Zhejiang Shanghai-Hangzhou-Ningbo released the 2024 three-quarter report. According to the restatement, Q1-Q3 achieved total revenue of 13 billion yuan (YoY +1.9%) and net profit of 4.13 billion yuan (YoY +5.2%); of these, Q3 achieved total revenue of 4.6 billion yuan (+2.9% YoY, +5.7% YoY) and net profit of 1.45 billion yuan (YoY +5.7%). The profit reported for the third quarter ($4.13 billion) was basically in line with our expectations ($4.22 billion). Zhejiang Shanghai-Hangzhou-Ningbo has brokerage subsidiaries. The recent rise in stock market turnover may be beneficial to the profit improvement of brokers' business, and at the same time, valuations have potential for expansion. In a domestic environment of low interest rates, high-dividend stocks have allocation value. Assuming that the company maintains a dividend of 0.32 yuan/share in 2024, the corresponding dividend ratio is 6.8%. Maintain a “buy” rating.

Q3 Net profit growth or improvement mainly due to brokers' profit improvement

On a quarterly basis, Q1 net profit to mother fell 8% year on year (according to the recalculation), mainly due to the decline in brokers' profits. Last year, Q1 used uncovered losses to deduct income tax expenses, resulting in a high profit base. Net profit due to Q2 increased 23% year-on-year, mainly due to strong exports driving truck growth, and Q2 exchange losses were large last year. Q3 net profit to mother increased 6% year over year, mainly due to improved brokerage business profits. By business, we expect the net profit of the company's securities, banks, toll roads and other businesses to change +15%/+2%/+0% year over year in Q3, with the net profit of the three businesses accounting for about 13%/12%/75%. The profit growth in the securities business mainly benefited from the recent rise in the stock market and the increase in stock trading volume; the company's Q1-Q3 securities investment income increased 16% year over year. The net profit of the associated company Shanghai Agricultural Commercial Bank grew steadily in Q3.

Zhejiang's regional economy is improving, driving steady growth in vehicle traffic

Toll revenue for the July/August/September sections controlled by the company increased by 0.1%/2.3%/2.9%, respectively. Among them, the number of passenger bus charging days in September was a plus of +2 days compared to the previous year (7% increase), but this was offset by the typhoon. Strong export growth in Zhejiang Province may drive an increase in road freight traffic. Q3 Zhejiang's total export value increased 6.8% year on year, and the export growth rate was higher than that of the whole country (Hangzhou Customs) for 6 consecutive quarters since Q2 last year. The company's 1H truck traffic was +5.3% year-on-year, and the share of short-haul minivans increased. We expect this trend to continue in Q3. Looking at road sections, the Shanghai-Hangzhou-Ningbo Expressway toll was +2.6%; the same ratio was -9.3% for the upper three expressways, mainly due to the renovation and expansion of the surrounding road section; the Zhoushan Cross-Sea Bridge toll was +8.7%, benefiting from the high tourist boom; the total toll for the above three sections accounted for about 70% of the total toll.

Profit forecasting and valuation

Considering the increase in stock market trading activity, we raised our net profit forecast for 2024/2025/2026 to 5.24/5.56/5.84 billion yuan (previous value of 5.08/5.27/5.52 billion yuan), with year-on-year growth rates of 0.3%/6.2%/5.0%, respectively. Due to the improvement in brokerage business and the increase in the valuation of the Hong Kong stock brokerage sector, we raised our target price to HK$6.91 (previous value HK$6.28), still based on the segmented valuation method, where the road discount rate WACC was 7.0% (10.4% equity IRR | 3.2% debt IRR) (previous value: 6.9%).

Risk warning: Traffic growth is lower than expected, A-share market turnover is lower than expected, road network diversion is higher than expected, capital expenditure is higher than expected, and fees have been lowered beyond expectations.