Road and bridge operation: Toll revenue rose 8.7% YoY to Rmb5.19bn in 1H23.
Specifically, toll revenue from Jiqing Expressway (a core road asset of the firm) increased 3.2% YoY and fell 1.7% vs. 1H21 to Rmb1.74bn. Toll revenue from Jingtai Expressway rose 43.3% YoY to Rmb1.06bn in 1H23, mainly thanks to the expansion and opening of the Jinan-Tai'an section.
2) Investment income: In 1H23, investment income rose 7.0% YoY to Rmb648mn. The steady growth in investment income was attributable to the disposal of its real estate business last year and the steady progress of financial investments.
3) Rail transit service: In 1H23, revenue increased 11.5% YoY to Rmb2.34bn, and attributable net profit grew 4.7% YoY to Rmb182mn, with railway freight volume up 14.2% YoY, outpacing the national and industry average by 7.4ppt and 7.1ppt.
Over the medium-to-long term, renovation and expansion of road assets could boost growth as they gradually come into operation. The firm improved capacity and had raised the standards for toll collection over the past few years via the renovation and expansion of its core road assets, including Jiqing Expressway, and the Dezhou-Qihe section and Jinan-Tai'an section of Jingtai Expressway, underpinning the growth momentum of its main business.
Looking ahead, according to the firm's announcement, the Qihe-Jinan section of Jingtai Expressway and Jihe Expressway (controlled by Qilu Expressway) are undergoing renovation and expansion, and related work is scheduled to be completed in 2026 and 2024, respectively. Considering the firm focuses on the Shandong market, which has a strong local economy, and taking into account the advantageous locations of the road assets controlled by the firm, we believe the road assets under expansion and renovation will, after commencing operation, give a further boost to Shangdong Hi-speed's toll revenue growth.
Dividend policy stable; dividend yield attractive. According to the firm's previous announcement, its dividend payout ratio should be no lower than 60% over 2020-2024. The firm's DPS did not decline even if its earnings came under pressure over 2020-2022 affected by the COVID-19 pandemic. We believe the firm's prudent dividend policy may effectively ensure absolute returns for investors. According to our calculation, the current share price implies a dividend yield of 7.3% and 7.8% in 2023 and 2024, highlighting its characteristic as a defensive stock.
Financials and valuation
We maintain our 2023 and 2024 earnings forecasts. The stock is trading at 9.2x 2023e and 8.7x 2024e P/E. We maintain OUTPERFORM rating and a target price of Rmb8.07, implying 11.1x 2023e and 10.4x 2024e P/E, and offering 19.7% upside.
Risks
Disappointing progress of the renovation and expansion projects; slower- than-expected economic growth.