Guotai Junan: Highway Industry High Dividend Cash Flow Stable Policy Optimization May Accelerate

Guotai Junan released a research report saying that the cash flow of expressways is stable and high dividend payouts continue, ensuring a certain dividend return. The optimization of toll road policies may accelerate, helping to bring investment returns back to a reasonable level. Expressway companies have traditionally maintained high dividend payout policies, and in recent years high dividend commitments have ensured policy stability. Considering the management requirements of central state-owned enterprises, it is expected that high dividend policies will continue in the future, and well-managed expressway companies remain the preferred choice for dividends. Key points from Guotai Junan: Expressways remain the preferred choice for dividends in the transportation industry. Over the past three years, the A-share market has favored high dividend stocks, and the expressway sector has shown significant excess returns. Dividend yield depends on the dividend payout ratio and PE valuation. Expressways are stable asset infrastructure that provides consistent cash flow and high dividend policies. The optimization of toll road policies may accelerate, leading to reasonable investment returns. Well-managed expressway companies remain the preferred choice for dividends. Guotai Junan maintains a "buy" rating for China Merchants Expressway Network & Technology Holdings (001965.SZ), Anhui Expressway (00995,600012.SH), Jiangsu Expressway (00177,600377.SH), and SHENZHEN INT'L (00152). The market is expected to continue to favor dividend excess returns in the future. Expressway traffic demand remains resilient, and the advantage of stable cash flow is sustainable. In 2023, benefiting from pent-up demand, road freight volume increased by 8.7% year-on-year, and passenger transport volume increased by nearly 29% year-on-year, with A-share expressway companies showing strong performance. In the first half of 2024, due to the high base effect, adverse effects such as freezing rain and snow weather, increased toll-free days, as well as traffic diversion and construction expansion on some sections, A-share expressway companies may face slight pressure on performance. The improvement trend may be affected by demand fluctuations in the second half, but it remains relatively resilient, with road assets showing better performance than the industry's growth trend. The current market outlook for the expressway industry is rational, and expressway traffic demand is expected to remain resilient, with the effects of national policies gradually manifesting and the stable cash flow advantage of expressway companies being sustainable. The optimization of toll road policies may accelerate, helping to bring investment returns back to a reasonable level. The current toll road standards have been maintained at the level of the 1990s, while the unit cost of new construction or expansion has significantly increased, leading to widespread reinvestment pressure in the expressway industry. The current "Regulations on Toll Roads" issued in 2004 are no longer suitable for ensuring the sustainable development of the industry. A comprehensive revision has been brewing for many years, and multiple revisions have become an industry consensus, with expectations of accelerated optimization of toll road policies. Referring to the draft revision in 2018, extending the operating period and extension of reconstruction projects will help bring investment returns back to a reasonable level, systematically alleviating the industry's reinvestment pressure. The draft revision proposes the principle of "reasonable returns," and the operating period of commercial highway projects is expected to be extended from the current 25 years to 30 years, with projects with large investment sizes and long return cycles possibly exceeding 30 years, and the reconstruction of toll lanes can reevaluate the operating period. Investment strategy: Well-managed expressway companies remain the preferred choice for dividends. It is recommended to select excellent expressway targets with good locations and well-managed reinvestment, continuing to benefit from market preferences. 1) Well-managed reinvestment: Select investment in high-quality road assets nationwide to ensure stable and long-term investment returns and superior industry performance growth. 2) Location advantages: In 2024, expressways with excellent locations are expected to show better traffic demand growth than the industry, thereby guaranteeing profit growth and stable cash flow in the future. Estimated dividend yield for 2024: China Merchants Expressway Network & Technology Holdings 3.7%, Jiangsu Expressway A 3.2%, Jiangsu Expressway H 6.1%, Anhui Expressway A 3.5%, Anhui Expressway H 6.1%, and SHENZHEN INT'L 8.7%. Risk warning: Economic fluctuations, reinvestment risks, policy risks, market style shifts.