Huachuang Securities: Toll revenue has strong resilience, industry may have systemic revaluation opportunities.

Huachuang Securities released a research report stating that due to an increase in free days and weather impacts, the overall performance of the highway industry has slightly declined. In 24H1, the main reasons for the decline in the highway industry's performance may be the increase in free days, frequent severe weather, and the high base effect of performance in the same period last year. The team believes that investment in expressways is more than just a dividend style factor, with important industrial logic changes behind it. Firstly, attention to the optimization of toll road policies may present systemic valuation opportunities for the industry. Secondly, the importance of state-owned enterprises and listed company platforms is becoming more prominent. The "dividend-market value-assets" cycle is starting, as seen in the announcement by Sichuan Expressway to acquire 85% equity of Hubei Jingyi High-speed. Affected by the increase in free days and weather, the overall performance of the industry has slightly decreased. In 24H1, Hunan Investment Group achieved a net profit attributable to shareholders of 0.6 billion yuan, a year-on-year increase of 72.6%; Jiangsu Expressway 2.75 billion yuan, a year-on-year increase of 10.7%; Jilin Expressway 0.24 billion yuan, a year-on-year increase of 5%; Guangxi Wuzhou Communications 0.35 billion yuan, a year-on-year increase of 2.1%; Fujian Expressway Development 0.53 billion yuan, year-on-year stable. Among the 19 listed companies, 4 achieved positive growth, while the overall industry performance decreased by 4.1% year-on-year. In 24Q2, Hunan Investment Group achieved a net profit attributable to shareholders of 0.3 billion yuan, a year-on-year increase of 57.5%; Henan Zhongyuan Expressway 0.33 billion yuan, a year-on-year increase of 40.8%; Shanxi Hi-speed Group 0.15 billion yuan, a year-on-year increase of 22.1%; Jiangsu Expressway 1.5 billion yuan, a year-on-year increase of 19.7%; Jilin Expressway 0.12 billion yuan, a year-on-year increase of 12%. Among the 19 listed companies, 5 achieved positive growth, while the overall industry performance decreased by 5.5% year-on-year. In 24H1, the main reasons for the decline in the performance of the highway industry may be the increase in free days, frequent severe weather, and the high base effect of performance in the same period last year. In Q1, some domestic regions experienced rare widespread rain and snow weather, affecting national highways to some extent; during this year's Spring Festival travel rush, there were two additional days of free tolls for small passenger vehicles, resulting in a corresponding decrease in toll revenue. In Q2, some domestic regions also experienced rare heavy rainfall, affecting public travel intentions and efficiency; in May, the period of free tolls for small passenger vehicles was longer than the same period last year. Toll revenue of listed companies has slightly decreased. In terms of toll revenue, China Merchants Expressway Network & Technology Holdings achieved 4.827 billion yuan in 24H1, a year-on-year increase of 54.6%, mainly due to the consolidation of China Merchants Expressway Network & Technology Holdings controlling toll revenue as the industry's number one. Jiangsu Expressway's toll revenue was 4.53 billion yuan, a year-on-year increase of 0.2%; Shandong Hi-speed 4.525 billion yuan, a year-on-year decrease of 9.3%; Shenzhen Expressway Corporation 2.434 billion yuan, a year-on-year decrease of 6.3%; Sichuan Expressway 2.326 billion yuan, a year-on-year decrease of 1.9%; Guangdong Expressway 2.204 billion yuan, a year-on-year decrease of 4.6%; Henan Zhongyuan Expressway 2.145 billion yuan, a year-on-year decrease of 4.7%; Anhui Expressway 1.89 billion yuan, a year-on-year decrease of 8.3%; Jiangxi Ganyue Expressway 1.777 billion yuan, a year-on-year decrease of 0.2%. Excluding China Merchants Expressway Network & Technology Holdings, the total toll revenue of the eight listed expressway companies in 24H1 was 21.83 billion yuan, a year-on-year decrease of 4.6%. Regulations on toll road management are expected to be optimized. The "Regulations on Infrastructure and Public Utility Franchise Management" will be implemented from May 1, 2024, with the eighth article stating that "the franchise period should not exceed 40 years in principle, and for franchise projects with large investment and long return periods, the period can be extended appropriately based on actual circumstances, except as otherwise provided by laws and regulations." In May 2024, the revision of the "Regulations on Toll Road Management" will be included in the "Legislative Work Plan for 2024" of the Ministry of Transport and the State Council. In July 2024, the "Decision of the Central Committee of the Communist Party of China on Further Deepening Comprehensive Reform and Promoting Modernization with Chinese Characteristics" approved at the Third Plenary Session of the Twentieth Party Central Committee proposed improving toll road policies. Investment recommendation: Huachuang Securities believes that the effectiveness of dividend asset investment strategy will continue to be effective for a relatively long period in the future, based on factors such as more high-quality assets entering the ranks of dividend return priorities, advocacy and encouragement by regulatory authorities, and the demand for long-term fund allocation. At the same time, Huachuang Securities believes that investment in expressways is more than just a dividend style factor, with important industrial logic changes behind it. 1) Emphasize the optimization of toll road policies, as proposed by the Third Plenary Session, which may present systemic valuation opportunities for the industry. 2) The importance of state-owned enterprises and listed company platforms is becoming more prominent, as the "dividend-market value-assets" cycle is starting, as seen in the announcement by Sichuan Expressway to acquire 85% equity of Hubei Jingyi High-speed. In 2024, with the overall stability of the domestic and international economy and the impact of a decrease in toll-free days in the second half of the year, Huachuang Securities predicts that in the second half of the year, vehicular/Truck traffic volume will be better than the first half of the year, and toll revenue for the whole year will remain relatively stable.At the individual stock level, from a static perspective: high attention to shareholder returns, or already improved through governance systems, operating steadily and with high dividends and high stock yields, such as Guangdong Provincial Expressway Development (000429.SZ), Shandong Hi-speed (600350.SH), Anhui Expressway (600012.SH), China Merchants Expressway Network & Technology Holdings (001965.SZ), Jiangsu Expressway (600377.SH), etc. It is recommended to enhance the industry ETF with China Merchants Expressway Network & Technology Holdings (001965.SZ), as well as Shandong Hi-speed (600350.SH) and Jiangsu Expressway (600377.SH) which are located in traffic-strong provinces and leading in dividends. Focus on high-quality assets and award-winning Anhui Expressway (600012.SH). From a dynamic perspective: targets that are expected to enter this sequence by releasing operational vitality through reforms and increasing shareholder returns. Sichuan Expressway (600107.SH): The major shareholder Sichuan Road Group has strong resources in the province and strongly supports the development of the listed company. After increasing the dividend ratio, the company plans to acquire roads, taking a new first step in the "dividends-market value-assets" virtuous cycle. Jiangxi Ganyue Expressway (600269.SH): the core road property has a long remaining tolling period, and the expansion and reconstruction will release full growth potential. The company is expected to bring more returns in terms of operational quality and governance system construction. Risk warning: Economic downturn, vehicle flow growth rate lower than expected, dividends lower than expected.