The highway toll business is the core, and the road production location advantage is remarkable. The Ninghai-Shanghai Expressway uses expressway operation in the Yangtze River Delta region as its core business, and the epitaxial layout increases profits in auxiliary industries such as transportation support services, new energy, and finance. The company is the only listed highway company in Jiangsu. It is backed by the Jiangsu Provincial State-owned Assets Administration Commission. It has a high-speed operating and investment mileage of about 910 kilometers, total assets of 79.8 billion yuan, and strong assets. Road production has good location advantages. The economy of the hinterland Yangtze River Delta urban agglomeration is growing steadily, population continues to flow in, car ownership is high, and travel demand is strong, providing favorable support for local road traffic, and the company's profitability is strong.
Traffic flow in the main high-speed sector rebounded rapidly after the epidemic, and long-term endogenous growth was steady; epitaxial driving sustainable development. The toll business contributes about 60% of the company's revenue and 90% of gross profit. Entering 2023, the impact of movement restrictions during the pandemic has dissipated. Average daily bus traffic increased 76.4% year on year in the first three quarters. Benefiting from the return of bus traffic to higher than pre-pandemic levels, the company's toll revenue increased 28.26% year on year in the first three quarters of 2023. Considering the high automobile ownership base in Jiangsu and the background of large-scale economic development, we expect the company's toll business revenue to grow steadily and maintain a high level of profitability; the company's new road production projects and road property renovation and expansion projects are expected to start contributing to revenue and profits one after another by the end of 24. The company actively develops auxiliary businesses with supporting facilities and electricity sales, and gradually reduces the sluggish real estate business. It has invested in the road industry and financial industry, and investment income and dividend income are relatively stable.
Profitability is improved, dividends are stable, and dividends have allocation value. Due to the large difference between actual traffic and estimated traffic, the company changed the accounting estimate for depreciation and amortization in 2022, reducing bicycle depreciation and amortization, increasing the profitability of the toll business, and increasing the company's net profit by 176 million yuan in 2022. Traffic flow resumed after the epidemic in the first half of 2023. The gross margin of the traffic business was about 65%, and the net profit margin and ROE all returned to the high levels before the pandemic.
Since road depreciation and amortization is a non-payable cost, the company has abundant cash flow to support the company's dividends. Since the listing of the Ninghai-Shanghai Expressway, the cumulative dividend rate has been 65%, ranking first in the expressway sector. Since '18, it has maintained a dividend of 0.46 yuan per share for 5 consecutive years. We expect the company's dividend policy to remain stable in the future.
Profit forecast and valuation: After the pandemic, the company showed a flexible recovery. Over the long term, road toll increases steadily. The main and auxiliary industries all have potential for growth, stable dividends, and high dividends. We estimate that the company's net profit for 2023/2024/2025 will be 46.55/ 50.54/5.426 billion yuan, respectively, and the corresponding EPS will be 0.92/1.00/1.08, respectively. Expressway targets with high dividends, steady growth, bonds, and good cash flow have high defensive attributes and allocation values. Interest rates decline or are beneficial to the highway sector and the Ninghu-Shanghai Expressway valuation increase. The corresponding target price is 13.04 yuan. The corresponding target price is 13.04 yuan. For the first time, coverage is given a “superior to the market” rating.
Risks: Traffic growth is slowing down; toll rates are drastically reduced; interest rates are rising, etc.