20131008-美银美林-Upgrade_to_Buy__Strong_growth_rebound___cheap_valuation_11页_586kb

Summary of Shenzhen Expressway Upgrade to Buy Analysis

Core Content

This report outlines the upgrade of Shenzhen Expressway from "Underperform" to "Buy" by Bank of America Merrill Lynch (BofAML), citing strong earnings growth and an attractive valuation as key factors. The price objective is raised to HK$3.5 from HK$2.7, implying a 16% upside.

Main Points

• Earnings Growth:

  • The company experienced a strong turnaround in earnings growth in 2H13, with toll income increasing by 20% YoY in Jul-Aug 2013.
  • The report forecasts a CAGR of 17% for earnings from 2013 to 2015, with YoY growth of 19% in 2014 and 16% in 2015.
  • Earnings are expected to increase by 8%, 12%, and 14% for 2013, 2014, and 2015, respectively, driven by traffic growth and improved average selling price (ASP).

• Traffic and Toll Growth:

  • Qinglian Expressway: Achieved 52% YoY toll growth in Jul-Aug 2013, due to traffic diversion from the Jingzhu Expressway during maintenance.
  • Nanguang Expressway: Showed 28% YoY toll growth in Jul-Aug 2013, up from 25% and 22% in 2Q and 1Q13.
  • Jihe Expressway (East + West): Toll growth rebounded to 13% YoY in Jul-Aug 2013, after declines in previous quarters due to road maintenance.

• Valuation:

  • The stock trades at 6x and 5x 2014-15 earnings, with a dividend yield of 8% and 10% respectively.
  • The price-to-book (PB) ratio is 0.5x, which is considered low given the company's improving return on equity (ROE) from 7% in 2012 to 9% in 2014.
  • The Free Cash Flow (FCF) yield is expected to turn positive in 2014.

Key Information

• Investment Thesis:

  • The company is rated "Buy" due to strong earnings growth and attractive valuation.
  • The valuation is considered cheap compared to historical averages and sector peers.
  • The report highlights that the current PE and PB multiples are 1 standard deviation below the five-year historical average.

• Financial Metrics:

  • Revenue:
    • 2013E: RMB3,328 million (up 1% from previous forecast).
    • 2014E: RMB3,602 million (up 5%).
    • 2015E: RMB3,872 million (up 8%).
  • Net Income (Adjusted):
    • 2013E: RMB731 million (up 8%).
    • 2014E: RMB866 million (up 12%).
    • 2015E: RMB1,006 million (up 14%).
  • EPS:
    • 2013E: HK$0.34 (up 8%).
    • 2014E: HK$0.40 (up 12%).
    • 2015E: HK$0.46 (up 14%).
  • Dividend Yield:
    • 2014E: 8.5%.
    • 2015E: 9.87%.
  • ROE:
    • 2013E: 7.5%.
    • 2014E: 8.5%.
    • 2015E: 9.3%.

Potential Risks

• Diversification Strategy: Management's strategy to expand into non-toll businesses, such as property, may dilute focus on core operations.
• BT Projects: Increased involvement in Build-Transfer (BT) projects could lead to financial pressure on cash flow.
• Toll Rate Cuts: Potential reductions in toll rates could negatively impact revenue.
• Traffic Growth: Lower-than-expected traffic growth may affect earnings.

Investment Opinion

• Price Objective: HK$3.50 (up from HK$2.70), based on SOTP valuation with DCF and P/B methods.
• Valuation Method:
  • Consolidated Road Assets: Valued by DCF at a WACC of 10%.
  • Equity-Accounted Road Assets: Valued by P/B at 0.75x, which is 40% below the sector average of 1.25x.
• Downside Risks: Toll rate cuts, lower traffic growth, increased BT projects, and diversification into non-toll businesses.
• Upside Risks: Stronger-than-expected traffic growth, cost savings, and acquisition of high-quality road assets.

Summary Table

Conclusion

The upgrade to "Buy" is based on the company's strong performance in the second half of 2013, continuous earnings growth in 2014 and 2015, and an attractive valuation with a high dividend yield and low PB ratio. While the company faces potential risks, the report highlights its strong fundamentals and growth potential.