Event description

Wuzhou Transportation achieved operating revenue of 599 million in the first half of 2016, down 53.47% from the same period last year, gross profit rose 35.65% year-on-year to 74.19%, net profit belonging to the parent company rose 110% to 145 million yuan, and EPS was 0.17 yuan. The company expects cumulative net profit from January to September 2016 to increase by about 350-400% compared with the same period last year.

Event comment

Return to the high-speed main business, the net profit doubled compared with the same period last year. As the company withdrew from mining and stopped commodity trading in 2016, operating revenue fell 53.47% in the first half compared with the same period last year, and the low-margin trading business withdrew completely, driving the company's overall gross profit margin to rise 35.65 percentage points to 74.19%.

In the end, the company's first-half net profit rose 110 per cent year-on-year to 145 million.

The depreciation coefficient is reduced to offset the impact of railway diversion, and the highway business profits are exported steadily. Due to the diversion of traffic caused by the opening of high-speed trains from Nanning to Baise and Nanning to Guangzhou, passage fee revenue fell 15.96% in the first half of the year compared with the same period last year. However, in April 2016, the company adjusted the depreciation coefficient of Tanbai Expressway from 22.75 yuan per vehicle to 17.84 yuan per vehicle, and the operating cost decreased by 19.4% compared with the same period last year, offsetting the impact of diversion. In the end, the gross profit margin of the highway business was maintained at 77%, achieving a gross profit of 400 million.

Spin off the loss-making business to reduce losses, and the expense rate decreases and thickens profits. In 2015, the company completed the transfer of equity in three loss-making companies-- 67% of Guangxi Tanghan Zinc Indium Co., Ltd., 100% of Nandan Nanxing Antimony Industry Co., Ltd., and 51% of Guangxi Wuzhou Guotong Investment Co., Ltd., the losses of the three companies are no longer included in the consolidated scope of the 2016 statement. With the divestiture of the off-road core business, the company's management and financial expenses fell by 66 per cent and 31 per cent respectively compared with the same period last year, contributing about 130 million of the profit increase in terms of expenses during the period.

Maintain the "overweight" rating. The future highlights of Wuzhou Traffic are as follows: 1) return to the main business of the highway, the main industry will turn around, and the future net profit will gradually return to more than 350 million yuan; 2) the increase in the shares of the major shareholder trading group gives the company a clear margin of safety (the increase plan has not yet been completed); 3) the construction of the cross-border e-commerce platform and the implementation of the new Henderson Hairun project. 4) the approval of Guangxi Free Trade Zone promotes the development of the company's logistics business. We estimate that the EPS of the company from 2016 to 2018 will be 0.23,0.38 and 0.44 yuan respectively, corresponding to 24 times, 15 times and 13 times of PE respectively, maintaining the "overweight" rating.

Risk hint: major changes have taken place in the highway toll policy, and the impairment of trade business has exceeded expectations.