The net profit of the 2022 annual report is lower than expected; but significant changes have taken place in the fundamentals.
Yuexiu Traffic recorded an income of 3.289 billion yuan (- 11.2%) and a net profit of 453 million yuan (- 69.1%) in 2022. The net profit is lower than we expected (RMB 648 million).
The decline in net profit is mainly due to a high base, and the divestment of Hanxiao Expressway in 2021 produced a large amount of disposal income.
In 2022, the deduction of non-net profit decreased by about 40% compared with the same period last year, mainly because residents' travel and freight transportation were affected by the epidemic. We believe that the 2022 annual report only reflects the past, and major changes have taken place in the fundamentals at present, with a substantial increase in private car traffic during the Spring Festival compared with the same period last year. Taking into account the rapid pace of travel recovery, we raised the 2023 / 2024 net profit forecast by 9.6% to 964 million / 903 million yuan (the previous value is 879 million / 899 million yuan), and introduced the 2025 forecast of 1.013 billion yuan. We raised our target price by 13.2% to HK $6.59, which is still based on 10x 2023E PE, which is about 10% higher than the company's average PE in 2016-2019 to reflect the boost of C-REIT to the company's long-term growth potential. Maintain a "buy" rating.
2022 was the trough of performance, and residents' travel and freight transportation were affected by the epidemic.
The epidemic in 2022 had a great impact on residents' travel and road freight transport, and the 10% reduction of 4Q22 truck tolls further dragged down the toll performance. In 2022, Yuexiu's deduction of non-toll income (excluding Hanxiao Expressway and newly acquired Lanwei Expressway) decreased by 8.1% compared with the same period last year; the investment income of participating in road property decreased by 34% compared with the same period last year, which was also affected by the diversion of the road network. As the company uses expected traffic flow for road production amortization, the amortization expense of intangible assets still increases by 8% compared with the same period last year, while most companies in the industry use actual traffic flow for amortization, and amortization expenses decrease synchronously when traffic flow decreases. The decline in revenue and the rise in costs caused the company's gross profit to fall 23% year-on-year. Due to the optimization of debt structure and the decline in market interest rates, Yuexiu's weighted average interest rate was reduced to 3.60% (2021: 3.87%), and financial expenses were reduced by 140 million yuan compared with the same period last year.
Self-driving travel is accelerating recovery, Spring Festival traffic has exceeded the pre-epidemic level Spring Festival residents self-driving travel has been a strong recovery. In the 40 days of Spring Festival travel this year, the volume of highway minibuses across the country increased by 19% compared with the same period in 2019, returning to 117% in the same period in 2019. The flow of trucks exceeded 20% in 2019 (Ministry of Communications). Yuexiu mentioned in the 2022 annual report that since the Spring Festival transportation in 2023, the company's toll road traffic has shown double-digit growth compared with the same period in 2022 and 2019. Highway freight transportation is closely related to the prosperity of manufacturing industry. Manufacturing PMI rose to 52.6% in February, exceeding the rise and fall line for two months in a row. The rebound in PMI is expected to drive road freight upwards.
Acquisition of Lanwei Expressway to achieve asset expansion, the higher internal rate of return of the project Yuexiu acquired Henan Lanwei Expressway in November 2022, equity IRR as high as 9.5% (2022-10-17 announcement). The Lanwei project recorded a positive profit in 2022, showing great potential for performance growth during the industry trough. Yuexiu plans to pay a final dividend of HK $0.10 per share, together with an interim dividend of HK $0.10 per share, with a dividend yield of 4.3% (dividend rate of 64%) for 2022. Assuming that the future dividend rate returns to 55%, we expect the company to have a dividend yield of 7.7%, 7.2% and 8.1% in 2023, 2024, and 2025.
Risk tips: economic growth slows, the impact of the epidemic exceeds expectations, road network diversion, and toll standards are reduced.