The company's recent situation

The company announced that it plans to acquire 65% of the shares of Suxi Changnan Expressway from Jiangsu Traffic Control for 5.2 billion yuan. In addition, the company signed a letter of intent with Wuxi Transportation to discuss the acquisition of 22.8% of its shares in Suxi Changnan Expressway Company and actively seeking the acquisition of 12.2% of the shares of Suxi Changnan Expressway Company held by Changzhou Gaotou.

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The acquisition of road products is located in the southern Jiangsu region and has an excellent location. The Suxi-Changnan Expressway, which the company plans to acquire, has a total length of 43.9 kilometers, including the 10.79 km Taihu Tunnel with 6 lanes in both directions. It will be opened on December 30, 2021 and will expire on December 29, 2046. Lushan is located on the south side of the main cities of the three cities of Suzhou, Wuxi, and Changzhou. It spans the waters of Taihu Lake. It is an important part of the “15 shots” of the “15 shots, 6 vertical and 10 horizontal” highway planning network in Jiangsu Province, and is also an important intercity traffic route in the Yangtze River Delta region. According to the company's announcement, from January to October 2023, Suxi Changnan Expressway Company achieved revenue of 498 million yuan. After annualization, the revenue per kilometer in 2023 was 13.6 million yuan/km, which is higher than the overall average of the Ninghai-Shanghai Expressway (the average revenue per kilometer of the company controlled road production in 2021 was 12.845 million yuan/km).

Traffic is still climbing, and road production may be losing money in the short term, but they are optimistic about long-term profits. The company's acquisition consideration is 1.1 times the P/B. The road production has been operating for a short time, traffic is still climbing, and due to relatively high investment costs, the Suxi Changnan Expressway Company is currently still in a state of loss. The net profit for January-October 2023 was -170 million yuan. We believe that road production has an excellent location. As traffic increases, road production is expected to bring good profit contributions to the company in the long term, but we think the market may be concerned about short-term losses.

The dividend per share may still be maintained. In addition to the impact of the epidemic in 2020-2022, the company's dividends per share have increased year by year since 2014, and the absolute amount of the company's annual dividends has not decreased under the influence of the pandemic. Based on the company's historical dividend model and future capital expenditure, we believe that the company's dividend per share may still be maintained.

Profit forecasting and valuation

Considering that the transaction was not completed, we kept the profit forecast for 2023 and 2024 unchanged. For the first time, we introduced a profit forecast of 5.27 billion yuan for the year 2025. The current A-share price price corresponds to 11.4 times the price-earnings ratio in 2024, and the valuation switched to 2024. In addition, considering the steady operation and dividend policy of the company, we have maintained an outperforming industry rating and raised the target price of A-shares by 10% to 12 yuan, corresponding to 12.1 times the 2024 price-earnings ratio. There is 5.4% upside compared to the current stock price. The current H share price corresponds to 6.7 times the price-earnings ratio in 2024. Considering the higher risk-free interest rate of H shares and lower market liquidity, the return on dividends required by investors is higher. H shares maintain an outperforming industry rating and a target price of HK$9.92, which corresponds to 8.7 times the price-earnings ratio of 2024, with 29.0% upside compared to the current stock price.

risks

Traffic growth fell short of expectations, and economic growth fell short of expectations.