Investment logic

Positioned as an infrastructure management platform, the logistics business contributes to high flexibility. The company positions itself as an infrastructure management platform under the Shenzhen State-owned Assets Administration Commission. Its main business includes logistics, toll roads, environmental protection, ports, etc., and also invests in shares in Shenzhen Airlines and Air China. The company's road environmental protection business relies on Shenzhen Express (51.6% shareholding). The business is relatively stable. The net profit center for the past was HK$1.1-1.2 billion. The logistics business is based on logistics park operations. When logistics land is converted to commercial and residential land, it can contribute a large amount of residential development income and land value-added income, which is the source of the company's profit flexibility. In 2023, the company's net profit to mother reached HK$1.902 billion, a year-on-year increase of 51.66%; the company's dividend ratio remained around 50% for the past 6 years.

The South China Logistics Park project was initially implemented and is expected to contribute profits in 2024. In 2023, the company's South China Logistics Park signed a land preparation agreement with the government to replace 0.53 million square meters of logistics land with 0.108 million square meters of commercial and residential land and compensation for demolition. According to our estimates, the South China Logistics Park can contribute 15 billion yuan in after-tax revenue during the project period, of which the land value-added income is about 9.6 billion yuan. We expect that in 2024, the company will be able to confirm the land value-added income of one of the 4 plots of land to be compensated, contributing to the value-added profit. In addition, the company issues REITs using mature logistics parks as underlying assets, which can list assets and obtain one-time benefits. In June 2024, the company's Huaxia Shenzhen International REIT was officially launched, and related revenue was confirmed in 2024.

Highway port profits are stable, and Shenzhen Airlines no longer has a negative impact on the company's performance. The company's highway and port business contributed steadily to profits. In 2023, it benefited from the recovery of travel and traffic, and the road business's net profit to mother increased 54% year-on-year. The subsidiary Shenzhen Express issued REITs using Yichang Express as the underlying asset. The fund-raising was completed in March 2024, and it can contribute profits this year.

The company holds 49% of Shenzhen Airlines's shares and contributed HK$0.47 billion and HK$0.59 billion to the net profit of the company in 2018-2019, respectively. Due to the drastic reduction in air travel, Shenzhen Airlines lost net losses for 4 consecutive years, and the company calculated corresponding asset impairment provisions. As of 2023, the company has accrued all of its Shenzhen Airlines interests. In 2023 and beyond, Shenzhen Airlines' losses will not hurt the company's performance.

Profit forecasts, valuations, and ratings

The company's net profit for 2024-2026 is estimated to be HK$2.76 billion, HK$3.41 billion, and HK$3.86 billion, respectively, with corresponding dividends of HK$0.57, HK$0.71 and HK$0.80 per share. Using the DDM valuation method, the company's WACC is expected to be 6.43%. Assuming that the company no longer carries out land conversion and real estate development business after the completion of the South China Logistics Park project and maintains a steady growth of g = 2%, the company's target price was calculated at HK$7.90, which covered the “buy” rating for the first time.

Risk warning

Land confirmation falls short of expectations; risk of a sharp drop in housing prices in Shenzhen; risk of falling rent in logistics parks; risk of exchange rate fluctuations; risk of mergers and acquisitions falling short of expectations; risk of asset impairment.