Changshi's infrastructure sector was split up and listed, leading overseas infrastructure sector investment. Changjiang Infrastructure Group was established on May 28, 1996. The infrastructure assets originally held by Changjiang Industrial Group Limited (“Changshi”) were spun off and independently listed on the main board of the Hong Kong Stock Exchange in July of the same year. The company focuses on infrastructure fields such as electricity distribution networks, gas transmission and distribution networks, transportation, water, and waste to energy conversion. The business is also gradually expanding into infrastructure-related housing estate services. The Yangtze River infrastructure business spans the world. In addition to some assets in Hong Kong and mainland China, the company's investments are mainly concentrated in the United Kingdom, Australia, mainland Europe, New Zealand, Canada and the United States.
The profitability of core assets is stable, and the UK sector contributes the most to revenue. In the first half of 2023, the company achieved revenue of HK$3,217 billion, a year-on-year decrease of 6%. The total revenue, including joint ventures, was HK$19.534 billion, down 3% year on year, and net profit to mother was HK$4.239 billion, a decrease of 4% year on year. The decline in revenue was mainly due to exchange. When measured in local currency, the profit of the joint venture increased 4% year on year. After splitting the company's net profit contribution, in the first half of 2023, the company's share of the joint venture's profit and loss was HK$1,239 million, which was basically the same as the previous year. The two accounted for 77.52% of net profit. By region, the UK sector contributed the most to revenue, accounting for 36%.
The company's finances are steady, and cash dividends are growing steadily. The joint ventures under Changjiang Infrastructure have stable annual dividends and interest expenses, and the company has plenty of cash on hand. The 2023 mid-year report shows that the company holds HK$12.053 billion in cash and equivalents, while maintaining a low debt ratio. By the end of June 2023, the company's net balance ratio was around 25%, and the net debt to total assets ratio was as low as 9.3%. Changjiang Infrastructure Group has maintained dividend growth for many years. The dividend payment ratio remains high. The dividend payment rate is around 80%, with an average dividend rate of 4.1%.
Overseas price control rules have been reset, and the profit impact was less than expected. For power grid and gas companies, Ofgem in the UK has set up a price control mechanism aimed at balancing grid investment and the return on the company's operations. The Ofgem pricing mechanism is called RIIO. Among them, RIIO-ED2 is a price control measure set by power grid companies to provide low-voltage users such as residents and businesses at the end of 2022. The implementation period is 2023-2028. The main elements of RIIO-ED2 include the return on capital subsidy rate of 3.9% (CPIH-REAL) based on inflation, which is 4.4% lower than ED1, and the TOTEX minimum subsidy standard was lowered by 11.8%.
Profit forecast and investment advice: We expect the company's main operating income for FY24-26 to be HK$72.03/74.17/7.509 billion, respectively, with corresponding net profit of HK$78.18/84.17/8.507 billion, corresponding EPS of 3.1/3.34/3.40. Since financial investment is the main focus and the company's dividends are stable, we use DCF for valuation estimates. The target price is 52.85 HKD/share, giving the 2024 PE 15.82 times the initial coverage rating.
Risk warning: risk of uncertainty in policy direction; risk of abnormal exchange rate fluctuations; risk of infrastructure sector policies and regulations in various countries and regions