Incident: The company plans to acquire 55% of Henan Yuexiu Pinglin Expressway Co., Ltd. (hereinafter referred to as the project company) at a price of 0.758 billion yuan. The main business of the project company is to operate Pinglin Expressway; at the same time, the company plans to sell 60% of the shares in Tianjin Jinxiong Expressway through public listing, at a transfer price of not less than 0.191 billion yuan.

The Pinglin Expressway has an excellent geographical location: The Pinglin Expressway is an important part of the Ningluo Expressway (G36), one of the 18 east-west highways in China's expressway network. It is the main road connecting Luoyang in northwest Henan with Pingdingshan, Luohe, and Zhoukou in central Henan. It is also a major logistics channel connecting northwest China and southeast coastal regions.

The purchase price of the Pinglin Expressway project is reasonable, with an internal rate of return of 9.2%: According to the announcement, the Pinglin Expressway has a total length of 106.45 kilometers, four lanes in both directions, and the remaining toll period is about 9 years (expires on October 24, 2033).

As of July 31, '24, the total assets of the project company were 2.308 billion yuan, net assets were 1.36 billion yuan, and the balance ratio was 41.1%. The company plans to acquire 55% of the project company's shares at a price of 0.758 billion yuan, at a discount of 3.6% over the assessed market price of 0.787 billion yuan.

The calculation of the company's market assessment price is based on a traffic research report prepared by Huahe Group. The report fully takes into account the negative impact caused by the renovation and expansion of the connected section of the Pinglin Expressway and the possible diversion impact of the new parallel section, and the CAGR (compound annual growth rate) of the project company's revenue for 2024-2033 is about 1.2%. Considering the company's historical CAGR of 4.22% from 2010 to 2023, we believe this assessment is reasonably conservative, and there is a possibility that traffic will exceed expectations in the future. Based on the revenue assessment of Huasheng Group and based on a market assessment value of 0.787 billion yuan, the internal rate of return for the Pinglin Expressway project is about 9.2%, which is a high rate of return.

If this acquisition is completed, the company's performance will increase significantly: the project company was established on February 23, 23. From the establishment of the project company to the end of 2023, Pinglin Express achieved revenue of 0.482 billion yuan and profit of 0.119 billion yuan after tax. From January to July '24, Pinglin Express had revenue of 0.304 billion yuan and net profit of 0.08 billion yuan after tax.

It can be seen that the profit situation of the Pinglin Expressway project is stable. According to a rough estimate based on annualized operating data from January to July '24, the annual net profit of the Pinglin Expressway Project was about 0.138 billion yuan. Due to the company's acquisition of 55% of the project shares, it is roughly estimated that the project contributed about 0.076 billion yuan in net profit to the mother for the whole year after the acquisition was completed, which significantly increased the company's performance. We expect the share settlement of the project company to be completed at the end of the year or the beginning of '25, and the increase in the company's performance will be fully demonstrated in '25.

Sale of 60% of Tianjin Jinxiong Expressway shares: The company announced the sale of 60% shares of Tianjin Jinxiong Expressway through public listing, with a transfer price of not less than 0.191 billion yuan. The company sold the Jinxiong Expressway mainly due to the fact that the remaining charging period for road production is only 6 years, and additional capital expenses will be incurred if the subsequent renovation, expansion and extension period is carried out. In January-May '23 and January-May '24, the Jinxiong Expressway achieved revenue of 0.086 billion yuan and net profit of 0.016 billion yuan and 0.11 billion yuan, respectively. The company expects that a successful sale of the Jinxiong Expressway will generate a one-time income from asset disposal and increase the company's net profit in the year the project was sold.

Profit forecast and investment advice: Since the acquisition has not been completed, we are not considering the impact of Pinglin Expressway in profit forecasting. The company's net profit for 2024-2026 is estimated to be 656 million yuan, 7.38 million yuan, and 769 million yuan, respectively, and the corresponding EPS is 0.39, 0.44 and 0.46 yuan, respectively. If the company completes the acquisition of Pinglin Expressway, profits for 25 years and beyond will increase accordingly. We are optimistic about the continued growth of the company's performance and maintain the company's “Highly Recommended” rating.

Risk warning: Major policy changes, economic growth has declined, revenue from the acquisition of road products has fallen short of expectations, and renovation and expansion costs have exceeded expectations.