2023 results in line with our expectations

Guangdong Provincial Expressway Development announced its 2023 results: Revenue rose 17.0% YoY (adjusted) to Rmb4.88bn; attributable net profit grew 28.0% YoY (adjusted) to Rmb1.63bn, in line with the preannouncement and our expectations; recurring net profit attributable to shareholders grew 30.1% YoY to Rmb1.71bn (adjusted), and the firm's non-recurring gains and losses included about Rmb123mn of credit impairment provision made on the management and maintenance expenses of Guangzhou-Foshan Expressway.

In 4Q23, revenue rose 35.3% YoY to Rmb1.19bn, and attributable net profit grew 225.2% YoY to Rmb278mn.

Trends to watch

The firm's toll revenue recovered thanks to a significant rebound in household travel. The firm's toll revenue rose 17.5% YoY to Rmb4.81bn in 2023 or fell 7.0% from 2021 due to the expiry of Guangzhou-Foshan Expressway. Excluding this, toll revenue would grow 1.9% from 2021. Specifically, toll revenue from Foshan-Kaiping Expressway, Guangzhu section of Jingzhu Expressway, and Guangzhou-Huizhou Expressway rose 17.4%, 28.2%, and 16.5% YoY in 2023 and 4.6%, 1.4%, and 0.3% from 2021.

Traffic volume to maintain solid growth thanks to favorable locations of road assets. According to the Department of Transport of Guangdong Province, the traffic volume in Guangdong province rose 6% YoY during the 2024 Chinese New Year (CNY) holiday, with the total traffic volume of expressways in the Guangdong-Hong Kong-Macao Greater Bay Area rising 5.4% YoY.

We think the firm’s road assets have favorable locations. In the near term, we expect the boom in passenger transport to continue and freight traffic to improve marginally. In the medium and long term, Guangzhu section of Jingzhu Expressway, a major road asset of which the firm is a controlling stakeholder, is undergoing renovation and expansion. We believe that its improved traffic capacity after the renovation and expansion will boost its profitability, and the firm may extend the toll collection period, which could support its long-term growth.

The high dividend payout ratio continues; the firm has long-term investment value. The firm announced its 2024-2026 shareholder return plan, which includes an annual cash dividend of no less than 70% of attributable net profit. As its high dividend policy continues, the firm has become one of the listed toll road companies with the highest dividend payout ratio.

In the past, steady earnings growth and high dividends supported the firm's absolute returns, and its cumulative return (including dividends) has reached 112% since 2016 (as of March 15, 2024), offering significant long- term investment value. According to our calculation, the current price implies a dividend yield of 6.1% in 2024 and 6.3% in 2025, which is still attractive.

Financials and valuation

We keep our 2024 earnings forecast unchanged and introduce 2025 earnings forecast of Rmb1.82bn. The A-share stock is trading at 11.4x 2024e and 11.1x 2025e P/E. We maintain an OUTPERFORM rating. Given our valuation rollover to 2024 and the firm’s high and visible dividends, we raise our target price 15.0% to Rmb11.04 (13.0x 2024e P/E), offering 14.3% upside.

Risks

Disappointing economic growth; sharper-than-expected traffic diversion.