Event: Proposed acquisition of smart transportation-related assets owned by major shareholders
The company plans to acquire 65% of the shares of Shandong Expressway Information Group Co., Ltd. held by the majority shareholders (11/23 announcement). The target company is mainly engaged in highway mechatronic system integration (including procurement, installation, commissioning, operation and maintenance of equipment such as monitoring, communication, and toll collection), which is in line with the general direction of smart transportation development. The target company's net profit for the 2021/22 consolidated statement was $233/277 million (audit report). The transaction price is 2,534 billion yuan in cash; before the acquisition is completed, the target company's intelligent connected calculation base is expected to be divested, and the actual equity transfer amount after the divestment is 2.53 billion yuan. The company expects the IRR of this investment to be 12.26%. The transaction is subject to approval by the shareholders' meeting, and our model does not yet reflect the acquisition. We maintain our net profit forecast for 2023/24/25 at 34.1/36.0/3.64 billion yuan. We still maintain the target price of 7.15 yuan and the “increase in holdings” rating based on 11.6x2023PE (giving a 10% premium on the 10.5x weighting center of the comparable company's market capitalization, reflecting the company's high dividend rate advantage).
Extend upstream in the highway industry chain and enter the field of smart transportation
The target company and the listed company have an upstream and downstream relationship in the highway industry chain. The business is collaborative, and the operational risk is relatively manageable. The target company's business structure includes mechanical and electrical construction integration, software development, and data operation.
Integrated revenue from mechatronic construction accounted for 84.34% (2022), including motorway electromechanical equipment integration, traffic safety facility construction, and power facility relocation projects; software development revenue accounted for 10.87% (2022). The target company's business areas are smart transportation and smart cities. The target company has 1 national-level specialty, specialty, and new small giant enterprise and 8 provincial specialized, specialized, and new enterprises; R&D personnel account for 30% of the employees (official website of the target company).
The stock business model is stable and in line with the general direction of smart transportation development
The integrated model of highway mechanical and electrical construction is steady. Business growth includes: 1) construction and renovation to release mechanical and electrical engineering requirements; 2) road equipment updates during the operation period, usually 5-10 years; and 3) daily operation and maintenance of existing equipment. Looking forward to the future, smart transportation is in line with the development direction of the industry and has greater potential for development. The Ministry of Transport recently issued “Opinions on Promoting the Digital Transformation of Highways and Accelerating the Development of Smart Highway Construction” and proposed targets for 2027 and 2035 to promote the digital transformation of the entire process of highway construction, maintenance, and operation.
Get new profit growth points, and the target company has a strong ROE
According to the audit report, the target company's weighted ROE in 2021/22 reached 12.4/ 11.5%, slightly higher than Shandong Expressway (the weighted ROE in 2021/22 was 9.9/ 8.3%). The target company's balance ratio at the end of October 2023 was 59%, and Shandong Expressway's balance ratio for the third quarter of 2023 was 62%. The target company's total revenue in 2021/22 was 31.5/40.1 billion yuan, net profit was 233/277 million yuan, net interest rate was 10.0/ 9.6%, and total asset turnover was 0.55/0.58 times. Considering the increase in equity profits (mergers under the same control traceable throughout the year), internal offsets from transactions, and the company's shareholding ratio under the same control, assuming that the acquisition is completed before the end of the year, we expect the company's net profit to increase by 13—160 million yuan in 2023.
Risk warning: residents' unwillingness to travel, road network diversion, high capital expenditure, risk of asset impairment.