2023 results are in line with our expectations

The company announced its 2023 results: revenue of 26.55 billion yuan, an increase of 18.6% year-on-year after retroactive adjustment due to the merger of the company and Information Group; net profit to mother was 3.30 billion yuan, up 8.5% year-on-year after retroactive adjustment, in line with our expectations. The company paid 0.42 yuan per share, with a dividend ratio of 61.7%.

Development trends

The toll road business picked up, and the investment sector grew steadily. By sector, 1) Road and bridge operations: In 2023, toll revenue of 10.25 billion yuan was achieved, an increase of 10.1% over the previous year. Among them, toll revenue for the core production of the Jiqing Expressway increased by 7.4% year on year, and toll revenue on the relevant sections of the Beijing-Taiwan Expressway increased by 43.1% year on year, mainly benefiting from the completion of the renovation and expansion of the Jitai section of the Beijing-Taiwan Expressway in October 2022. 2) Investment and operation: Investment income of 1.37 billion yuan was achieved in 2023, down 21.2% year on year, mainly due to the confirmed high base of 540 million yuan in revenue from the sale of real estate in 2022, and a 13.9% year-on-year increase after deducting this one-time impact. The rapid growth rate of investment income in 2023 was mainly due to the company's capital increase and the maintenance group obtained 30% of shares, which increased 7.0% year on year after deducting this impact, and capital operations were relatively steady. 3) Rail Transit Group: In 2023, it achieved revenue of 4.55 billion yuan, an increase of 2.8% year on year, and net profit of 450 million yuan, an increase of 14.8% year on year. Among them, railway traffic increased 17.6% year over year. 4) Information Group: The company completed the acquisition of 65% of Information Group's shares to lay out the road maintenance market and the transformation and development of smart transportation. Information Group achieved revenue of 4.36 billion yuan in 2023, an increase of 8.7% over the previous year, and net profit of 310 million yuan, further enhancing the company's performance.

The main business continues to reinvest, and we are optimistic about medium- to long-term growth. According to the company's announcement, the Beijing-Taiwan Expressway Qiji renovation and expansion project and the Jihe Expressway renovation and expansion project carried out by the company are progressing in an orderly manner. Referring to the effects of boosting traffic on the entire line after the completion of the renovation and expansion of the company's Jiqing Expressway and the Beijing-Taiwan Expressway, the adjustment of charging standards has brought significant incremental contributions to the company's performance. We believe that with the opening of the Beijing-Taiwan Expressway Qiji section and Jihe Expressway, the company's performance is expected to grow further in the medium to long term.

The dividend policy is steady to guarantee reasonable returns to shareholders. According to the company's announcement “Shandong Expressway Co., Ltd. Shareholder Return Plan for the Next Five Years (2020-2024)”, the dividend ratio for the next five years will not be less than 60%. Even if the performance is pressured by the pandemic in 2020-2022, the company guarantees that the dividend per share will not decline. We believe that the company's steady dividend policy can effectively guarantee investors' absolute returns.

Profit forecasting and valuation

The profit forecast for 2024 remains unchanged, and net profit of 2025 of 3.98 billion yuan was introduced for the first time. The current stock price corresponds to the 2024/2025 price-earnings ratio of 12.2 times/11.0 times. Maintaining an outperforming industry rating and switching to 2024, and considering the company's steady dividends, we raised our target price by 24.0% to 10.01 yuan, which corresponds to 13.4 times the 2024 price-earnings ratio and 12.2 times the 2025 price-earnings ratio. There is 10.1% upside compared to the current stock price.

risks

The progress of the renovation and expansion fell short of expectations, and the economic growth rate fell short of expectations.