20230127-招银国际-越秀交通基建-01052.HK-Growth_formula__Organic_growth_+_Asset_injection_+_Spin-off_via_Infrastructure_REIT_35页_3mb

Summary of Yuexiu Transport (1052 HK)

Core Content

Yuexiu Transport is a leading expressway operator in China, primarily focused on Guangdong and Hubei provinces, with a strong track record of dividend payments since its listing in 1997. The company employs a strategic approach combining organic growth, asset injection from its parent company, and spin-off via Infrastructure REITs to maximize profitability and cash flow.

The "incubation-injection" strategy involves the parent company, Yuexiu Group, acquiring and developing expressway assets at an early stage. Once these assets reach a certain level of profitability, they are injected into Yuexiu Transport, enabling the company to benefit from their performance. This strategy allows for the optimization of asset structure and enhances the company's growth potential.

Yuexiu Transport has already completed several asset injections, including Hancai, Han'e, and Daguangnan in 2019, and Henan Lanwei Expressway in 2022. These projects have significantly contributed to the company's revenue growth and are expected to continue doing so in the future. The company also has a substantial amount of assets still in the incubation phase, valued at around RMB7bn, which could be injected in the coming years.

To improve cash recycling and reduce leverage, Yuexiu Transport has spun off mature projects through REITs. In Dec 2021, the company completed the spin-off of 70% of Han-Xiao Expressway, resulting in a gain of RMB961mn. This approach is expected to continue, with more mature projects being spun off for REIT listing, which will enhance the company's dividend pay-out and financial flexibility.

Key Projects and Financials

GNSR Expressway

• Core revenue-generating asset, accounting for ~31% of consolidated revenue in 1H22.
• Concession period is expected to be extended from 2032 to 2053 through the Reconstruction and Expansion (R&E) Project.
• Toll revenue is projected to increase due to the expansion of lanes from 6 to 10–12.
• IRR of the R&E project is estimated at ~7.2%.
• Total investment for the R&E project is estimated at RMB17bn, with RMB3.06bn expected to be contributed by Yuexiu Transport over 2023–2028E.

Hubei Assets

• Han'e, Hancai, and Daguangnan Expressways have become key revenue drivers.
• These projects are expected to benefit from the opening of the Shunfeng E'zhou Airport, which is a major cargo hub.
• Toll revenue from Hubei projects reached ~RMB700mn in 1H22, contributing ~45% of total consolidated toll revenue.

Financial Forecast

• Core net profit growth is forecasted at 58% in 2023E and 10% in 2024E.
• EPS is expected to rise from RMB0.54 in 2023E to RMB0.60 in 2024E.
• P/E ratio is estimated at 11x for 2023E, aligning with the historical average of 10.5x.
• Target Price (TP) is set at HK$7.0, based on a DCF model with a WACC of 5.7%.

Strategic Advantages

• Dividend Stability: Continuous dividend distribution since 1997, with a payout ratio of ~55% expected in the next two years.
• Traffic Recovery: With the relaxation of the zero-COVID policy, traffic volume is expected to recover to pre-pandemic levels starting in Feb/Mar 2023.
• Strong Execution: The company has successfully completed asset acquisitions and spin-offs, enhancing its financial position and growth prospects.

Risk Factors

• Traffic Diversion: Potential competition from other toll roads may affect traffic volume.
• Gearing Ratio: Increased leverage and finance expenses could impact profitability.
• Uncertainty in GNSR Expansion: Delays or challenges in the R&E project may affect the extension of the concession period and revenue projections.

Conclusion

Yuexiu Transport is well-positioned to benefit from the economic recovery and the strategic asset injection and spin-off model. The company's focus on high-growth regions like Hubei, combined with its core asset GNSR Expressway and strong dividend history, supports a BUY recommendation with a Target Price (TP) of HK$7.0, reflecting a 53.2% upside from the current price of HK$4.57.