Core road products have a long remaining period of time, and the ability to reinvest in the main business is strong. The overall road production is mainly cross-provincial trunk routes, and the remaining period is long. Among them, the core roads are Hening Expressway, Xuanguang Expressway, and Gaojie Expressway. The operating period is expected to be extended by 25-30 years. The main business reinvestment is mainly based on renovation and expansion and the acquisition of high-quality road products. The return rate is high, enhancing business sustainability.
Revenue side potential release: 1) The long-term GDP growth rate of Anhui is at a high level in the country. The CAGR reached 10.1% in 2013-2022. It undertook industrial transfers, strong economic vitality, and net population inflows to support traffic growth in Anhui. Automobile ownership in Anhui Province increased 24.1% in 2022 compared to 2019. 2) Road trucks account for a relatively high share of traffic, and have high revenue elasticity in the procyclical period. 3) The Hening Expressway will complete the “four change to eight” line by the end of 2022, doubling the traffic volume compared to before the renovation and expansion. The Xuanguang Expressway will complete the “four change to eight” by the end of 2024, and traffic volume may increase significantly. The “guillotine roads” of the Ningxuanhang Expressway and the Yuewu Expressway have been opened one after another, and the road network synergy is gradually showing, and it is expected to turn losses into profits for 24 years.
The share of the cost side is declining: 1) The straight-line method is used to depreciate and amortize road products. Operating costs are fixed costs. As toll revenue increases, gross margin increases, and performance flexibility is high. 2) The debt level is healthy, and the financial expense ratio and period expense ratio are far lower than those of peers. Without major capital expenses, the company's overall financial expense ratio is on a downward trend, and we expect expenses for other periods to be relatively stable.
Profitability is high, and dividend rates are rising steadily. The dividend rate reached 63% in '22, and the 2023-2025 plan is to further increase it to 70%. If the acquisition of the Liuwu Expressway continues to advance, the fixed increase price is expected to increase, thereby reducing the share dilution ratio. If successfully implemented, the dividend rate will be further increased, and the company's dividend ratio may increase to 75% in 2023-2025.
Profit forecasting and valuation: The company's flexible recovery after the epidemic. The renovation and expansion volume+smooth road network brought about flexible performance. The dividend rate is high and improved, and high dividends have allocation value. We estimate that the company's net profit for 2023/2024/2025 will be RMB 17.24/18.66/1.969 billion, respectively, and the corresponding EPS of RMB 1.04/1.12/1.19 yuan, respectively. Expressway targets with high dividends, steady growth, bonds, and good cash flow have high defensive attributes and allocation values. Economic shocks, declining interest rates, or an increase in the valuation of the highway sector and the Wantong Expressway are given 11 times the PE valuation in 2024. The corresponding target price is 12.37 yuan. For the first time, coverage is given a “superior to the market” rating.
Risks: Traffic growth has slowed, toll rates have been drastically lowered, negative effects of renovation and expansion have exceeded expectations, failed acquisitions, rising interest rates, etc.