1Q24 results miss our expectations

Shandong Hi-speed announced its 1Q24 results: Revenue came in at Rmb4.53bn. After being adjusted for the consolidation of Information Group, the company's revenue declined by 11.9% YoY. Net profit attributable to shareholders was Rmb769mn. Adjusted attributable net profit fell 6.7% YoY, missing our expectation, due to lower revenue from the toll road business.

Trends to watch

Toll revenue dropped YoY; investment business remained sound.

Toll roads and bridges: Toll revenue fell 12.2% YoY to Rmb2.26bn.

Specifically, revenue from the Jiqing expressway declined by 14.4% YoY, due to more rainy and snowy days, nine toll-free days for small passenger vehicles (PVs) during the Chinese New Year (CNY) holiday (February 10-17), and traffic diversion.

Investment and operation: Investment income increased by 6.2% YoY to Rmb324mn.

Rail Transportation Group: Revenue fell 14.2% YoY to Rmb965mn. Net profit declined by 22.7% YoY to Rmb66mn.

Retrofitting and expansion projects as well as changes in road networks weighed on earnings in the short term; upbeat on the growth potential of the toll road business in the medium and long term.

Toll revenue declined in the short term, as the changes in road networks weighed on some road assets at the company. In addition, we think ongoing retrofitting and expansion projects for the Jingtai expressway and the Jihe expressway will, to some degree, erode traffic.

That said, we think retrofitting and expansion projects will boost the firm's earnings growth in the medium and long term, given increased traffic following the completion of such projects for the Jiqing expressway and the Jingtai expressway as well as new toll collection standards. The firm has announced that the Jihe expressway will likely start operation by end-2024.

Stable dividend payment policy bodes well for shareholder returns. The firm has announced that dividend payout ratios for 2020-2024 will be at least 60%. Its dividend per share did not decline even if earnings came under pressure due to the impacts of the COVID-19 pandemic in 2020- 2022. We think its stable dividend payment policy bodes well for shareholder returns.

Financials and valuation

We cut our 2024 and 2025 net profit forecasts 3.6% and 4.0% to Rmb3.48bn and Rmb3.82bn, to reflect lower-than-expected toll revenue. The stock is trading at 12.4x 2024e and 11.3x 2025e P/E. We maintain an OUTPERFORM rating and a target price of Rmb10.01. Our TP implies 13.9x 2024e and 12.7x 2025e P/E, offering 12.2% upside.

Risks

Progress in retrofitting and expansion projects and/or economic growth disappoints.