Description of the event
China Merchants Highway issued the “Important Reminder Notice on the Final Trading Day Before Zhaolu Convertible Bonds”: 1) From January 29, 2024 to March 4, 2024, the closing price of China Merchants Highway's stock price for 15 trading days was not less than 130% (i.e. 10.23 yuan/share) of Zhaolu Convertible Bonds's current conversion price (7.87 yuan/share), triggering the “conditional redemption clause” of “Zhaolu Convertible Bonds”. The strong redemption date was March 26; 2) As of March 22 last Friday after market settlement, distance 2024 There is only one trading day left on March 26 (“Zhaolu to Bond” redemption date).
Incident comments
Backed by central enterprises' highway investment and operation platforms, epitaxial mergers and acquisitions and endogenous growth are two-wheel drive. China Merchants Highway is a highway investment and operation service provider with the longest investment and operation mileage and coverage of the widest range of regions under a central enterprise. Unlike most listed expressway companies in China, the controlling shareholder is a local provincial trading company. China Merchants Highway is controlled by the central enterprise China Merchants Group and is the only expressway operating platform under the China Merchants Bureau. The company continues to acquire high-quality road products, driving the rapid growth of the main business. In 2014-2019, the company's compound revenue growth rate reached 13.0%, and the compound performance growth rate reached 8.0%. Both revenue and performance maintained a relatively rapid growth rate, mainly due to: 1) the increase in the company's performance of mergers and acquisitions of high-quality road products; 2) the natural increase in vehicle traffic of the original road products. In 2014-2019, the compound growth rate of the company's toll revenue reached 19.3%, ranking among listed expressway companies. Successful epitaxial mergers and acquisitions are about the ability to find projects and higher yield requirements. The company carries out road product acquisitions throughout the country, and market-based incentives drive the company to find high-quality investment projects.
The debt-to-equity swaps will be implemented, and the stock price suppression will be lifted. The company issued 50 million convertible bonds in March 2019, with a face value of 100 yuan each, with a total issuance amount of 5 billion yuan; starting in the second half of 2023, the company's convertible bonds are approaching the trigger price for forced redemption. The market is worried that the 5 billion convertible bonds will have a one-time conversion or a large dilution impact on the market value of the main stock, causing the company's stock price to stagnate compared to comparable companies. Since 2024, the increase in Zhaolu's stock price has been the penultimate among the 7 comparable companies. The absolute return from the beginning of the year is only 11.5%, not considering the dividend rate corresponding to the 23 5. 4% On March 4, the company's debt conversion triggered strong redemption. The strong redemption date was March 26; as of last Friday (March 22), there was only one trading day left until the compulsory redemption of Zhaolu Bonds. The balance of Zhaolu Bonds was 2.97 million yuan, which had a very limited impact on the company's market capitalization of 68.1 billion last Friday. It is expected that as the forced redemption date approaches, the company's debt-for-share swaps will be fully implemented on March 25, and the company's stock price suppression will gradually be lifted, and the optimal allocation period will be ushered in.
Investment advice: A leading highway company with both offense and defense. The company is a leading highway operator with both offense and defense. Relying on the background of the China Merchants Bureau, it acquires high-quality road products nationwide, and has a strong driving force for long-term growth. At the same time, the company has a young road production system and relies on its main business to lay out the entire highway industry chain, with sufficient endogenous growth momentum; the company vertically extends the entire industry chain through transportation technology, smart transportation, and investment ecology, and has both capacity collaboration and resource synergy. With the recovery in traffic, the company's profits are expected to continue to grow rapidly. In addition, the company continued its high dividend policy and issued a dividend promise. The dividend ratio for 2022 to 2024 will not be less than 55%, and the company's dividend rate is expected to reach 5.4% in 2023. The company's net profit for 2023/2024/2025 is estimated to be 66.7/73.8/8.07 billion yuan, respectively, and the corresponding PE valuation is 10.2/9.2/8.4X, respectively, maintaining a “buy” rating.
Risk warning
1. Traffic growth falls short of expectations; 2. Operation falls short of expectations after the acquisition of road products; 3. Changes in highway toll policies; 4. Risk that profit forecasting assumptions are untrue or fall short of expectations.