EUR 850.00 For Business Accounts Only

Morningstar | 00177 Updated Forecasts and Estimates from 26 Feb 2019

We maintain our fair value estimate of HKD 11.10 per share, following narrow-moat Jiangsu Expressway’s, or JE’s, in line third-quarter performance, with net profit rising 16.8% year over year to CNY 1.2 billion under PRC GAAP. JE’s core toll operations were decent, with third-quarter toll income growth accelerated to 8.8% from a 5.6% year-over-year rise in the first half. We believe JE’s monopoly and the highly developed regional economy will continue to keep its traffic volume on a stable growth over the midterm. JE’s 155% jump in third-quarter property sales to CNY 145 million was also a positive boost to bottom-line growth, but we think the company’s limited land reserves and tighter lending policy should mean the past growth is unsustainable. We maintain our full-year 2018 recurring net profit forecast of CNY 3.9 billion for JE. We think the shares are slightly undervalued presently, trading at 12% discount to our valuation of 2 times price/book, with an attractive forecast dividend yield of 6.3% 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.

Third-quarter traffic growth was well on track. Supported by growing car-ownership in Jiangsu province, JE’s core asset, Shanghai-Nanjing expressway, saw a solid 7% year-over-year growth in passenger traffic. However, the growth of high-margin truck/cargo volume slowed to 2% in the third quarter, from 6% in the second-quarter. We think the U.S.-China trade war is likely to be prolonged, which could weaken China’s activity levels and that may weigh on China’s exports, which is slightly 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.

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 6%-8% overall traffic volume growth for JE in 2018-2019.