The stock offering was oversubscribed to raise 6.15 billion yuan for renovation and expansion

Zhejiang, Shanghai, Hangzhou, and Ningbo completed the stock offering (10 for 3.8 shares) on December 14, the first equity financing since listing, and the stock offering was oversubscribed. The issue price is HK$4.06 per share. The capital raised was RMB 6.15 billion, mainly for highway renovation and expansion. The road property acquisition process is speeding up. In September, the company acquired 15% interest in Yongtaiwen Expressway and 100% interest in Huangqunan Expressway. At the same time, the company plans to jointly acquire 60% interest in Yonglan Expressway with China Merchants Highway. Considering the recovery in traffic and favorable asset acquisitions since this year, we raised our net profit forecast for 2023/24/25 by 0.6/2.5/ 1.3% to 50.3/56.5/6.07 billion yuan. Considering the comprehensive impact of stock offers/road property acquisitions/restructuring and expansion on equity and cash flow, we adjusted the target price to HK$6.40 (previous value of HK$7.96), still based on the segmented valuation method, where the highway discount rate was 6.8%. The company promised to increase dividends to 75% of distributable profits from 2023-2025 (68/47/ 60% for 2020/21/22).

Based on this, we expect the 2023 DPS to be 0.42 yuan, corresponding to a dividend rate of 9.2%. Maintain “buying.”

The expressway is planned to be renovated and expanded, and the operating period is expected to be extended

The capital raised is intended to be used for: 1) highway renovation and expansion not exceeding RMB 5.5 billion; 2) supplementary working capital, etc. not exceeding RMB 1 billion. The company has several expressway projects whose operating period expires centrally around 2030. The remaining period is relatively short, and the toll period can be extended through renovation and expansion. Among them, the renovation and expansion of the Jinhua section of the Yongjin Expressway, the Shaoxing section of the Yongjin Expressway, and the Chajiasu Expressway is scheduled to begin at the end of 2023 and be completed in 2027. The total investment of the project is not more than 35 billion yuan (including government investment). Based on a 20% capital ratio and equity ratio, the company's capital investment is about 5 billion yuan. The company expects the IRR for the renovation and expansion to be above 6%. The operating period may be extended for 25 years after completion of the project. We expect that two years before the construction of the project, traffic will be less affected; two years after construction, traffic guidance may divert vehicles to parallel roads due to the two sides involved; after completion of the project, traffic capacity will be greatly increased, or vehicles will be attracted to a sharp recovery.

The acquisition process has accelerated, and three road properties have been acquired one after another

The stock offering reduces the company's balance to debt ratio and creates room for investment. The company acquired 15% interest in Yongtaiwen Expressway and 100% interest in Huangqunan Expressway from major shareholders in September '23. The transaction prices were 816 million yuan and 017 million yuan respectively. The remaining charging periods were 6.7 years and 12 years, respectively. The company expects the IRR for both road property acquisitions to be above 8% (announcements 9/28 & 10/9). The company plans to establish a joint venture with China Merchants Highway (equity ratio is 50:50; the company's investment is 1.34 billion yuan) to acquire 60% of Yonglan Expressway's interests, with a remaining charging period of about 21.2 years. We expect that the acquisition of three road properties will be slightly beneficial to net profit.

High dividends are attractive during periods of declining interest rates

The valuation is attractive. Based on the 12/14 closing price, the company's 2023 dividend rate is 9.2%, which is significantly higher than the average for the past 10 years (5.7%); the interest spread of the dividend rate reduced risk-free interest rate (420 bps) is also higher than the past 10 year average (350 bps). The Federal Reserve has sent a signal to cut interest rates, which is beneficial to the increase in the valuation of high-dividend assets.

Risk warning: Traffic growth is lower than expected, A-share market turnover is lower than expected, road network diversion is higher than expected, fees have been lowered, and asset purchases have been terminated.