The net profit in the interim report fell short of expectations. The first half of 2024 achieved revenue of 3.757 billion yuan (yoy -8.92%) and net profit to mother of 0.774 billion yuan (yoy -16.72%) in the first half of 2024, mainly due to impairment in the environmental business and insufficient power generation volume. Net profit to mother fell short of our expectations (0.94 billion yuan), mainly due to impairment losses of 0.133 billion yuan due to environmental protection business and weather factors, wind power generation revenue fell 13% year on year. Due to the reduction in the number of toll days and the impact of bad weather on travel, 1H non-toll revenue (excluding Yichang Expressway) decreased by 1.8% year-on-year, slightly better than the industry's performance. Considering the poor operation of the environmental business, we lowered our 2024/2025/2026 net profit forecast to 1.99/2.24/2.28 billion yuan (previous value 2.35/2.57/2.65 billion yuan). Based on the segmented valuation method, a target price of RMB12.1/HK$9.4 (previous value: RMB10.77/HK$9.04) was given for A Shares/Hong Kong Shares. The company promised that the 2024-2026 dividend ratio will not be less than 55% (after deducting interest on perpetual bonds). Based on this, it is estimated that the dividend ratio of A shares/Hong Kong shares in 2024 will be 4.1/ 6.4%. The model has not yet included the dilution effect of issuing additional A shares. Maintain “buy-in.”

1H non-toll revenue performance is better than the industry

1H highway/environmental/other business accounts for about 65/20/16% of revenue, and gross profit accounts for about 85/10/5%. Among them, 1H highway business revenue/gross profit fell 6/ 11% year on year, mainly due to the Yichang Expressway in March '24, the number of 1H toll days decreased by 3 days year on year, the 1Q snow and ice disaster and 2Q heavy rainfall affected travel, and 1H highway maintenance costs increased 12% year on year. Excluding the Yichang Expressway, 1H non-toll revenue fell 1.8% year on year. The performance was better than the industry, which may be related to the company's high proportion of buses. According to the Planning Institute of the Ministry of Transport, the 1H highway section traffic volume decreased by about 1-2% year on year. Combined with changes in the number of toll days, the 1H industry's toll revenue fell by about 3% year on year. The subsidiary Bay Area Development 1H's toll revenue increased 1% year on year, but net profit to mother increased 40% year over year, mainly due to the reduction in unit amortization amounts and exchange losses due to the reduction in unit amortization of Guangzhou-Shenzhen Expressway.

The fan manufacturing and solid waste recycling business are still underperforming

In the environmental protection business, 1H clean energy power generation revenue/gross profit fell 13/ 24% year on year, mainly due to falling wind resources and rising wind disposal rates; food waste disposal revenue increased 10% year over year but the business was still losing money, mainly due to low oil sales prices and insufficient garbage collection and transportation; revenue from vehicle dismantling and comprehensive battery utilization increased 6% year over year, and the business was still losing money, mainly due to falling prices of lithium battery materials and power batteries and rising waste vehicle recycling costs. The investment income of the participating company Derun Environmental fell 27% year on year, probably due to the reduction in sewage treatment settlement prices in Chongqing. Due to poor environmental profits, the company's 1H impairment loss was 0.133 billion yuan.

Future capital expenditure will be heavy, and the plan is to implement a fixed increase in A shares

The company's balance ratio reached 58.63% at the end of June, and future investment tasks are heavy. The company's interim report revealed that the capital expenditure plan from the second half of 2024 to 2026 would reach 10.75 billion yuan, mainly for Outer Ring Phase III and high-speed aircraft cargo renovation and expansion. In this context, the company plans to increase its share capital by no more than 30% and raise no more than 4.9 billion yuan. Our model has not yet been reflected. Looking ahead to 3Q, the opening of the Shenzhen-China Corridor will benefit the company's overall road network.

In July, equity toll revenue increased by about 1% year on year, a slight improvement from June (down 1% year over year).

Risk warning: Highway and environmental business growth is slowing, capital expenditure is higher than expected, and fees have been lowered.