The company announced a pre-increase in 2023 performance: 1) The company expects to achieve net profit of 1.885-1.285 billion yuan in 2023, an increase of 55.90%-84.63% year-on-year, after deducting non-net profit of 950-1,140 million yuan, an increase of 28.91% -54.69% year-on-year. 2) Net profit attributable to mother for the first three quarters of 2023 was 1,084 million yuan, and the estimated net profit range for 23Q4 was 0.01-210 million yuan. The fourth quarter is usually the quarter where maintenance expenses are confirmed to be larger, and the profit for a single quarter will be lower than the level of the previous three quarters.

We analyzed the rapid year-on-year increase in 2023 performance. The main reasons include: 1) The recovery in traffic volume, the steady increase in traffic on the road sections under the company's jurisdiction, and the increase in traffic service revenue compared to the previous year. 2) We recommend focusing on the reduction in the cost rate during the company period. In particular, the financial expense ratio was significantly optimized. For example, 23Q3 sales expense ratio was 1.08% (YoY -0.12pct), management expense ratio 3.31% (YoY -0.22pct), R&D expense ratio 0.74% (YoY +0.14pct), and financial expense ratio 5.31% (YoY -3.34pct). The total cost ratio for the period decreased by 3.54 pct.

The main reason for the decline in financial expenses is that corporate bonds 13 Ganyue MTN3 (interest rate of 5.35%, scale of 1.5 billion) and 13 Ganyue 01 (interest rate of 5.15%, scale of 1.8 billion yuan) expired in March 2023 and April 2023, respectively. The company's current comprehensive cost of issuing bonds is significantly lower than the interest rate of the previous 10-year corporate bonds.

We emphasize that the company has a core competitive advantage and that there is room for continuous improvement in performance. Highlight 1: The remaining charging period for core road products is long, and renovation and expansion unleash new growth potential. The remaining toll periods for the Changjiu Expressway and Changzhang Expressway have reached 26 and 20 years respectively; construction of the Zhangji section of the Changtai Expressway officially commenced in 2022.

The Changjiu Expressway achieved revenue expansion after the renovation and expansion of the Changtai Expressway. After the completion of the renovation and expansion of the Changtai Expressway, the north-south corridors in Jiangxi Province will all have eight lanes, improving traffic efficiency and helping to further develop the road network connectivity effect. Highlight 2: We believe there is still clear room for improvement in financial expenses. As the company's past few high-interest bonds expire, financial expenses will be significantly optimized. In 2024, the 2.3 billion yuan 14 Ganyue-02 (interest rate is 6.09%) will expire, and interest rates on ultra-short-term financing notes recently issued by the company will continue to decrease, leading to continuous optimization of financial expenses. Highlight 3: The company's dividend ratio was low in the highway industry in '22, but we believe that in combination with the general background of the supervisory authorities advocating dividends and the company's promotion of a modern governance system, there is some room and potential for improvement in the future.

Investment advice: 1) Profit forecast: We maintain the company's profit forecast for 2023-25, that is, the estimated net profit to be realized is 1.2 billion, 1.3 billion and 1.41 billion yuan, respectively, and the corresponding EPS is 0.52, 0.56 and 0.6 yuan, respectively, and the corresponding PE is 8, 8, and 7 times, respectively. 2) Target price: The company's current PB is less than 0.6 times, which is significantly lower than the industry average (1.3 times the average of companies with a market value of 10 billion dollars or more), but we believe that the company's road production is of high quality and potential. From the perspective of a special estimate, there is room for market value repair. Based on the fact that the gross margin level of core road production is not weak compared to leading companies, we maintain a target market value of 13.3 billion yuan and a target price of 5.68 yuan. We expect 36% of the space above the current price to maintain a “strong push” rating.

Risk warning: The progress and results of the renovation and expansion fall short of expectations; the increase in traffic falls short of expectations.