The net profit reported in the interim was lower than expected, mainly due to weak traffic growth and a sharp increase in amortization expenses

The company 1H24 recorded revenue of 1.827 billion yuan (-5.6% YoY) and net profit to mother of 0.314 billion yuan (-26.5% YoY). Profit was 15% lower than our expectations (0.37 billion yuan). The main reasons for the decline in net profit are: 1) industry level: reduction in billing days, bad weather, insufficient transportation demand; 2) Company level: sharp increase in amortization expenses, expiration of Guangzhou North Ring Road, and the impact of road network diversion. The company plans to pay an interim dividend of HK$0.12 per share (-20% YoY), with an interim dividend rate of approximately 3.35% (2024/8/6), and a dividend ratio of 58.5% (1H23:53.8%). Considering the sharp increase in amortization expenses and the impact of road network changes, we lowered our 2024/2025/2026 net profit forecast by 20/15/ 22% to 0.646/0.743/0.721 billion yuan (previous value: 0.81/0.869/0.921 billion yuan). We are still reducing our target price by 21% to HK$4.22 (previous value of HK$5.34) based on 10x 2024E PE (average value of 2016-2023). Maintain “buy-in.”

High pressure on 1H operations, reduced toll days, bad weather, and weak freight demand dragged down revenue-side companies' 1H24 toll revenue by 5.1% year-on-year. At the industry level, traffic volume on the national highway section fell by about 1-2% year-on-year in January-June (Ministry of Transport Planning Institute). Domestic effective demand was insufficient, making truck growth weak. The company's truck accounts for a high share of revenue and is greatly affected. Furthermore, the number of charging days for 1H24 passenger buses decreased by 3 days compared to the same period last year (a decrease of 1.8%). Bad weather also dragged down income. Central China was affected by snow and ice disasters in January-January, while Guangdong and Henan experienced heavy rainfall in April-June. At the company level, toll revenue from Guangzhou North Second Ring Road, the core road product, fell 7.4% year on year, mainly due to the diversion of its vehicles from the Pu Expressway (opened at the end of October 23). Among the shares in road production, the Guangzhou Beihuan Expressway expires, and the investment income of the project decreased by 0.05 billion yuan over the same period last year.

Amortization expenses increased more than expected, but financial expenses were further compressed

The company's 1H24 operating costs were +8.3% YoY, of which amortization of operating rights (about 77%) was +10.1% YoY.

Since the company uses expected traffic to amortize road products, amortization expenses still increase dramatically when tolls fall; most companies in the industry use actual traffic to amortize, and amortization expenses are reduced simultaneously when traffic falls. The decline in revenue combined with rising costs led to the company's 1H24 gross profit falling 16% year over year.

Due to the optimization of the debt structure and the decline in market interest rates, the company's 1H24 weighted average interest rate decreased to 3.05% year-on-year (1H23:3.33%). Overall, 1H24 financial expenses decreased by 0.03 billion yuan year over year.

2H outlook: The impact of road network changes is complex. Waiting for traffic to improve, we expect the company to face complex road network changes, including: 1) Guangzhou North Second Ring Road (revenue -7.4% YoY in June) may still be affected by the diversion of the Congpu Expressway, but the impact has been eliminated since November; 2) the Wuhuang Expressway has been closed, renovated and expanded since May '24, benefiting the Han'e Expressway (+115.5% year-on-year revenue in June); 3) Tianjin-Gao—Tianjin Expressway (June revenue: -19%) Revenue +30.3% YoY), Hubei Suiyuenan Expressway (6 (Monthly revenue +7.0% YoY) may continue to benefit from the construction and renovation of surrounding parallel national highways; 4) Humen Bridge is expected to be affected by the diversion of the Shenzhen-China Corridor (opened at the end of June 24). From an endogenous growth perspective, macroeconomic policies may drive transportation demand, and wait 2H for traffic to improve.

Risk warning: economic growth is slowing, capital expenditure exceeds expectations, road network diversion, and fees are lowered.