Wanlian Securities: The fundamental operations of highways are stable, with potential policy benefits expected.

Wanlian Securities released a research report stating that the current highway industry has entered a mature stage, with the growth of operating mileage slowing down. Its operating model has the characteristics of heavy assets, long cycles, and stable returns. The historical operating performance has been steady, and profits are expected to rebound in the first three quarters of 2025. Since 2025, influenced by market trends, the highway sector has shown significant adjustments relative to the broader market. After the adjustment, the sector's high dividend characteristics have been further enhanced, highlighting its investment value. Looking ahead to 2026, the industry is expected to continue benefiting from macroeconomic recovery and declining market interest rates. However, attention should be paid to changes in market trends, and it is recommended to focus on core targets with stable operations and dividend expectations. Wanlian Securities' main points are as follows: Historically, the performance of listed highway companies has been relatively stable, with profits rebounding in the first three quarters of 2025. The company's statistics show that the 13 listed highway companies had a compound annual growth rate of operating revenue of 8.8% from 2015 to 2024, with a year-on-year revenue decline of 4.1% in the first three quarters of 2025. The compound annual growth rate of net profit attributable to the mother from 2015 to 2024 was 5.9%, with a net profit growth rate of 3.7% in the first three quarters of 2025. Gross profit margin and net profit margin have both rebounded in the first three quarters of 2025. Passenger and freight turnover volume is expected to maintain steady growth. From January to October 2025, highway passenger turnover volume reached 427.8 billion passenger-kilometers, a slight increase of 0.19% year-on-year. With the continuous rise in demand for inter-regional travel such as self-driving tours, passenger traffic is expected to maintain steady growth. As for freight traffic, it is closely related to the macroeconomy. From January to October 2025, freight turnover volume reached 6,548.48 billion ton-kilometers, a year-on-year increase of 3.71%, maintaining overall stability. With the continuous recovery of the macroeconomy, it is expected that highway freight traffic will maintain steady growth. Highway construction costs continue to rise, and the revenue-expenditure gap continues to widen. The potential demand for raising toll standards and extending operating periods continues to strengthen. According to the balance of revenue and expenditure of China's highways, the revenue-expenditure gap of highways is large and tending to widen. As of 2021, the revenue-expenditure gaps for repayment-type and operational-type highways are roughly 250 billion and 350 billion yuan, respectively. In recent years, there has been an upward trend in toll standards for highways in some regions, with lower tolls per kilometer in the central and western regions compared to the eastern region, which also faces relatively higher financial pressures and therefore has stronger demands for price adjustments. It is expected that after the adjustment in some central and western regions, it may spread to other regions, but the entire process is expected to be lengthy. In the long term, the highway price index growth rate and dividend ratio have a certain advantage compared to other high-dividend sectors. The overall returns of the highway sector have been relatively stable. From 2014 to 2024, the cumulative increase of the highway sector was about 35%, significantly outperforming the broader market (the Shanghai and Shenzhen 300 Index rose by 11% during the same period). Compared to other high-dividend sectors, it is second only to the coal sector (about 37%) with a small difference between the two. Moreover, with its high dividend characteristics, the highway sector has good long-term stable investment return advantages. In addition, the decline in interest rates also benefits from a decrease in financial expenses, which can increase the profits of listed highway companies. Risk factors: Economic downturn, unexpected policy direction, investment risks, etc.