As a comprehensive highway investment and operation platform, China Merchants Highway mainly controls the road production mileage leading industry, and is involved in a wide range of road production layouts. The company continued to invest in mergers and acquisitions of road products in the early stages, expanding the scale of its main business operations. It has successively acquired Lujin Asset Package, Yonglan Express, and China Railway Asset Package. At the same time, the company is expected to increase one-time income after the issuance of REITs. As a central enterprise platform, the company has excellent governance and good growth, and the market is expected to give a valuation premium

It is the only highway operation platform under China Merchants Group, and the central enterprise has excellent governance. The majority shareholder of China Merchants Highway is China Merchants Group, with a shareholding ratio of 62%. The company is the only highway operation platform of the China Merchants Group and the only state-owned enterprise among listed companies in the highway industry. The company has excellent corporate governance. Since its listing, its comprehensive performance has been at the forefront of the industry in terms of investment and financing management, shareholder returns, and market value management. In October 2024, it was announced that it intends to repurchase shares. The total repurchase capital range is 0.31-0.62 billion yuan. All shares repurchased will be cancelled, demonstrating the importance the company attaches to market value management.

The company has participating and controlling assets all over the country, ranking first in the industry in terms of asset size. As of 2024H1, the total mileage of road products invested and operated by the company was 14,745 kilometers. The remaining toll period after the expiration of road products reached 12.9 years weighted by the proportion of tolls, which is among the top listed highway companies in the industry. The company focuses on highway operation, and the operating income of participating and controlling highways accounts for more than 90% of the company's total profit; in addition to directly controlling road production, the company participated in 26 toll road companies in all provinces and cities across the country, and contributed a total investment income of about 40% of operating profit in 2023.

Epitaxial acquisitions continue, and the issuance of REITs is expected to bring road investment and financing into a virtuous cycle. Since its listing, the company has continuously acquired high-quality road products. Over the past 23 years, it has consolidated China Railway Asset Package, Lujin Project, Yonglan Project, etc., and has continuously increased the company's profits through epitaxial mergers and acquisitions. Considering that the company's current balance ratio is still relatively low in the industry, the company's ROE and profitability can still be enhanced through cash acquisitions in the future. At the same time, the company is also continuously optimizing its asset structure and revitalizing existing infrastructure assets. The company is promoting the issuance of public REITs. It is expected that REITs will contribute one-time asset disposal income after issuance, which is expected to increase the company's 24-hour performance and bring highway investment and financing into a virtuous cycle.

Investment advice. China Merchants Highway holds a number of road products and listed highway companies. It has strong investment and operation capabilities. The company's road property merger and acquisition model is sustainable in the long run. As a central enterprise platform, China Merchants Highway has excellent acquisition capacity, and there is still room for leveraged asset acquisitions under the current debt ratio. At the same time, toll road regulations are expected to be revised in the future, and there will be marginal upward changes in the overall highway industry policy, which will benefit the highway industry at that time. The company promised a dividend rate of 55%, and the corresponding 24-26 dividend rates under the latest closing price (considering interest on perpetual bonds) were 4.0%, 4.2%, and 4.2%, respectively. We expect the company's net profit to be 5.83 billion yuan, 6.13 billion yuan, and 6.18 billion yuan respectively in 24-26, corresponding to a 24-year PE of 13.4x, PB of 1.1x, 25-year PE of 12.7x, and PB of 1x, maintaining a “highly recommended” rating.

Risk warning: Macroeconomic performance falls short of expectations, toll policies have changed beyond expectations, and mergers and acquisitions have fallen short of expectations.