EUR 850.00 For Business Accounts Only

Morningstar | JE's 1H Recurring Growth in Line; Truck/Cargo Traffic Resumes Growth in 2Q

Narrow-moat-rated Jiangsu Expressway's, or JE's, first-half recurring profit of CNY 2 billion implies the year-over-year growth in second quarter slowed to 3% from 16% in first quarter. This is in line with our expectations, owning to lackluster property sales in the quarter. Although JE still has a few property projects in pipeline, we think the past growth is unsustainable, due to limited land reserves and tighter lending policy. JE's core toll operations were decent, with second-quarter traffic growth accelerated to 8% from a 3% year-over-year rise in the first quarter. We expect JE's monopoly and the highly developed regional economy to continue to keep its traffic volume on a stable growth over the midterm.

We maintain our full-year 2018 recurring net profit forecast of CNY 3.9 billion, but we lower our fair value estimate to HKD 11.10 per share from HKD 11.80, to reflect a weaker Chinese yuan against the Hong Kong dollar. In addition, we've lowered our fair value uncertainty rating to low from medium to be in line with the company's financial strength and stable income outlook. We think the shares are slightly undervalued presently, trading at 11% discount to our valuation of 2 times price/book, with an attractive forecast dividend yield of 6.2% in 2019. We continue to expect the company's stable business outlook, robust cash flows, and generous dividend payouts to drive its long-term investment value.

First-half traffic growth was well on-track. Supported by growing car-ownership in Jiangsu province, JE's core asset Shanghai-Nanjing expressway saw a solid 6% year-over-year growth in passenger traffic. The high-margin truck/cargo volume growth also recovered to 6% year over year in the second quarter, following a marginal decline in the first quarter due to heavy snows. We think this was helped by strong regional economies, as well as a continuance of overloading controls on highways.

While the U.S-China trade war may add uncertainty to China's exports, which is slightly negative to JE's truck/cargo volume growth, we think the downside is manageable, as truck/cargo volume makes up only 20% of the overall traffic on the Shanghai-Nanjing expressway. In addition, we think the NDRC's decision to cut Shanghai and Ningbo-Zhoushan ports' handling tariffs may drive activity for these ports, which will benefit truck/cargo traffic. As such, we maintain our forecast of 8% overall traffic volume growth for JE in 2018.

Despite the stable growth on JE's toll assets, the concession rights for most of its toll roads will end by 2032. To replenish the company's long-term growth, JE has invested more than CNY 20 billion on a few new toll projects since 2017, such as Wufengshan Toll Bridge, North South Approach Expressway, and the Liguang Expressway. According to JE, these projects were 40%-90% completed, so we expect them to start contributing to JE's earnings from 2019. We project these new income streams, along with steady growth on existing toll assets, to drive a net profit CAGR of 7% for JE over the next five years. In addition, with the majority of these projects being completing by 2020, we expect JE's free cash flows to improve, underpinning an upside for dividend payout ratio from 2021.