The virtuous cycle of “dividends-market capitalization-assets” promotes a win-win situation for “investors, companies, and groups”. 1. Starting in 2020: Shandong Expressway launched a five-year dividend plan, greatly increasing shareholders' return expectations. In April 2020, the company raised the 2019 dividend ratio to 60%. Previously, the dividend ratio was in the 30-40% range. In July, it further launched a five-year dividend plan, promising that the dividend ratio for 2020-24 will not be less than 60%, and we have observed a steady increase in the company's dividend amount per share since 2019-22, and since then it has entered the first tier of high dividends.

2. Positive feedback on market performance to achieve effective valuation improvement. 1) Event-driven look: After the announcement of an increase in the dividend ratio, there was a significant increase in the short term. Five trading days after the 2019 dividend ratio was raised to 60%, a five-year return plan was introduced, and the stock price surged more than 7%. 2) The increase is not a one-off, and the valuation is based on an effective increase and a steady upward trend. The company's net market ratio increased from around 0.8 times PB in early January 2020 to 1 times PB in July 2020. As of February 2, 2024, it was more than 1.2 times PB. 3. Acquire group assets to expand, strengthen and improve the listing platform. 1) Clear positioning: As of 2023Q3, Shandong Expressway Group held 70.48% of the shares. The Group determined that Shandong Expressway will be the only platform for the operation and integration of the Group's high-quality highway and bridge assets. 2) Main business acquisition: In 2021, the company acquired 38.93% of Qilu Express's shares for 1,554 billion yuan to become a Qilu Express controlling shareholder; 3) Expand the industrial chain and value chain to create long-term sustainable development capabilities, including the acquisition of Rail Transit Group shares from Shandong Expressway Group in 2020 to expand the railway freight sector, and achieve total profit of 4.8, 4.1, and 4.6 billion yuan in the railway business in 2020-22; in November 2023, the company announced that it plans to acquire Shandong Expressway Information Group 65 from the Group for 2.53 billion yuan % equity. The Group promises that the target company will achieve net profit of not less than 267 million yuan, 266 million yuan, and 313 million yuan in 2024-26. 4. Wantong Expressway: A similar path, increasing shareholder returns and helping to effectively increase valuation. Starting with Wantong Express's dividend rate increase, the 0.8 times PB in early November 2021 soon increased to 1 times in early 2022, and is currently 1.7 times. 5. Brief analysis of implications: Using dividends as a starting point to achieve a win-win situation for all parties. 1) Event-driven perspective: Increasing the dividend ratio (current and commitment for the next three years or more) is directly effective in increasing market value and valuation, and the market immediately gives clear positive feedback. 2) Raising dividends is catalytic or not one-time. By raising investors' long-term return expectations, value investment drives a steady increase in market value. 3) After the market value and valuation of listed companies are repaired, effective interaction with controlling shareholders is expected to increase, including but not limited to the expansion of asset size, optimization of asset structure, improvement of profit quality, etc., to achieve a win-win situation for both the long-term sustainable development of listed platforms and the group's asset securities ratio. Investors can also share profits through higher dividend returns. Taking Shandong Expressway, etc., as an example, it is expected that “dividends-market-capitalization-assets” can achieve a virtuous cycle; investors, listed companies, and groups can achieve a win-win situation for all parties.

Shandong Expressway: Core road products have entered a period of releasing dividends for renovation and expansion, strengthening the shareholder return base. 1. The remaining charging period for the company's core road production is long. The company's self-managed road production mileage is as high as 1,555 kilometers, with a weighted remaining period of 15 years. Among them, the Jiqing Expressway, Beijing-Taiwan Expressway, Jihe Expressway, and Wujing Expressway together accounted for more than 70% of road production revenue. In particular, the Jiqing Expressway, which accounts for 35% of toll revenue, has 21 years left.

2. The Jiqing Expressway and Beijing-Taiwan Expressway were renovated and expanded or entered a profit release period. Jiqing Expressway: The largest contributor to road production. The renovation and expansion was completed in '19. The revenue in '21 is before the super expansion. The feasibility report predicts that the toll revenue for the Jiqing Expressway will reach 5.318 billion yuan by 2030, an increase of 45% over the $3,665 billion in '21. Sectional renovation and expansion of the relevant sections of the Beijing-Taiwan Expressway are being promoted, and the completed section shows a good restoration of traffic flow.

Investment advice: 1. Profit forecast: We expect the company to achieve net profit attributable to mother in 2023-25 of $3.23, 36.1 billion and $3.91 billion, with year-on-year growth rates of 13.1%, 11.8% and 8.3%, respectively, and corresponding PE of 11.6, 10.3 and 9.5 times, respectively. 2. Target price and investment advice: In the 2024 investment strategy, we are optimistic about the performance of dividend assets. We expect more high-quality assets to enter the ranks that value dividend returns, a combination of factors such as promotion and encouragement from the regulatory authorities, and the need for long-term capital allocation. As of February 2, '24, the average PB of the 7 A-share highway companies with a market capitalization of 10 billion or more was 1.4 times. As the core target of the industry with leading operating mileage and high revenue and profit scale, PB was only 1.2 times lower than the average of leading companies. At the same time, the company's expected dividend rate for 2023 was at least 5.2% (considering dividends according to the promised lower limit of 60%).

We gave the expected net assets in 2024 (after deducting the impact of perpetual bonds) 1.4 times PB, with a target price of 9.44 yuan. We expect 22% of the space compared to the current price, which is equivalent to a dividend rate of 4.2%. Covered for the first time, giving it a “Recommended” rating.

Risk warning: The risk of impairment of Evergrande Real Estate's equity transfers, the progress and effects of the renovation and expansion fall short of expectations, and the increase in traffic volume falls short of expectations.