3Q23 results in line with our forecast

Guangdong Provincial Expressway Development (GPED) announced its 3Q23 results: Revenue rose 9.5% YoY (after retrospective adjustment) and 13.6% QoQ to Rmb1.35bn. Net profit attributable to shareholders rose 12.8% YoY (after retrospective adjustment) to Rmb471mn, in line with our expectations.

In 1-3Q23, revenue rose 12.2% YoY (after retroactive adjustment) to Rmb3.69bn, and attributable net profit grew 13.9% YoY to Rmb1.36bn (after retrospective adjustment). GPED made Rmb68.79mn of provisions for impairment of management and maintenance expenses it incurred for Guangfo Expressway.

Trends to watch Vehicle traffic grows rapidly in summer peak season; earnings grow

at double digits. The firm's core road assets are located in the Pearl River Delta region, with a high proportion of buses. In 3Q23, the firm's revenue and earnings recorded double-digit YoY growth thanks to the summer peak season.

Data from Transport Planning and Research Institute (TPRI), Ministry of Transport shows that China’s vehicle traffic on expressways grew 16%, 25%, and 26% YoY in July, August, and September, with passenger vehicle traffic recovering notably (up 22%, 34%, and 38% YoY). Rapid traffic growth in 3Q23 drove double-digit earnings growth of the firm.

Plans to increase investment in reconstruction and expansion project of Guangdong-Zhaoqing Expressway to sustain core business.

According to corporate filings, the firm plans to increase its investment in Zhaoqing Yuezhao Highway Co., Ltd. (Yuezhao) for the reconstruction and expansion project of the Yuejing Hengjiang-Ma'an section of the G80 Guangzhou-Kunming Expressway. The firm will bear the capital contribution of Rmb0.8bn according to the 25% share ratio of Yuezhao.

The internal rate of return (IRR) of the capital is 5.23%, higher than the current long-term loan interest rate of 4.2%. We think this project may be profitable.

We believe the firm continues to expand its expressway business. In addition to the Yuezhao project, the reconstruction and expansion project of Guangzhu section of Jingzhu Expressway (core road asset), Jiangzhong Expressway (Jingzhu Expressway), and Shenzhen Huiyan Expressway (in which it holds stakes) are also progressing. We expect the toll collection period of the firm's road assets to be extended, ensuring steady growth of toll revenue in the long term.

Dividend payout ratio leading the industry; strong defensive value.

According to the firm’s announcement on shareholder return plan for the next three years (2021-2023), its dividend payout ratio for 2021-2023 should be no less than 70%, one of the highest among listed expressway companies. Based on current prices, we expect the firm's dividend yields to be 6.7% and 7.1% for 2023 and 2024, offering strong defensive value.

Financials and valuation

We maintain our 2023 and 2024 earnings forecasts. A-shares are trading at 10.4x 2023e and 9.8x 2024e P/E.We maintain an OUTPERFORM rating. Given visible earnings growth and rising market recognition of high- dividend names, we raise our target price 8.8% to Rmb9.6, implying 12.0x 2023e P/E and 11.3x 2024e P/E, offering 15.0% upside.

Risks

Slower-than-expected economic growth and/or progress of reconstruction and expansion projects.