3Q24 results in line with our expectations

Shandong Hi-speed announced its 3Q24 results: Revenue rose 36.3% YoY to Rmb7.76bn (+19.3% YoY after retrospective adjustment1); net profit attributable to shareholders grew 8.2% YoY to Rmb883mn (-2.7% YoY after retroactive adjustment), in line with our expectations.

Trends to watch

YoY decline in toll fee revenue narrowed in 3Q24; investment income declined. 1) Road and bridge operation: In 3Q24, revenue fell 2.4% YoY to Rmb2.91bn, narrowing from the YoY decline in 1H24. Specifically, toll fee revenue of the Jiqing Expressway fell 10.9% YoY due to traffic diversion; toll fee revenue of related sections of the Jingtai Expressway rose 1.6% YoY. 2) Investment and operation: Investment income fell 19.3% YoY to Rmb266mn in 3Q24 and dropped by 0.25% YoY to Rmb970mn in 1-3Q24. 3) Rail transit: In 3Q24, revenue rose 24.3% YoY to Rmb1.24bn and net profit fell 8.1% YoY to Rmb133mn.

Shandong Hi-speed plans to invest in the Weilai Expressway retrofitting and expansion project; we are upbeat on the growth potential of the main business. The firm announced its plan to invest in the retrofitting and expansion project of the Laiyang-Weifang section of the S16 Rongwei Expressway, with an estimated total investment of about Rmb6.88bn (25% of capital). The project is scheduled to be completed and start operation in October 2027.

The Weilai Expressway is a major east-west trunk road in the Jiaodong Economic Circle. In 1-3Q24, the road asset generated revenue of Rmb326mn, accounting for 4.3% of the firm's total toll fee revenue. The company estimates that the IRR of the project is 5.5% and it will likely generate net profit of Rmb3.51bn during the toll collection period. We believe the firm's earnings still have growth potential, as the company continues to reinvest in its main business and expand its toll road assets.

Dividend policy sound; dividend yield attractive. The firm has announced that dividend payout ratios for 2020-2024 will be at least 60%. Its dividend per share did not decline even if earnings came under pressure due to the impacts of the COVID-19 pandemic in 2020-2022. We think its stable dividend payment policy bodes well for shareholder returns.

We estimate that the firm's current price implies a dividend yield of 4.8% and 5.0% for 2024 and 2025. Its dividend yield is attractive, in our view.

Financials and valuation

We maintain our 2024 and 2025 earnings forecasts. The stock is trading at 13.0x 2024e and 11.9x 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb10.01. Our TP implies 14.9x 2024e and 13.7x 2025e P/E, offering 14.8% upside.

Risks

Economic growth and/or progress in retrofitting and expansion projects disappoints.