EUR 850.00 For Business Accounts Only

Morningstar | JE’s 1Q in Line; Shares Fairly Valued.

We maintain our fair value estimate of HKD 11.20 per share for narrow-moat Jiangsu Expressway, or JE, following the company’s in line first-quarter results. With little property income booked in first-quarter 2019, JE’s revenue dropped 16% year over year, while net profit rose 2% to CNY 1 billion. This was helped by a decent toll segment performance, which was largely driven by a low base a year ago due to the extreme cold weather conditions. We think a slowing economy in China, as well as impact from the U.S.-China trade impasse, will continue to weaken China’s industrial activity and weigh on exports, and pressure 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. We continue to expect the company’s stable business outlook, robust cash flows and potentially higher dividend payouts to drive its long-term investment value. We made little change to our key assumptions, and we expect JE’s recurring net profit to rise 3.8% in 2019, to CNY 4 billion. We think the shares are fairly valued, with dividend yield at 4.8% compared with a normalized 5.0%-5.5%.

First-quarter traffic growth on JE’s core Shanghai-Nanjing expressway rose strongly by 13% year over year. We think this should be largely boosted by the low base in first-quarter 2018, as the heavy snow in Jiangsu in January led to a sharp 24% fall in traffic in January 2018. We maintain our assumption of 5% traffic growth on Shanghai-Nanjing expressway, and we expect higher traffic growth at the newly acquired toll assets to drive 6.8% toll revenue growth in 2019.

JE has also announced that it will invest in two new toll projects, costing about CNY 2 billion. This makes the company’s new toll projects as six since 2016, with total investment of CNY 24 billion. We expect these new toll assets to replenish the company’s long-term growth, as the concession rights for most of its toll roads will end by 2032. However, the heavy capital spending has led to declines in dividend payout ratio to 60%-63% on recurring earnings between 2016 and 2018, from an average of 77% between 2010 and 2015. According to JE, Zhendan has commenced operations, and the other three projects are 35%-55% completed. We project these new income streams, along with steady growth on existing toll assets, to drive a recurring net profit CAGR of 6% for JE over the next five years. In addition, with the majority of these projects completing by 2020, we expect JE's free cash flows to improve, underpinning an upside for dividend payout ratio from 2021.