Guotai Haitong: Maintaining a buy rating on highway stocks, policy optimization may catalyze optimistic expectations.

Guotai Haitong released a research report stating that the comprehensive revision of the "Toll Road Management Regulations" has been brewing for many years, and there is a wide consensus in the industry on the four revision items. The bank expects that policy optimization may accelerate, with a focus on the revision of the highway law being an important signal, which is expected to improve the industry's long-term returns. For a long time, highway companies have faced the limited operating life of road assets and the continuous operational demand of enterprises, and reinvestment is the inevitable choice. Industry-wide reinvestment pressure has led to a general decline in reinvestment returns. The bank believes that policy optimization will systematically improve reinvestment risks, secure "reasonable returns" on reinvestment, reduce the risk of free flow around the network when old roads expire, and enhance long-term investment value. The main viewpoints of Guotai Haitong are as follows: Highway traffic demand is recovering and the certainty of dividends is still prominent In 2023, the highway industry will experience a concentrated release of suppressed demand and expansion effects, driving a significant increase in traffic volume and profitability. From the second half of 2024 to the first half of 2025, the highway industry's traffic volume will continue to be under pressure, with a year-on-year reduction in truck traffic, deviating significantly from the steady growth trend in the road freight industry. The bank speculates that this is mainly due to the impact of national road diversion and differential tolls under economic fluctuations. According to observations, the industry's traffic volume had year-on-year growth by the third quarter of 2025, and the improvement trend continued in the fourth quarter of 2025. The bank expects that the diversion impact of the past year may have been fully reflected, and the future demand for highway traffic is expected to recover steadily. At the same time, highway companies are generally taking advantage of the continuous decline in LPR (Loan Prime Rate), actively optimizing their debt structure. It is expected that continued financial cost reduction will continue to safeguard the profit growth of highway companies. The highway dividend policy is stable, and future capital expenditures for expansion and renovation are relatively controllable, making it still an optimal choice in the transportation industry. Comprehensive revision of the "Toll Road Management Regulations" has been brewing for many years and is expected to accelerate The "Toll Road Management Regulations" is the most important policy in the highway industry. Since its promulgation and implementation in 2004, it has upheld the basic principles of "reasonable returns" and "tax-supported maintenance" as clearly defined in the superior law "Highway Law", effectively guaranteeing the rapid construction of China's highway network over the past forty years. However, with the continuously rising construction costs of highways and the long-standing unchanged toll standards, the revenue from new construction and renovation projects has declined, financing has become more difficult, debt risks have accumulated, making it more difficult to ensure the substantial increase in maintenance funds needed for the next ten years. The Ministry of Transport has successively released draft amendment bills for the regulations in 2013, 2015, and 2018, and in the past two years, the amendment of the regulations has continued to be listed in the annual legislative work plan, with high-level meetings frequently mentioning the acceleration of policy optimization. The bank believes that with a large number of toll roads reaching the end of their operational term in the next year, the optimization of toll road policies is expected to accelerate. There is a wide consensus in the industry on the revision of toll road policies, and it is suggested that the revision of the highway law will be an important signal Based on the three draft amendments and the pilot policies carried out in various regions, there is a wide consensus in the industry on the four revision items. 1) For new projects: extend the operating period. Based on the principle of "reasonable returns", the operating period is extended from 25 years to 30 years, and for projects with large investment and long payback periods, the operating period can exceed 30 years. 2) For renovation projects: extension is allowed. The bank speculates that it will be determined based on new project assessments. 3) Introduction of new exemptions and compensation. After trials in many regions, related mechanisms are expected to be legislatively promoted. 4) Establishment of a maintenance toll system. Based on the principle of "users pay", a two-stage toll system consisting of operating period tolls and maintenance period tolls will be established. It is emphasized that the revision of the "tax-to-fee" mechanism for maintenance funds in the superior law "Highway Law" may be an important signal for the amendment of the regulations. Risk warning: Risks related to policy revision, economic fluctuations, and market style shifts.