Core view: The net profit of the 23rd annual report is in line with expectations. It is proposed to distribute dividends at the 60% dividend ratio. In 2023, it will achieve revenue of 6.63 billion yuan (yoy +27%), net profit to mother of 1.66 billion yuan (yoy +15%), deducting non-net profit of 1.74 billion yuan (yoy +22%), and net profit is in line with our expectations (1.70 billion yuan). The main reasons for the increase in net profit: recovery in travel, low performance base, and positive road network changes. We expect the company's net profit to be 18.9/19.4/2.09 billion yuan in 2024/25/- (previous value: 19.1/19.4 billion yuan), mainly considering that traffic volume was still affected during the Xuanguang renovation and expansion period in 24. We gave a target price of HK$15.7/HK$14.5 for A/ H shares based on the DCF valuation method (the previous target price was $11.62/HK$11.18, based on the DDM valuation method), and WACC used 6.41%/8.01%. We believe that DCF can more fairly reflect the return on reinvestment of retained capital than DDM. The company plans to pay a 2023 dividend of 0.601 yuan/share at a 60% dividend ratio, which corresponds to a dividend ratio of 4.3/ 7.7% for A shares/H shares. Maintain “buy-in.”
The recovery in travel is driving a recovery in traffic on major road sections
Benefiting from a recovery in travel, total toll revenue increased 10% year over year in '23 and up 6% from '21. Among them, tolls on Hening Road (34% of the total) increased 19% year on year, up 19% from '21. The adjacent road section was renovated and expanded with six leaves completed (end of '22), and the parallel road section was renovated and expanded in Ningluo, which encouraged vehicles to drive on Hening Road. The Ningxuanhang toll (7%) increased 203% year-on-year, up 149% from '21, benefiting from the completion of the Jiangsu/Zhejiang section in September/December '22. Tolls in Yuewu (4%) increased 12% year on year, up 13% from '21. Mainly due to the opening of Wuyue (October '23), the entire Yuewu East Extension Line was completed, and it is expected that it will still have an impact in '24. The Lianhuo/Ninghuai toll (accounting for 7/ 3%) increased by 12/ 12% year over year, up 9/ 10% from '21, reflecting a natural increase in traffic flow.
Revenue declined due to the renovation and expansion of the Xuanguang and Guangci Expressway
Tolls for Xuanguang/Guangci in '23 (10%/2%) decreased by 22/ 15% year on year, down 37/ 29% from '21. The main reason was that some sections of the road were closed due to renovation and expansion construction, and road conditions improved after the G318 parallel road was renovated. The impact is expected to continue in '24. High boundary tolls (22%) increased 0.4% year over year, up 4% from '21. The opening of traffic in Wuyue led to the diversion of some vehicles, which is expected to still have an impact in '24. The toll fee for the Anqing Bridge (8%) increased 4% year on year, the same as in '21. The opening of the Chizhou Yangtze River Bridge had a diversion impact.
Anhui Transportation REIT causes fair value profit and loss fluctuations
Road business costs decreased by 0.4% year on year in '23, with depreciation and amortization falling 2.5% year on year, and current payment costs increasing by 3.1% year on year. Supported by operating leverage, gross profit increased 16% year over year in '23 and up 12% from '21. Cash flow from operating activities increased 37% year over year to $2.65 billion in '23, up 27% from '21. Due to large fluctuations in the public REITs market, the company's participation in Anhui Traffic Control REIT in '23 caused a fair value change loss of 120 million yuan. After considering dividend investment income of 42 million yuan, the net drag on profits was about 80 million yuan. The 1Q24 public REITs market is picking up, and we expect 1Q Anhui Traffic Control REIT to bring positive contributions.
Risk warning: willingness to travel has declined, road network changes have exceeded expectations, capital expenditure has exceeded expectations, and rates have been lowered.