1H24 results slightly miss our expectations

Shandong Hi-speed announced its 1H24 results: Revenue rose 6.2% YoY to Rmb12.14bn, gross profit fell 2.1% YoY to Rmb3.49bn, and attributable net profit fell 7.2% YoY to Rmb1.63bn, slightly missing our expectations due to falling revenue from the toll road business. In 2Q24, revenue rose 43.8% YoY to Rmb7.61bn, gross profit fell 0.9% YoY to Rmb1.88bn, and attributable net profit fell 9.8% YoY to Rmb863mn.

Trends to watch

Toll revenue fell 10% YoY, and investment segment saw strong growth. 1) Toll roads and bridges: In 1H24, toll revenue fell 10.3% YoY to Rmb4.66bn. Specifically, toll revenue from Jiqing Expressway, a core road asset, fell 15.3% YoY, mainly due to traffic diversion from the opening of Jiqing Middle Line and retrofitting and expansion of intersection sections. 2) Investment and operation: In 1H24, investment income rose 9.6% YoY to Rmb701mn, including Rmb32.494mn recognized from the disposal of a flagship company and the sale of stakes in Guangdong Provincial Expressway Development. 3) Rail Transportation Group: In 1H24, revenue fell 2.0% YoY to Rmb2.29bn and net profit fell 15.2% YoY to Rmb195mn. 4) Information Group: Revenue and net profit reached Rmb1.44bn and Rmb65mn in 1H24.

Retrofitting and expansion well on track; upbeat on medium-to-long- term growth. According to the firm's announcement, retrofitting and expansion of the Jingtai expressway and the Jihe expressway are underway. In 1H24, toll revenue of the Jihe Expressway fell 33.8% YoY due to the impact of traffic decline. 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. We expect the firm’s earnings to increase as the Jingtai and Jihe expressways start operation.

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. The firm’s current price implies a dividend yield of 4.6% and 4.8% for 2024 and 2025, indicating investment value.

Financials and valuation

Due to pressure on toll revenue growth caused by changes in road networks, we cut our 2024 and 2025 net profit forecasts 6.3% and 7.1% to Rmb3.266bn and Rmb3.552bn. The stock is trading at 13.5x 2024e and 12.4x 2025e P/E. Given the firm's solid dividend policy, we maintain an OUTPERFORM rating and our TP of Rmb10.01, implying 14.9x 2024e and 13.7x 2025e P/B, offering 10.2% upside.

Risks

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