EUR 850.00 For Business Accounts Only

Morningstar | Removal of Toll Stations on Provincial Borders Has Little Impact for Toll Operators. See Updated Analyst Note from 10 Mar 2019

China recently announced that it would remove toll stations on provincial borders during the National People’s Congress. The removal of cross-provincial border stations doesn’t mean a cut in toll fees, but a change of collection method. We expect little impact to expressway operators’ revenue, while non-stopping at tolls will improve traffic flows and save labor costs. We estimate narrow-moat-rated Jiangsu Expressway, or JE, would benefit from about CNY 6-8 million cost savings on annual basis. This, however, is negligible, compared with a CNY 5 billion operating profit from its toll business in 2018. JE’s fourth-quarter traffic growth slowed to 4%, compared with 11% in the third quarter. This is in line with our expectation and reflects a slowing economy in China, as well as impact from the U.S.-China trade impasse.

We maintain both our recurring earnings forecasts and our fair value estimate of HKD 11.10 per share for JE, ahead of annual results due on March 22. We think the shares are fairly-valued at current level, which implies a normalized 5.5% dividend yield 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.

Fourth-quarter traffic growth on JE’s core Shanghai-Nanjing expressway slowed to 1% from 6% in the third quarter. While the foggy days in November had some negative impact, we think the primary reason is the slowing economy, which may also reflect indirect impact from the U.S.-China trade war. We think the U.S.-China trade war is likely to be prolonged, which could weaken China’s activity levels that may weigh on China’s exports, and it is negative to JE’s truck/cargo volume growth. But we think the downside is manageable, as truck/cargo volume makes up only 20% of the overall traffic on the Shanghai-Nanjing expressway.