Net profit and dividend in 2020 exceeded expectations; strong guidance in 2021; slightly lowered target price Zhejiang Shanghai, Hangzhou and Ningbo released 2020 results on March 23, with net profit of 2.997 billion yuan (down 19.2% from the same period last year), higher than our forecast of 8.5%, mainly due to the strong performance of 2H20 toll roads and securities business. We believe that the company has two drivers: 1) the opportunity to become China's REIT pilot; 2) domestic recovery and export boom to boost transport demand. In view of the strong recovery in traffic, we have raised our net profit forecast for 2021 / 22 by 0.1%. We still reduce the target price slightly by 2.4% to HK $8.83 based on the segment valuation method to reflect the rise in risk-free interest rates and the decline in PE in the securities market. The company declares a dividend of 0.355 yuan per share in 2020, with a dividend rate of 51.4% and a dividend yield of 6.4%.
We expect the annual diluted EPS on 2021-22-23 to be 1.01 pound 1.13 pound 1.17 yuan. Keep buying.
The fundamentals of 2H20 toll road and securities business are strong and tough.
The segment net profit of the toll road / securities / other business 2H20 increased by 360.91% respectively compared with the same period last year (1H20: down 104% / up 38% / up 1%). The strong earnings performance of the securities business is due to the rebound in A-share trading volume. 2H20 Zhejiang Shanghai-Hangzhou-Ningbo holding toll road recorded a strong 10% year-on-year growth rate (Shanghai-Hangzhou-Ningbo Expressway / Shanghai-Hangzhou-Ningbo Expressway / Shanghai No. 3 Expressway increased by 815% year-on-year). We attribute this to: 1) the relaxation of travel restrictions related to the COVID-19 epidemic; 2) the recovery of exports in Zhejiang Province.
Traffic flow is temporarily restricted by the "in-place Spring Festival" initiative of the Spring Festival in 2021, as bus traffic is dragged down by the "in-place Spring Festival" initiative of the Spring Festival in 2021, the toll income of the company's core Shanghai-Hangzhou-Ningbo Expressway from January to February increased slightly by 2.5% compared with the same period in 2019, but the toll income of the upper three expressways decreased by 6.7%. However, the volume of traffic on the national highway in the first half of March exceeded that of the same period in 2019 by 20%, according to the Ministry of Transportation. Management also gives strong guidelines for traffic growth: 10% more in 2021 than in 2019.
Acquisition is good; convertible bonds bring potential dilution
Zhejiang Shanghai-Hangzhou-Ningbo acquired the 100% interest of Hangzhou-Nanjing Expressway / Longlilong Expressway at the end of 2020 with an internal rate of return of 10.1% for Hangning Expressway / Longlilong Expressway. According to our estimate, the above transaction is expected to boost the net profit of Zhejiang, Shanghai, Hangzhou and Ningbo. The company sold 230 million euros of convertible bonds in January, which would dilute 5.7 per cent of its equity if fully converted. We estimate that the dividend yield of 2021 / 2022 / 2023 will be 8.7 / 9.9 / 10.2% (historical average: 5.5%), which is more attractive.
Risk tips: 1) the growth rate of traffic is not as fast as we expected; 2) the trading volume of China's A-share market is lower than we expected; and 3) unexpected toll concessions or free passage period are extended, and the compensation is insufficient.
