1H24 results miss our expectations
Yuexiu Transport Infrastructure announced its 1H24 results: Revenue fell 5.6% YoY to Rmb1.83bn and net profit attributable to shareholders fell 26.5% YoY to Rmb314mn, missing our expectations as revenue was disrupted by rainy and snowy weather, while depreciation and amortization costs rose more than we expected. In 1H24, the firm paid an interim dividend of HK$0.12/sh, implying a dividend payout ratio of 58.5% (vs. HK$0.15/sh and 53.8% in 1H23).
Trends to watch
Toll revenue from controlled projects edged down; expiry of Beihuan Expressway's toll right weighed on investment income. Toll revenue fell 5.1% YoY to Rmb1.79bn in 1H24, as: 1) rainy and snowy weather increased in central and eastern China around the Chinese New Year holiday; 2) the number of toll-free days during holidays rose by four days compared with last year; and 3) traffic diversion caused by changes in road network. In 1H24, revenue of the Beierhuan Expressway fell 7.9% YoY due to the opening of Congpu Expressway, and revenue of the Daguangnan Expressway fell 8.1% YoY as roads of the Wuhuang Expressway were closed for construction, and traffic volume was diverted from the Wuyang Expressway.
In addition, the firm recognized a loss of Rmb20.43mn in 1H24 as the toll rights of its associate project Guangzhou Beihuan Expressway ended on March 22, leading to a 56.7% decline in the firm's gains from the project.
Depreciation, amortization and maintenance costs rose; profitability declined. As the company's depreciation and amortization are based on expected toll traffic volume, the amortization of intangible land management rights increased 10.1% YoY despite a YoY decline in actual traffic volume in 1H24, and maintenance expenses increased 39.0% YoY due to rainy and snowy weather. As a result, the gross margin of road assets controlled by the company fell 6ppt YoY to 50.1% in 1H24. The firm's profitability weakened.
In the medium and long term, we expect the firm to grow through M&A, reconstruction, expansion. According to corporate filings, the reconstruction and expansion of the firm's core road asset, Guangzhou North Second Ring Expressway, started construction in June 2024. We believe the completion of this project will further improve traffic capacity and extend the toll collection period. Moreover, Yuexiu Group has acquired Shandong Qinbin Expressway and Henan Pinglin Expressway. We believe these assets may be injected into the firm to further expand its assets and boost earnings.
Financials and valuation
We cut our 2024 and 2025 net profit forecasts 19.8% and 19.8% to Rmb659mn and Rmb692mn, as revenue came under pressure and costs rose more than we expected. The stock is trading at 8.2x and 7.8x 2024e and 2025e P/E. We maintain an OUTPERFORM rating, and we cut our target price 19.8% to HK$4.16, implying 9.5x 2024e and 9.1x 2025e P/E, and dividend yields of 7.3% in 2024 and 7.7% in 2025, offering 16.2% upside..
Risks
Disappointing economic growth; higher-than-expected capex; changes in toll collection policies.
