Core viewpoints
Road stocks have risen this year with four drivers: recovery in travel, falling interest rates, weaker risk appetite and increased holdings of long-term funds. The market believes that interest rates and risk appetite are already in a low position, and it is not cost-effective to continue to hold highway stocks. We believe that the summer traffic volume is significantly higher than 1H, 3Q profit is interesting, and the market may underestimate the supporting role of long-term funds. The company promises a dividend rate of 70% in 2021-2023, based on which we expect the dividend yield of 2023E to be 6.8%. Compared with the historical PE and the average dividend yield minus the risk-free spread, the current valuation is attractive. We estimate that the company's annual EPS in 2023-24-25 will be 0.79 max 0.86 max 0.88 (previous value: 0.77 0.84 max 0.88). Our target price is 10.14 yuan (the previous value is 9.97 yuan), which is based on the average calculated by DCF and PE. DCF is based on WACC=6.12% (the previous value is 6.50%), and PE is based on 11.2x2024E PE (a 25% premium rate is given on the Wind consensus expectation hub 8.99x to reflect the advantage of high dividend; the previous value is 12.3x2023E PE). Maintain "buy".
The core road products are located in the Pearl River Delta, focusing on the main business and adhering to high dividends.
The company's core road products are located in the Pearl River Delta region, with outstanding geographical advantages. The profits mainly come from the Guangzhou-Zhuhai section of Beijing-Zhuhai Expressway (Guangzhou-Zhuhai), Guanghui Expressway (Guangzhou-Huizhou) and Fokai Expressway (Foshan-Kaiping). The three expressways contribute 80% of the return net profit (1H23). The company focuses on the main highway business, accounting for a relatively small proportion of financial investment, and the holding road property / shareholding road property / financial assets contribute 80 to 12.8 per cent of 1H23. The situation of corporate governance is good, and we have adhered to the high dividend policy for a long time, with a dividend rate of 70% in 2016-2022.
3Q is profitable and has long benefited from the Great Bay area Interconnection Company.
1H23 income / return net profit increased by 140.14% compared with the same period last year, mainly due to: 1) the recovery of travel boosts traffic; 2) the low base of 1H22; and 3) the depreciation of road assets in the north section of Fokai has been completed. The company's bus revenue accounts for a relatively high, 3Q profit boom. According to the Planning Institute of the Ministry of Communications, in July / August, the cross-section traffic volume of high-speed passenger cars on trunk lines across the country increased by 22% compared with the same period last year, an increase of 24% over the same period in 19 years, and significantly better than the first half of the year (12% higher than 1H19). Road freight transport is weakly cyclical, with a flat performance in the first half of the year, but with the bottom of the inventory cycle and the improvement of PPI and PMI, road freight transport also shows signs of stabilizing from July to August. The company has long benefited from the interconnection in the Greater Bay area, and "Macau cars going northward" and "Hong Kong cars northward" are expected to bring about an increase in traffic flow.
The core road production is proposed to be rebuilt and expanded, and the charging period is expected to be extended.
The average remaining toll period of the company's road property is about 13.7 years (the base period is the end of 2022), and it is expected to extend the toll period through reconstruction and expansion. In the holding road production, Fokai Expressway has completed the reconstruction and expansion and extended the toll period, the Guangzhu section of Beijing-Zhuhai Expressway is being renovated and expanded, and Guanghui Expressway has carried out preliminary research on reconstruction and expansion. According to the toll standards of expressways in Guangdong Province, the toll standards are expected to increase by 33% after the four-lane section is rebuilt and expanded to six or more lanes.
Company 2023-2024H1 road network impact is neutral, 2024H2-2025 may be affected by diversion. Among them, the surrounding road networks of Fokai Expressway and Guanghui Expressway are relatively stable from 2023 to 2025; the Guangzhu section of Beijing-Zhuhai Expressway may be affected by the opening of Shenzhong Corridor (expected in mid-2024; Xinhua News Agency) and reconstruction and expansion.
Risk tips: reduced willingness to travel, higher-than-expected changes in the road network, higher-than-expected capital expenditure, and lower rates.