1H24 results in line with our expectations

China Merchants Expressway announced its 1H24 results: Revenue rose 39.7% YoY to Rmb5.98bn, thanks to the financial consolidation of China Merchants China Railway Holdings (CMCR Holdings); and attributable net profit fell 3.6% YoY to Rmb2.71bn. The company's results in 1H24 were in line with our expectations. In 2Q24, revenue rose 31.3% YoY to Rmb2.96bn; and attributable net profit fell 3.2% YoY to Rmb1.41bn.

Trends to watch

By business segment: 1) Investment and operation business - In 1H24, revenue rose 54.6% YoY to Rmb4.83bn, mainly thanks to the financial consolidation of CMCR Holdings. According to data from the Ministry of Transport, the number of road passenger trips rose 6.6% YoY to 29.84bn passenger trips in 1H24. We believe the firm's toll road operation business performed steadily in 1H24. 2) Investment income - In 1H24, investment income fell 3.7% YoY to Rmb2.35bn (86.7% of attributable net profit), as the firm no longer receive investment income from CMCR Holdings after the financial consolidation. In addition, many listed toll road companies in which China Merchants Expressway holds stakes saw earnings decline in 1H24 due to more toll-free days during holidays, bad weather, and macroeconomic conditions, according to their interim reports. Corporate filings show that China Merchants Expressway included Road King into its financial statements in 1H24. The latter generated Rmb52.11mn in net profit over April 22-end-1H24. 3) Other business segments - Revenue of the transportation technology, intelligent transportation, and transportation ecosystem business segments reached Rmb922mn, Rmb122mn, and Rmb113mn in 1H24, recording changes of +10.1%, -39.9%, and -6.2% YoY.

Toll road operation business to improve HoH and issuance of publicly offered REITs to boost earnings in 2H24. Revenue of the toll road industry came under pressure in 1H24. Looking ahead into 2H24, we expect business operations of toll roads to improve after the impacts of the short-term factors (such as holidays and weather conditions) ease. In addition, corporate filings show that China Merchants Fund's China Merchants Expressway REIT received the approval from the China Securities Regulatory Commission (CSRC) on May 24. We believe that if the REIT is successfully issued, the company will see earnings increase in the short term; and it may also activate existing, high-quality assets and　improve its investment and sustained operation capabilities in the long term thanks to the establishment of a closed loop of "investment, financing, management, and exit".

Financials and valuation

We cut our 2024 and 2025 net profit forecasts 14.3% and 11.7% to Rmb5.97bn and Rmb5.53bn, as the recovery of truck traffic is weaker than our expectation due to the impact of the macroeconomic conditions. The stock is trading at 14.0x 2024e and 15.1x 2025e P/E, implying dividend yields of 3.8% and 3.6% in 2024 and 2025. As the firm's dividend is solid and visible, we maintain an OUTPERFORM rating and our target price of Rmb13.52. Our TP implies 15.5x 2024e and 16.7x 2025e P/E, offering 10.5% upside.

Risks

REITs and/or economic growth disappoints.