The company updated its asset restructuring plan, which has many highlights to fully protect the interests of small and medium-sized shareholders. 1) Acquisition plan:

The company plans to issue shares and pay cash to purchase 100% of the oil company's shares held by Rizhao Port Group, 50% of Rizhao Shihua's shares, 53.88% of Joint Pipeline's shares and 51% of Gangyuan Pipeline's shares held by Yantai Port Group.

The total consideration was 9.44 billion yuan, of which the share consideration was 4.81 billion yuan (0.697 billion shares issued to Yantai Port Group to acquire related assets at 6.9 yuan/share), accounting for 9.7% of the total share capital after issuance; the cash consideration was 4.63 billion yuan to purchase related assets from Rizhao Port Group (up to 2 billion as supporting capital arrangements). 2) Acquisition valuation: PE 11.6 times and PB1.36 times, lower than the current level of listed companies. (12.9 times TTM PE for Qingdao Port A shares, 1.5 times PB). 3) Highlight 1: The proposed acquisition of the asset package in the new plan focuses on liquid bulk goods. The profit level is significantly higher than the previous one, and it is at the forefront of the port industry. According to 2013 data, the ROE level of the new asset package reached 11.7%, second only to the 12.2% ROE level of listed companies in Qingdao Port in 2023, which is higher than other ports.

This restructuring is an important step in port consolidation in Shandong Province. Injecting high-quality assets will help enhance the core competitiveness of listed companies. 4) Highlight 2: This trade will increase earnings per share. After considering supporting financing, we expect that the probability will not be diluted. a) Without considering supporting financing, this asset purchase plan will increase earnings per share. Based on 2023 data, it is estimated that after the transaction is completed, profit can be increased by 0.81 billion yuan, equivalent to 16.5% of Qingdao Port's 2023 profit (4.92 billion yuan). EPS will increase from 0.76 yuan to 0.8 yuan, 5.2% thicker, and ROE will increase from 12.2% to 13.3%, 8.8%, or 1.1 percentage points. 2024Q1EPS will rise from 0.2 yuan to 0.21 yuan, an increase of 3.8%. b) We expect that after considering supporting financing, the probability will still not be diluted. We believe that such a plan fully reflects the protection of the interests of small and medium shareholders by the group and the company, and is a reflection of an excellent governance system.

High ROE long-term assets+excellent governance system should receive a premium, and we upgraded our rating to “strong promotion”.

1) Asset quality: high ROE, strong cash, stable profit. We will compare Qingdao Port with the Ninghu-Shanghai Expressway, a representative highway company. a) ROE: The two are similar, but there is a big difference behind it. Looking at the 2023 data: Ninghai-Shanghai Expressway ROE 13%, Qingdao Port 12.2% (Note: Qingdao Port's exam preparation ROE for 23 years after the transaction was completed was 13.3%). Looking at the 5-year average ROE in 2019-23, the Ning—Shanghai Expressway was 12.4%, and the Qingdao Port was 12%. Qingdao Port showed a high turnover ratio and low financial leverage. b) Cash flow perspective: In 2023, Qingdao Port's operating cash flow is 6.15 billion yuan, free cash flow is 3.4 billion yuan, Ninghu Expressway operating cash flow is 7.4 billion yuan, and free cash flow is 3.6 billion yuan. c) Profit stability: Leading ports are undervalued. In 2019-23, Qingdao Port maintained continuous profit growth, up 30% from 19 (3.79 billion to 4.92 billion); the Ning—Shanghai Expressway experienced a decline in the years affected by the pandemic, and profit increased 5.1% in 23 compared to 19. (Increased from 4.2 billion to 4.4 billion). 2) Long-term asset advantages are receiving attention from the market. Compared with road assets, the biggest advantage of port assets is long-term: that is, the port has no franchise term limit. In the context of regional port integration, in the long run, the scissor gap between rising revenue and falling costs will continue to accumulate sufficient cash flow, and returns after entering a mature period will become more and more prominent. 3) Excellent governance systems should receive a premium. Among the five elements of Huachuang Transportation | China Special Assessment, we believe that the construction of a modern governance system has a great impact on enterprise valuation. We believe that the governance system can be observed in multiple dimensions, including but not limited to: focusing on investor returns (dividends), implementing equity incentives/employee shareholding, high operating efficiency (“one interest rate, five rates”), and focusing on the interests of small and medium shareholders. Highway assets are favored by the market because in recent years, more companies have increased their dividend ratio and paid more attention to investor returns. As a company where the amount of dividends per share has not declined for a long time, it is regarded as an industry benchmark. The current restructuring plan of Qingdao Port is a rare case in the market of issuing shares to increase earnings per share, which fully demonstrates the importance it attaches to the interests of small and medium-sized shareholders. The company has maintained the port industry's leading ROE level for a long time, reflecting the advantages of operational efficiency. 4) Profit forecast: Based on the relevant procedures of this restructuring plan, we are temporarily maintaining the profit forecast. That is, the net profit due to mother is expected to be 54.2, 59.6 and 6.44 billion yuan respectively in 24-26, corresponding EPS of 0.84, 0.92 and 0.99 yuan, respectively, and PE of 12, 11, and 10 times, respectively. 5) Investment suggestion: Based on our comparison of Qingdao Port and Ninghu Expressway above, we believe that the company's valuation should be at least close to leading highway companies. The PB of Ninghu (1.82 times PB) and Wantong (1.86 times PB), which have similar ROE levels, is more than 1.8 times. We have given the company an estimated net assets of 1.84 times PB per share in 2024, corresponding to a target price of 12.5 yuan. We have upgraded the rating to “strong promotion”.

Risk warning: The economy has declined, and the hinterland economy has fluctuated markedly.