3Q24 earnings largely in line with our expectation

China Merchants Expressway announced its 3Q24 results: Revenue rose 34.9% YoY to Rmb3.09bn, and net profit attributable to shareholders fell 6.4% YoY to Rmb1.45bn, largely in line with our expectation. In 1-3Q24, the firm's revenue rose 38.0% YoY to Rmb9.08bn, and net profit attributable to shareholders fell 4.6% YoY to Rmb4.36bn.

Trends to watch

Tolls revenue growth remained under pressure in 3Q24. As the firm holds controlling stakes in a wide range of road assets, we use industry data as a reference to analyze its performance. Based on data from G7 Connect, the national truckload freight traffic index fell 1.6%, 3.4% and 2.0% in July, August and September. Therefore, we think the firm's revenue from road tolls of road assets controlled by the firm declined YoY in 3Q24. In 3Q24, the firm's investment income fell 7.1% YoY to Rmb1.2bn, mainly because earnings of listed toll road companies in which the firm holds stakes mostly declined YoY in 3Q24. As a national toll road operation platform, we believe performance of the firm's operations was in line with industry-wide performance, as the growth of the toll road industry was under pressure due to impact from macroeconomic environment.

Share buyback plan shows confidence in the firm's operations. According to the firm's announcement, the firm plans to buy back Rmb310-618mn of its shares and cancel them to reduce its registered capital, accounting for 0.25-0.5% of its total shares based on the maximum buyback price of Rmb18.10/sh. Meanwhile, China Merchants Bank's Beijing branch plans to provide up to Rmb432.6mn of loans for the share buyback with a term of 12 months and an interest rate of no more than 2.25%. We believe the share buyback indicates the management's recognition of the firm's intrinsic value and confidence in its sustainable future growth, as well as its emphasis on protecting the interests of minority shareholders.

We expect issuance of public REIT to boost earnings in 4Q24. Based on announcements of China Merchants Expressway's REIT, the infrastructure project company for the REIT has now completed the registration of ownership change and the REIT raised Rmb3,496mn, with the contract for the REIT taking effect from October 17, 2024. We believe that the successful issuance of the REIT will boost the firm's earnings in 4Q24. In the long term, we believe that the firm could effectively make use of its existing high-quality assets and enhance its continuous investment and sustainable operation capabilities.

Financials and valuation

We maintain our 2024 and 2025 earnings forecasts. The stock is trading at 13.6x 2024e and 14.7x and 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb13.52, implying 15.5x 2024e P/E and 16.7x 2025e P/E and offering 13.4% upside.

Risks

Disappointing performance of acquired road assets; slower-than-expected economic growth.