A regional leader in the South China Expressway, building a “highway as the main focus, environmental protection as a supplement” business model.

Shenzhen Expressway Group Co., Ltd. was established in 1996. It is the first listed company in Shenzhen in Hong Kong and Shanghai. The actual controller is the Shenzhen State-owned Assets Administration Commission. The company focused on highway operation and management, and entered the field of environmental protection in 2020 to establish a “road-oriented, environmentally-friendly” business model.

Stable performance, abundant cash flow, and generous dividend returns, making it a high-quality choice for “low wave dividends”.

The cash flow of highway companies is very stable, and at the same time, the natural increase in car ownership also provides growth for toll revenue, so highway companies generally adopt high-dividend payment policies. The industry's average dividend rate is 3%, second only to traditional high-dividend sectors such as coal, real estate, banking, and steel. Major industry contradictions, sustainability issues caused by the duration of concessions, have been effectively resolved with the extension of the “Measures for the Administration of Infrastructure and Utility Franchises” to a maximum of 40 years.

Location advantages increase the value of the company's road production, and the transformation and expansion of core assets helps the main business continue.

The main road products of the Shenzhen Expressway are concentrated in the vast Shenzhen region. High-quality road products are compounded by regional economic dividends to establish the profitability of toll roads. The average gross profit margin of the company's toll road business is 50%. The gross margin of core road products such as the Western Section of the Jihe Expressway and the Outer Ring Expressway can reach 77% and 68%, which is at the leading level in the industry. At the same time, the company is actively carrying out renovation and expansion projects to guarantee the right to operate core road products.

The current dividend rate of Shenzhen Express has reached 5.3% (2023 dividend amount/closing price on July 10), which is at the forefront of the industry. The dividend rate is very attractive in the current environment of declining interest rates.

Environmental revenue has been growing steadily, and we are waiting for results to be realized. The Shenzhen Expressway environmental protection business includes clean energy generation and solid waste resource treatment. The environmental protection business is in the same franchise model as toll roads. Combining years of experience in toll road operation, the company has certain natural advantages in the field of environmental protection. At present, the revenue side of the company's many environmental protection businesses has shown a steady growth trend. Food waste disposal revenue has increased 29.1% year on year, and we are waiting for the results to be realized after the maturity period.

Investment advice: Interest rates are declining, risk appetite weakens, and the value of the “low-wave dividend” target is highlighted. As an established expressway operator, Shenzhen Expressway operates steadily, has abundant cash flow, and adopts a “high dividend” dividend policy all year round, which has allocation value. We believe that in the short to medium term, the company will benefit from: (1) the drainage effect brought about by the opening of the Shenzhen-China Channel; and (2) the increase in performance brought about by the opening of the second phase along the river. In the long run, the company will benefit from:

(1) The new “Highway Administration Regulations” have been implemented to improve policies such as toll periods and fee standards for expressway operation rights (2) extend franchise rights to a maximum of no more than 40 years, resolve the pain points of highway operation, and (3) gradually implement major environmental protection business results. In summary, we expect the company's net profit to be 2.46/2.86/3.06 billion in 2024-2026, respectively. According to the relative valuation method, currently comparable highway companies unanimously predict a PE average of 12.7 in 2024, and an average PE of 13.5 in the past ten years. After comprehensive consideration, we gave Shenzhen Expressway 12xPE in 2024. Based on the forecast 2024 earnings of 1.04 yuan per share after deducting the dividend on perpetual bonds, the corresponding target price is 12.48 yuan. The first coverage gave a “Buy-A” rating.

Risk warning: Risk of slowing growth in the region; risk that the drainage effect of the Shenzhen-China channel falls short of expectations; risk that high-speed aircraft load renovation and expansion projects will greatly affect traffic flow; risk that environmental protection business falls short of expectations; risk that profit forecasts and assumptions fall short of expectations.