Abstract: Guangdong Yun Traffic has a good track record in the past three years, with an average annual compound growth rate of 54.7% from 2012 to 2015. Looking forward to the future, highway service and automobile transportation and supporting service business will be the main driving force of the company's growth, while Taiping interchange and material logistics business will maintain steady growth. According to the market consensus, the company currently has a price-to-earnings ratio of 8.4 times in 2016 and 6.6 times in 2017, which we do not think is expensive, especially considering that the company's earnings per share grew at an average annual compound growth rate of 12.3% from 2015 to 2017. the potential of the company's comprehensive property development is not taken into account.
Company background: the company, formerly known as Guangdong Nanyue Logistics Co., Ltd., was established in 2000 and listed on the main board in 2005. At that time, the company had four major businesses: material logistics services, highway service area business, cross-border bus services and traffic intelligence services.
The company restructured in 2012 and sold some underperforming businesses. Since then, the company's main businesses include highway services, motor transport and ancillary services (acquired from the parent company), Taiping Interchange and material logistics. The company is a state-owned enterprise in which Guangdong Communications Group holds a 66.96% stake. China Petroleum & Chemical Corp (0386.HK) also holds a 5.36 per cent stake.
Automobile transportation and supporting services: endogenous growth + acquisition. In 2015, the business made the largest contribution to net profit (excluding minority interests) (45%). At the end of 2015, the company was the largest enterprise in Guangdong Province in terms of passenger line plates, with a market share of 20% (3650 passenger line signs). Management expects the division to grow naturally at about 7 per cent per cent a year. The company had 7371 operating vehicles at the end of 2015, including the contribution of the purchase of Shanyun Automobile Transportation in Shanwei City (473 operating vehicles) newly acquired in 2015. In addition to natural growth, the division will grow by: (I) acquiring 1-2 transport companies per year; (II) improving the efficiency of new acquisitions; and (III) increasing the proportion of proprietary vehicles (60.26% in 2015).
Potential income from comprehensive real estate development business. Some service areas and stations of the company are close to the city center and can be relocated. The land can be used for redevelopment as long as it is approved by the government. The company estimates that more than 2 million square meters of land (residential and commercial) has the potential for redevelopment. Yangxi old passenger station will be a pilot project. Once there is a successful case, this will help the company to release the value of property assets in the future, which is not reflected in the book value, as passenger stations tend to be close to full depreciation.
Highway service: the fastest growing of the four market segments. This contributed 23.7 per cent of net profit (former minority equity) in 2015, and by the end of 2015, the company had operated 120 LOYEE convenience stores (30 per cent of segment revenue), most of which were located in highway service areas. The company plans to actively expand the number of stores in highway service areas, and aims to increase the number to nearly 300 by the end of 2016 and to 600 by the end of 2020. The company will achieve the above goals through the following measures: (1) to increase the number of service areas to more than 100 pairs by the end of 2016 (end of 2015: 88.5 pairs); (2) to increase the penetration of the company's passenger terminal. By the end of 2015, the company operated 139 gas stations (accounting for 35.8 per cent of the division's revenue last year), about 80 per cent of which was contracted to China Petroleum & Chemical Corp. When the contract expires, the company will gradually withdraw the right of management. The company aims to have 50 self-operated gas stations by 2020. According to management estimates, the profitability of proprietary gas stations will be 100% higher.