2023 results in line with our expectations

Shandong Hi-speed announced its 2023 results: Revenue was Rmb26.55bn, up 18.6% YoY after retrospective adjustment due to the consolidation of Shandong Hi-speed Information Group; attributable net profit was Rmb3.3bn, up 8.5% YoY after retrospective adjustment, in line with our expectations. The firm paid a dividend of Rmb0.42/sh, implying a dividend payout ratio of 61.7%.

Trends to watch

The toll road business recovers, and the investment segment has grown steadily. Road and bridge operation: Toll revenue grew 10.1% YoY to Rmb10.25bn in 2023. Specifically, toll revenue from Jiqing Expressway (a core road asset) rose 7.4% YoY, and toll revenue from sections related to Jingtai Expressway grew 43.1% YoY, mainly thanks to the completion of the reconstruction and expansion of the Jitai section of Jingtai Expressway and its opening in October 2022.

Investment and operation: In 2023, investment income fell 21.2% YoY to Rmb1.37bn, mainly due to a high base caused by the recognition of Rmb0.54bn of income from the sale of the real estate business in 2022. It would rise 13.9% YoY if this one-off impact was excluded. The rapid growth in investment income in 2023 was mainly due to acquiring a 30% stake in Shandong Hi-speed Maintenance Group via capital increase. It would rise 7.0% YoY if this impact was excluded, indicating stable capital operations.

Rail transit services: In 2023, revenue grew 2.8% YoY to Rmb4.55bn, and net profit rose 14.8% YoY to Rmb0.45bn. Specifically, railway transport volume grew 17.6% YoY. Shandong Hi-speed Information Group: The company completed the acquisition of a 65% stake in Shandong Hi-speed Information Group to expand its presence in the road maintenance market and smart transportation. Shandong Hi-speed Information Group's revenue grew 8.7% YoY to Rmb4.36bn in 2023, and its net profit reached Rmb310mn, boosting the company's earnings.

Continues to invest in main business; upbeat about medium-to-long- term growth. According to the company's announcement, Jingtai Expressway's Qiji reconstruction and expansion project and Jihe Expressway reconstruction and expansion project are progressing smoothly. Given the boost to traffic volume from reconstruction of Jiqing Expressway and the Deqi and Jitai sections of Jingtai Expressway, as well as the firm's toll rate adjustment, which contributed significantly to the firm's earnings growth, we expect the firm's earnings to grow further in the medium and long term, as the Qiji section of Jingtai Expressway and Jihe Expressway open to traffic.

Solid dividend policy to ensure reasonable returns for shareholders. According to the company's 2020-2024 shareholder return plan, its dividend payout ratio should not be lower than 60%. The firm has ensured that its dividend per share did not decline even if earnings were under pressure in 2020-2022 due to COVID-19. We believe the company's prudent dividend policy can effectively ensure absolute returns for investors.

Financials and valuation

We leave our 2024 earnings forecast unchanged and introduce 2025 net profit forecast of Rmb3.98bn. The stock is trading at 12.2x 2024e and 11.0x 2025e P/E. Maintain OUTPERFORM. Given the rollover of valuation to 2024 and the firm's steady dividend payout, we raise our TP 24.0% to Rmb10.01, implying 13.4x 2024e and 12.2x 2025e P/E, offering 10.1% upside.

Risks

Slower-than-expected progress in reconstruction and expansion; slower- than-expected economic growth.