Core view: Q3 net profit is in line with our expectations. Benefiting from the release of summer travel demand, the company released its 2023 three-quarter report. Q1-Q3 achieved total revenue of 12.350 billion yuan (+9.3% year-on-year) and net profit of 4,079 billion yuan (+38.7% year-on-year); of these, Q3 achieved net profit of 1,415 billion yuan (+4.5% year-on-year, +26.7%), in line with our expectations (1,431 billion yuan). Q3 Net profit increased year-on-year, mainly due to the increase in summer traffic conditions. Q3 net profit increased month-on-month, mainly due to: 1) summer is the peak travel season; 2) Q2 is due to the low exchange loss base. We maintain our 2023/2024/2025 net profit forecast at 50.0/55.1/6.0 billion. We adjusted the target price to HK$7.96 (previous value: HK$7.68), and the valuation is still based on the segmented valuation method, where the toll road discount rate WACC is 7.4%. The company plans to offer shares to raise capital for renovation and expansion. Our model and target price are yet to be reflected. Maintain a “buy” rating.

By business, the profit of Q3 Securities declined slightly, and the banking and road business recorded an increase. We expect the company's Q3 to account for a year-on-year change of -2%/+13%/+11% in the net profit of securities, banks, toll roads and other businesses. The net profit of the three businesses accounted for about 12%/12%/68%. The securities subsidiary's Q3 net profit fell 2% year on year and 1% month on month, mainly affected by adjustments in the A-share market.

The Q3 net profit of the affiliated company Shanghai Agricultural Commercial Bank increased 11% year-on-year, affected by the 22-year low base, and increased 1% month-on-month in Q2. The net profit growth of toll roads was relatively good, mainly benefiting from the release of summer travel demand.

Travel continues its recovery trend, with steady growth in Q3 deduction of non-toll fees

Considering that the securities subsidiary's Q3 revenue increased 1% year over year and the company's total revenue increased 2% year over year, we expect Q3 toll revenue to record a year over year increase. After excluding the Shenjiahu-Hangzhou Expressway (which was announced in Q4 '22, accounting for about 7% of toll revenue in '22), we believe that Q3 non-toll revenue grew at a higher year-on-year rate. According to the Planning Institute of the Ministry of Transport, in July-September, the national highway bus section traffic volume increased 31% year on year, up 32% from the same period in '21, significantly better than the first half of the year (up 8% from 1H21); truck section traffic increased 4% year on year, up 5% from the same period in '21, and was also significantly better than the first half of the year (down 6% from 1H21) (Ministry of Transport Planning Institute). However, due to the mistiming of this year's Golden Week (9.29-10.6), the number of days receivable in September decreased by 2 days year on year, which dragged down September revenue by about 6.7%.

It is proposed to use 10 shares for no more than 3.8 shares, and the capital raised for the highway renovation and expansion company plans to fund no more than 3.8 shares with 10 shares. The capital raised will not exceed RMB 6.5 billion, mainly for highway renovation and expansion. The renovated and expanded road sections include the Yongjin Expressway and the Chajia-Su Expressway. It is expected that the toll period will be extended after the renovation and expansion of the project is completed. The matter was approved by the shareholders' meeting (7/24), but it has not yet been implemented. If the stock offering is completed, the company plans to increase the 2023-2025 dividend to 75% of distributable profits.

The company's actual dividend for 2020/2021/2022 is 68/47/ 60% of distributable profit and 51/34/ 30% of net profit from the parent.

Risk warning: The traffic growth rate was lower than expected, the A-share market turnover was lower than expected, the degree of road network diversion was higher than expected, the scale of capital expenditure was higher than expected, and the fee standard was lowered beyond expectations.