1H24 results in line with our expectationGuangdong Provincial Expressway Dev’t announced its 1H24 results: Revenue fell 4.7% YoY to Rmb2.23bn, gross profit fell 5.1% YoY to Rmb1.52bn, and net profit attributable to shareholders fell 3.4% YoY to Rmb856mn, in line with our and market expectations. In 2Q24, revenue fell 6.7% YoY and 1.6% QoQ to Rmb1.11bn, gross profit fell 7.4% YoY and 2.4% QoQ to Rmb750mn, and net profit attributable to shareholders grew 8.6% YoY but rose 3.3% QoQ to Rmb435mn.

Trends to watch Among the road assets controlled by the company, Guangzhou- Huizhou Expressway experienced traffic diversion, while Foshan- Kaiping Expressway and Guangzhu section of Jingzhu Expressway maintained stable vehicle traffic. In 1H24, Guangzhou-HuizhouExpressway’s revenue fell 12.4% YoY to Rmb892mn, as its vehicle traffic was diverted by the opening of Guangzhou-Shanwei High-speed Railway, Huizhou-Longmen Expressway, and Dongguan-Panyu Expressway Phase III (part of the Guangzhou-Longchuan Expressway). Revenue of Foshan-Kaiping Expressway rose 1.3% YoY to Rmb743mn, and that of Guangzhu section of Jingzhu Expressway grew 1.9% YoY to Rmb569mn.

We suggest paying attention to the impact of Shenzhen-Zhongshan Channel’s traffic diversion from Guangzhu section of JingzhuExpressway. After the Shenzhen-Zhongshan Channel opened on June 30, it diverted vehicle traffic from Guangzhu section of the Jingzhu Expressway, of which the toll revenue dropped 14.9% YoY in July, according to the company. According to the Department of Transport of Guangdong Province, the average daily vehicle traffic of the Shenzhen- Zhongshan Channel has been about 100,000 since its opening, and we believe the impact on the Guangzhu section of the Jingzhu Expressway warrants further attention.

Solid fundamentals and high dividend payout ratio; dividend yieldoffers investment value. The firm’s main road assets are located in Guangdong province, where its traffic volume is growing steadily.

According to the Department of Transport of Guangdong Province, the traffic volume of expressways in Guangdong grew 2.15% YoY in 1H24, with passenger vehicles up 1.92% YoY and trucks up 3.1% YoY.

The firm announced its 2024-2026 shareholder return plan, which includes an annual cash dividend of no less than 70% of attributable net profit. The firm has become one of the listed toll road companies with the highest dividend payout ratio. The current price implies a dividend yield of 4.8% in 2024 and 5.0% in 2025, which is still attractive.

Financials and valuation

Considering traffic diversion from road network changes, we lower our 2024 and 2025 net profit forecasts 11.6% and 9.8% to Rmb1,566mn and Rmb1,644mn. The stock is trading at 14.7x and 14.0x 2024e and 2025e P/E. As the firm boasts a high dividend payout ratio, relatively stable business operations, and attractive and visible dividend yield, we maintain OUTPERFORM and our TP of Rmb11.04, implying 14.7x 2024e and 14.0x 2025e P/E, same as current price.

Risks

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