1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 1.83 billion yuan, down 5.6% year on year; net profit of 0.31 billion yuan, down 26.5% year on year. Performance was lower than our expectations, mainly due to the revenue side being disturbed by rain and snow while depreciation and amortization costs increased more than our expectations. 1H24 Company's interim dividend of HK$0.12/share, with a dividend ratio of 58.5% (1H23 dividend of 0.15 HKD/share, dividend ratio of 53.8%).

Development trends

Toll revenue from holding projects declined slightly, and the expiration of the North Ring Road affected investment income. The company's 1H24 toll revenue was 1.79 billion yuan, down 5.1% year on year. The main reasons include: 1) the central region of China was affected by rain and snow around the Spring Festival; 2) the number of free holiday days increased by 4 days compared to last year; 3) road network changes caused diversion: the 1H24 North Second Ring Expressway was affected by the opening of the Congpu Expressway. Revenue fell 7.9% year on year; the revenue of the Daguangnan Expressway was affected by the closure of the Wuhuang Expressway and the diversion of the Wuyang Expressway.

Furthermore, the Guangzhou Beihuan Expressway toll rights for the company's joint venture project ended on March 22, 2024. 1H24 confirmed a loss of 20.43 million yuan. The company should have accounted for a 56.7% year-on-year decline in the joint venture's performance.

Depreciation and maintenance costs have risen, and profitability has declined. On the cost side, due to the company's depreciation and amortization using the expected traffic flow method, despite the year-on-year decline in actual 1H24 traffic, the amortization of the company's intangible operating rights increased 10.1% year on year. Combined with factors such as rain and snow, maintenance expenses increased 39.0% year on year. The upward pressure on the company's costs was strong. The gross margin of 1H24 Company's holding road fell 6ppt to 50.1% year on year, and profitability declined somewhat.

In the medium to long term, the company is expected to achieve growth through mergers and acquisities+transformation and expansion. According to the company's announcement, the renovation and expansion of the Guangzhou North Second Ring Expressway, the company's core road product, will commence construction of the entire line in June 2024. We believe it is expected that traffic capacity will be further improved and the toll period extended after completion. Furthermore, we believe that the Shandong Qinbin Expressway and Henan Pinglin Expressway acquired by Yuexiu Group are expected to be injected into listed companies later to further expand the size of the company's assets and increase the company's profits.

Profit forecasting and valuation

Due to pressure on the company's revenue and rising costs exceeding our expectations, we lowered our 2024/2025 net profit by 19.8%/19.8% to 0.659 billion yuan/0.692 billion yuan. The current stock price corresponds to the 2024/2025 price-earnings ratio of 8.2 times/7.8 times. While maintaining an outperforming industry rating, we lowered our target price by 19.8% to HK$4.16, corresponding 9.5 times the price-earnings ratio of 2024 and 9.1 times the price-earnings ratio of 2025, corresponding to the 2024/2025 dividend ratio of 7.3%/7.7%, respectively, with 16.2% upside compared to the current stock price.

risks

The economic growth rate fell short of expectations, capital expenditure exceeded expectations, and the charging policy changed.