Incident: The company plans to acquire Pinglin Expressway and sell Jinxiong Expressway

Yuexiu Transportation Infrastructure announced on the evening of October 9 that it plans to acquire 55% of the shares of high-quality road products in Henan Pinglin Expressway.

The project is located in the core development area of the Central Plains urban agglomeration. The area is densely populated and the surrounding road network is mature and stable. The purchase consideration was $0.758 billion, and the equity IRR was approximately 9.2%. If the project is completed by the end of the year, we expect net profit to increase by about 0.07 billion yuan in 2025, an increase of about 9%. On the evening of September 30, the company announced plans to sell 60% of the shares in Tianjin Jinxiong Expressway. The transaction consideration has not yet been determined. In 2023, 60% of Jinxiong Express's shares contributed about 0.7% to Yuexiu's profit. We believe that the above deal will revitalize road production resources and enhance the company's profitability. Since the transaction has not yet been settled, our model is not included in the calculation, and the profit forecast remains unchanged for the time being. The estimated net profit for 2024/2025/2026 is 0.646/0.743/0.721 billion yuan. Referring to the company's average PE value for 2016-2023, we raised our target price by 15.9% to HK$4.89 (previous value: HK$4.22) based on 10x 2025E PE (previous value 10x 2024E PE). Maintain “buy-in.”

The Pinglin Expressway has a high internal rate of return, and the acquisition is expected to increase the company's profitability Pinglin Expressway is the main road connecting Luoyang, Pingdingshan, Luohe and Zhoukou in Henan. It is also a component of the Ningluo Expressway G36, and is also the main logistics channel connecting the northwest and southeast coasts of China. In the long run, the project is expected to benefit from the shift of China's manufacturing industry from the coast to the central region. The toll mileage of the project is 106 kilometers, with 4 lanes in both directions. It has been in operation since 2006, and the remaining toll period is about 9 years. The project company recorded revenue/net profit of 0.482 billion yuan/0.119 billion yuan in 2023, and revenue/net profit of 0.304 billion yuan/0.08 billion yuan in January-July 2024. The IRR of the project's equity is approximately 9.2%. The company plans to use the capital raised from the original REIT to invest, and the cost as idle capital is lower. If the acquisition is completed by the end of the year, we expect the company's profit to increase by about 9% in 2025, complementing the reduced profit due to the expiration of Guangzhou Beihuan.

The Jinxiong Expressway will soon be renovated and expanded. The sale will help avoid excessive capital expenses. The Jinxiong Expressway connects Baoding, Xiong'an and Tianjin, and is also connected to the Beijing-Shanghai Expressway, making it convenient for vehicles to travel to Beijing and Shanghai. Tianjin's “14th Five-Year Plan” proposes to advance preliminary work on the renovation and expansion of the Jinxiong Expressway.

The company announced on 9/30 that considering the remaining charging period of the project is about 6 years, the extension period must be approved by regulations and will incur additional capital expenses. After evaluation, the sale will be decided, and the net profit is expected to increase after completion of the transaction.

The project company recorded revenue/net profit of 0.086 billion yuan/0.016 billion yuan in 2023, and revenue/net profit of 0.037 billion yuan/0.011 billion yuan in January-May 2024. The listing price is yet to be determined.

The overseas interest rate cut cycle has begun, which is beneficial to the restoration of high-dividend asset valuations of Hong Kong stocks, and the Federal Reserve began the interest rate cut cycle in September. At the valuation level, the dividend rate of high-dividend stocks in Hong Kong is positively correlated with interest rates on US bonds. Interest rates on US bonds affect the capital costs of overseas institutions, which in turn affects the dividend rate of Hong Kong stocks. Without considering the disposal proceeds from the sale of Jinxiong Expressway, we estimate that the company's 2024E dividend ratio is 6.8% (assuming the dividend ratio remains 60%), which is higher than the 2014-2023 average (6.3%). Excluding inclusion/inclusion of the above transactions, we estimate the company's 2025E dividend ratio to be 7.8%/8.5% (all assuming a 60% dividend ratio).

Risk warning: economic growth is slowing, capital expenditure exceeds expectations, road network diversion, and fees are lowered.