1H net profit was slightly lower than expected, and Xuanguang renovation and expansion caused vehicle diversion

Wantong Express released its semi-annual report. In 2024, it achieved revenue of 3.05 billion yuan (yoy +31.4%), net profit to mother of 0.81 billion yuan (yoy -3.5%), and deducted non-net profit of 0.805 billion yuan (yoy -9.4%). Net profit to mother was slightly lower than our expectations ($0.827 billion). Among them, 1Q deducts non-net profit of 0.434 billion yuan (yoy -7.6%), and 2Q deducts non-net profit of 0.371 billion yuan (yoy -11.4%). The decline in profits was mainly affected by vehicle diversion due to free days, bad weather, renovation and expansion construction, and road network changes. Considering the weak endogenous growth in traffic flow and the impact of renovation and expansion construction, we lowered the net profit to mother for 2024/25/26 to 1.61/1.74/1.88 billion yuan (previous value: 1.8/1.85/2 billion yuan). We are still based on the DCF valuation method. WACC uses 5.64%/7.21% (previous value: 6.41%/8.14%) and gives a target price of 17.0 yuan/15.6 HK$15.6 (previous value: 15.4/HK$14.0) for A shares/H shares. Maintain “buy-in.”

Insufficient demand, road network changes, policy exemptions, and bad weather dragged 1H traffic companies' 1H toll revenue down 8.55% year on year. The main reasons were: 1) insufficient domestic effective demand, leading to weak endogenous traffic flow growth; 2) vehicle diversion due to renovation and expansion construction and road network changes; 3) the number of days exempted from passenger bus tolls increased by 4 days year on year in the first half of the year; 4) Central China was affected by snow and ice disasters during the Spring Festival travel season. Looking at road segments, the Hening Expressway and Lianhuo Expressway networks are stable, and changes in revenue mainly reflect the effects of factors 1), 3), and 4). The 1H Hening Expressway toll (36% of the total) decreased by 2.6% year on year, and the Lianhuo Expressway toll (7%) decreased by 5.7% year on year.

The renovation and expansion led to a decline in revenue from Xuanguang/Guangci. The opening of the Wuyue traffic caused the performance of the Gaojie/Anqing Bridge/Yuewu Expressway to be affected by the renovation and expansion. In particular, the implementation of one-way traffic on March 8 caused 1H tolls to drop by 58/ 48%. Due to the opening of the Wuyue East Extension Line (October 23), the Yuewu Expressway toll (accounting for 6% of the total) increased 68% year-on-year; at the same time, this road network change diverted traffic from the Gaojie Expressway and Anqing Bridge. Highland Expressway tolls (21% of the total) decreased 14% year over year. Tolls for the Anqing Bridge (7% of the total) fell 16% year over year, and were also affected by the upstream Xuanguang renovation and expansion and the diversion of the Wuyue Expressway. The Ningxuanhang toll (10% of the total) increased 74% year-on-year, continuing to benefit from the completion of the Jiangsu/Zhejiang section in September/December '22, while the opening of the Ning'an Expressway in December '23 was also beneficial.

The impact of the 3Q Xuanguang renovation and expansion construction continues, but 4Q is expected to drastically improve the 1H toll road business cost by only 0.6%, financial expenses decreased by 38% year on year, and cost control is relatively good. CICC Anhui Traffic Control REIT generated non-recurring revenue, with 1H earnings of about 0.02 billion yuan in 24 years, compared to a loss of about 0.06 billion yuan in the same period last year. CICC Anhui Traffic Control REIT announced that the Xuanguang Expressway plans to completely close the section from August 31 to September 30. The renovation and expansion project is expected to achieve four-lane traffic in both directions within October, and eight lanes in both directions by the end of December. Based on this, we expect a further decrease in 3Q traffic on the Xuan-Guang Expressway, but a significant month-on-month improvement in the 4Q.

Risk warning: Intent to travel has declined, changes in the road network have exceeded expectations, capital expenditure has exceeded expectations, and rates have been lowered.