A high dividend target with a dividend ratio of around 8%. 1) Entering the first tier of dividends: The company previously announced a three-year (2023-25) shareholder return plan. The dividend ratio is not less than 60% of the net profit returned to mother for the current year. If the conditions are met, interim profit distribution can also be carried out. In terms of dividend ratio, it has entered the first tier of the highway industry, second only to 70% of Guangdong Expressway A, which is the same as the Shandong Expressway and the Anhuan-Tongtong Expressway. 2) High dividends on H shares. In the annual report, the company revealed that the board of directors has proposed a cash dividend of 2.4 yuan for every 10 shares to all shareholders, accounting for 61.83% of net profit due to mother in 2023 and 67.2% of the company's deducted non-net profit, corresponding to a dividend rate of 8.2%. (Note: Jiangsu Ninghu Expressway and Ninghu Expressway H shares have a dividend rate of 6.6% based on 0.47 yuan/share dividend; Anhui Wantong Expressway/Wantong Expressway H shares have a dividend rate of 7.3% based on 0.601 yuan/share dividend; closing price as of 05/07).

The company's growth potential may still be underestimated. We released an in-depth A-share report on the company in November 2023, clearly stating the classic investment logic of “big group, small company”. We think it can be understood from two dimensions: one group has the resources and will to support the development of listed companies; second, listed companies actively seek to grow bigger, better and stronger. As far as the company is concerned, 1) Shudao Group: It has resource advantages and strongly supports the development of listed companies. The Shudao Group is the first state-owned enterprise in Sichuan Province to be one of the world's top 500. It has the advantage of strong resources within the province. It is also the core construction entity of highways in Sichuan Province. It is rich in road production resources. Chengdu and Chongqing, Sichuan is its highway investment, operation and listing platform. The Group is promoting professional integration and strongly supporting the development of listed companies in Chengdu and Chongqing, Sichuan, as reflected in: a) The acquisition of the Second Ring West Expressway in the first half of '23 to enhance sustainable development capabilities. The Group gave a 7-year performance promise to lock in basic benefits, and strong profit growth. In terms of toll revenue, in 2023, the Second Bypass Expressway surpassed the Cheng-Chongqing Expressway to become the company's third-largest road producer. In 2023, the Chengdu-Chongqing Expressway/Chengya Expressway/Chengren Expressway/Chengbei Interchange (including Qinglongchang Overpass) /Suiguang Expressway/ 9.30/5.36/1.08/2.75/1.68/865 million yuan respectively, up 25.47%/16.7%/34.73%/25.44%/1.81%/26.02%/26.83%/29.77%. The share of revenue from various products:

Chengya Expressway 22% > Chengren Expressway 20% > Second Bypass Expressway 18% > Chengyu Expressway 17% > Chengle Expressway 11% > Suiguang Expressway 6% > Suixi Expressway 4% > Chengbei Exit Expressway 2%. b) The Group increased its holdings of the company's shares (H shares) by about 4% twice in 2022/23, reflecting Shudao Group's confidence in the company's continued stable development in the future.

2) Chengyu, Sichuan: Under the Group's overall development strategy, aggressive and proactive planning. a) Focus on and optimize the main business, and consolidate and expand the scale of the main business. The acquisition of the second route west in '23 is not only strong support from the group, but also a reflection of the company's active quest to improve sustainable development capabilities and the scale of the road network; b) expand the Luyan economy and explore business innovation. In January '24, it was announced that it would acquire the assets of Shu Jiao Renewable Energy Company for no more than 84.5 million yuan, including the assets of 48 road charging stations, 204 DC charging piles, and 408 charging guns. It is expected to help the company cultivate the green energy industry, accelerate the layout of charging station outlets, and increase its share of the charging market.

c) The profitability of the company's existing road products is constantly improving. Without considering the two-way West Expressway combined, the main road products achieved net profit of 1,162 billion yuan, +76.9% year-on-year (+18% compared to 2019); as a result, Guangsui West Company achieved a significant reduction in losses. Suixi, Guangzhou, is a new route that was put into operation in 2016. The impact of the epidemic extended the company's climbing period, resulting in losses of more than 350 million yuan in 20-22. Against the backdrop of rapid revenue growth, losses of less than 300 million yuan for the first time in 23 years.

Investment advice: 1) Profit forecast: We expect the company to achieve net profit of 1.31 billion yuan, 14.3 billion yuan, and 16.1 billion yuan respectively in 2024-26, corresponding EPS of 0.43, 0.47 and 0.53 yuan respectively, and corresponding PE of 6.8, 6.2, and 5.6 times, respectively. 2) Target price: The company's H shares are only 0.57 times PB, and the dividend rate is over 8%. According to the 60% dividend ratio, the 24-year dividend rate reached 8.8%. Considering factors such as the discount on A/H shares, we set the price at a 6% dividend rate (close to Ninghai H shares in 23 years). The target market value is HK$14.4 billion, and the target price is HK$4.70, which is estimated to be close to 47% of the current price. 3) Investment advice: We emphasize the view that increasing dividends is only the starting point. It is the first step in a solid “dividends-market capitalization-assets” cycle. Backed by the resource advantages of the Shudao Group, the company is proactive, the growth of the main business can be expected in the future, and the first coverage gives a “strong promotion” rating.

Risk factors: The effects of the renovation and expansion fell short of expectations, traffic growth fell short of expectations, and economic decline.