Key points of investment

Incident: Anhui Express released its 2023 interim report: In the first half of 2023, the company achieved operating income of 2,324 billion yuan, down 17.48% year on year. After deducting the impact of zero-margin PPP projects, the company achieved revenue of 14.42%; net profit of 840 million yuan, up 26.06% year on year, net profit after deducting non-attributable net profit of 888 million yuan, up 33.3% year on year. Irregular losses mainly came from fair value changes caused by the decline in CICC Anhui Traffic Control REIT. The basic EPS for the first half of 2023 was 0.51 yuan/share.

In 2023Q2, the company achieved revenue of 1,179 billion yuan, down 36.28% year on year. After deducting the impact of zero-margin PPP projects, the company achieved a year-on-year increase of 9.79%, and a year-on-year decline of 8.74 pcts; net profit of 380 million yuan, a year-on-year increase of 46.21%, and a month-on-month increase of 33.06pcts; net profit excluding non-attributable net profit was 418 million yuan, up 62.51% year on year. The growth rate increased by 47.63 pcts. The high profit growth rate in the second quarter was mainly affected by the severe disturbances and low base of the epidemic in the second quarter of last year.

Comment:

The impact of the epidemic has dissipated, and toll revenue has been greatly recovered year on year: there are a total of 10 toll road projects managed and controlled by Wantong, with an operating highway mileage of about 609 kilometers (not including the proposed asset Liuwu Expressway), and the location advantage of the road section to which it belongs is obvious. In the first half of 2023, travel demand recovered rapidly due to macroeconomic recovery. Toll revenue for the company's road section was 2,036 billion yuan (after tax), an increase of 14.29% over the previous year.

The potential of the core road section is gradually being unleashed:

The effects of the Hening Expressway renovation and expansion continue to be realized: the Hening Expressway is the core section of the company. The renovation and expansion was completed and opened to traffic at the end of 2019, and traffic is still in a period of rapid growth. In the first half of 2023, Hening Expressway achieved toll revenue of 701 million yuan, accounting for 33% of total toll revenue (before tax), an increase of 24.61% over the previous year.

In the first half of 2023, after the completion of the renovation and expansion of the Chuhe Bridge and the Heluye Expressway within the road section, it had a positive impact on the increase in tolls on the Hening Expressway; in parallel with the Ningluo Expressway renovation and expansion construction, vehicles chose the Hening Expressway to pass.

The Guillotine Road of the Ningxuan-Hangzhou Expressway was opened to traffic, and toll revenue increased dramatically: the total length of the Ningxuan-Hangzhou Expressway was 117 kilometers. The entire line was completed in December 2022, and traffic and efficiency increased dramatically. In the first half of 2023, the Ningxuan-Hangzhou Expressway achieved toll revenue of 114 million yuan, an increase of 184.5% over the previous year. The Ningxuanhang Expressway achieved a net loss of 108 million yuan in the first half of 2023, a year-on-year loss of 190 million yuan, and a loss attributable to the parent company of about 55 million yuan. Since high-speed costs are relatively rigid, Ning Xuanhang is expected to turn a loss into a profit this year as traffic increases.

The Gaojie Expressway achieved toll revenue of 476 million yuan in the first half of 2023, accounting for 23% of total toll revenue (before tax), an increase of 6.23% over the previous year. The degree of recovery was weaker than the overall level mainly due to the completion of maintenance projects for the G105 Taihu to Qianshan section and the G318 Qianshan Outer Ring Road section at the end of October and December 2022, respectively (trucks detoured during construction), which diverted some trucks.

The Xuanguang and Guangci Expressway achieved toll revenue of 269 million yuan and 57 million yuan respectively in the first half of 2023, accounting for 13% and 3% of total toll revenue (before tax), respectively, with year-on-year declines of 3.34% and 1.33%, respectively, mainly due to road section renovation and expansion. It is expected that the renovation and expansion project will be completed and opened to traffic in 2024. At that time, traffic is expected to increase significantly and extend the company's sustainable operation capacity.

It is proposed to increase plus cash to acquire the majority shareholder's high-quality assets to 75%, with positive returns to shareholders: The company announced on June 21, 2023 that it plans to buy the majority shareholder's high-quality assets at a price of 3.66 billion yuan, including 550 million yuan in cash, and an additional 469 million A-shares to the shareholder Anhui Traffic Control Group at a price of 664 yuan/share to pay 3.116 billion yuan in share consideration. After the transaction is completed, the shareholding ratio of majority shareholders will rise from 31.63% to 46.71%. When the company uses the revenue method (DCF) to evaluate transaction considerations, the discount rate used is WACC of 9%, which is currently a high discount rate for acquisitions in the same industry. At the same time, predictions of future vehicle traffic are neutral, and transaction consideration is reasonable. Since this acquisition and subsequent supporting capital raised involved additional share capital, there will be a dilution of impact on EPS in the short term. In order to protect the rights and interests of small to medium shareholders, when the company meets the cash dividend conditions in 2023-2025, the profit distributed in cash each year is not less than 75% of the consolidated statement net profit achieved in that year, making it currently the company with the highest dividend in the high-speed sector.

The decline in CICC Anhui Traffic Control REIT resulted in a fair value change loss of 91.53 million yuan, which has recovered approximately 37.12 million yuan since the third quarter: the company holds 38.9 million CICC Anhui Traffic Control REITs. Due to the poor performance of this REIT in the first half of 2023, the company calculated a fair value change loss of 91.53 million yuan, of which 2023Q1 and 2023Q2 calculated about 16.82 million yuan and 74.71 million yuan respectively. Since the third quarter, the cumulative increase in CICC Anhui Traffic Control REITs has been 11.71%. It is estimated that the company has recovered losses of 37.12 million yuan. It is expected that with the recovery in REIT value, the company is expected to continue to recover some losses in the next two quarters.

Investment Strategy: The Anhui Expressway has many interprovincial highways within Anhui Province. The core road production has strong profitability, and continues to strengthen and expand the main road industry through renovation, expansion and acquisitions. We maintain our profit forecast, not considering the Liuwu Express takeover. We expect the company to achieve net profit of 1,753 billion yuan, 2,013 billion yuan, 2.194 billion yuan, and EPS of 1.06 yuan, 1.21 yuan, and 1.32 yuan. Corresponding to the closing price on August 30, PE valuations are 10.1X, 8.8X, and 8.1X; assuming the company's dividend rate is 60%, the A dividend rate for 2023 to 2025 is 5.94%, 6.82%, and 7.44%, respectively. It was 8.71%, 10.00%, and 10.90%.

Considering the Liuwu Express acquisition, it is estimated that from 2023 to 2025, the company will achieve net profit of 1,978 billion yuan, 2,226 billion yuan, 2,416 billion yuan, and EPS of 0.93 yuan, 1.05 yuan, and 1.14 yuan. Corresponding to the closing price on August 30, PE valuations are 11.5X, 10.2X, and 9.4X; assuming that the company's dividend rate is 75%, the dividend rate for A from 2023 to 2025 is 6.53%, 7.35%, and 7.98%, respectively. 10.78%, 11.70% Maintain a “buy” rating.

Risk warning: regional epidemic disturbances, falling traffic due to economic downturn, changes in charging policies, reinvestment risks, etc.