3Q24 results beat our expectations

Guangdong Provincial Expressway Dev't announced its 3Q24 results: Revenue fell 5.6% YoY to Rmb1.27bn, gross profit fell 5.9% YoY to Rmb872mn, and attributable net profit rose 6.4% YoY to Rmb501mn. The firm's results beat our expectations, mainly because: 1) The impact of Shenzhen-Zhongshan Channel's traffic diversion from Guangzhou-Zhuhai East Expressway was lower than we expected; 2) in 3Q24, the firm recognized investment income of around Rmb100mn (+78.2% YoY), beating our expectation due to delayed dividends from Guangzhou- Lechang Expressway; and 3) in 3Q24, financial expenses fell 23.9% YoY.

In 1-3Q24, revenue fell 5.0% YoY to Rmb3.50bn and attributable net profit remained largely flat YoY at Rmb1.36bn. Specifically, the firm made impairment provision of Rmb64.77mn for the full amount of management and maintenance expenses paid by Guangfo.

Trends to watch Impact of Shenzhen-Zhongshan Channel's traffic diversion lower than expected in 3Q24; YoY decline in Guangzhou-Huizhou

Expressway narrowed. According to the firm, toll revenue from road assets controlled by the firm - Foshan-Kaiping Expressway, Guangzhou- Zhuhai East Expressway, and Guangzhou-Huizhou Expressway - fell 1.8%, 9.4%, and 7.7% YoY in 3Q24. Specifically, toll revenue from Guangzhou-Zhuhai East Expressway fell sharply YoY in 3Q24 due to traffic diversion of Shenzhen-Zhongshan Channel and Zhongshan-Kaiping Expressway. However, toll revenue from Guangzhou-Zhuhai East Expressway fell 14.9%, 7.9%, and 4.9% YoY in July, August, and September, with the decline narrowing. Therefore, we think the impact of traffic diversion was smaller than we expected.

In addition, the YoY decline in Guangzhou-Huizhou Expressway's revenue in 3Q24 was 4.7ppt narrower than the decline in 1H24, and thus the firm's YoY revenue decline in 3Q24 was not significantly lower than in 1H24, indicating relatively solid performance.

Investing in Huizhou-Shenzhen Coastal Expressway expansion project to focus on toll road business. According to the firm's

announcement, it will invest Rmb4.35bn in the expansion project of the Shenzhen section of the Huizhou-Shenzhen Coastal Expressway based on its shareholding ratio, of which 30% will be capital fund. The firm estimates that the after-tax internal rate of return (IRR) of the capital fund will be 5.88%. The firm continues to develop its toll road business, which we believe will ensure steady growth of toll revenue in the long term.

Dividend payout ratio high; dividend yield offers investment value.

The firm announced its 2024-2026 shareholder return plan, which includes an annual cash dividend of no less than 70% of attributable net profit. The firm has become one of the listed toll road companies with the highest dividend payout ratio. The current price implies a dividend yield of 4.9% in 2024 and 5.1% in 2025, which is still attractive.

Financials and valuation

We raise our 2024 and 2025 net profit forecasts 4.9% and 4.1% to Rmb1,643mn and Rmb1,711mn, as the actual impact of traffic diversion from Shenzhen-Zhongshan Channel is smaller than we expected, and the firm is subject to changes in accounting rules from 4Q24. The stock is trading at 14.2x and 13.6x 2024e and 2025e P/E. Maintain OUTPERFORM. Given the firm's stable dividend policy, we raise our TP 24.6% to Rmb13.76, implying 17.5x 2024e and 16.8x 2025e P/E, offering 23.4% upside.

Risks

Disappointing economic growth; slower-than-expected progress in reconstruction and expansion.