Guotai Haitong: Policy optimization is expected to improve industry reinvestment risks. Maintain a "buy" rating on the highway sector.

Guotai Haitong released a research report stating that the demand for highway traffic has resilience, stable dividends and certain stock returns, which are still preferred for dividends. The impending announcement of national policies for the expansion and renovation of highways is imminent, with many provinces implementing local policies in recent years as a trial run. Listed companies generally have expansion and renovation projects in progress, and the bank estimates that the revision of the "Regulations" is imminent, with local expansion and renovation trials possibly guiding national policy optimization. The implementation of related revisions will systematically improve reinvestment risks. Guotai Haitong's main points are as follows: The national policy for the expansion and renovation of highways is imminent, and it is a consensus that the expansion and renovation has been postponed. The "Regulations on Toll Roads Management" issued in 2004 effectively ensured the rapid construction of China's highway network. However, facing the construction demands, expansion and renovation, and maintenance needs of the next ten years, the pressure for reinvestment and the risk of local debt are becoming apparent. Policy optimization is urgent, especially in terms of the national level expansion and renovation policy that is yet to be issued. In 2013, 2015, and 2018, three drafts of revisions to the "Regulations" were successively issued, with broad consensus on the relevant important revisions. Among them, all three versions added "the possibility to reassess the operating period for expansion and renovation", but the specific management methods are yet to be perfected. In recent years, many provinces have implemented local policies guiding the trial runs of expansion and renovation. On the one hand, the current "Regulations" do not cover expansion and renovation, so local policies meet local demands without conflicting with higher laws; on the other hand, these trial runs in various regions will accumulate rich practical experience, possibly guiding national policy optimization and nationwide promotion and implementation. In recent years, many provinces have actively explored specific management methods by implementing local policies guiding the expansion and renovation. 1) Guangdong: Guangdong has the earliest and largest highway construction and in 2015 implemented the first local special policy, the "Guangdong Province Highway Expansion and Renovation Management Measures," which reiterated the ability to reassess the fee period and standards for expansion and renovation by 2025. 2) Sichuan: At the end of 2020, the "Sichuan Province Highway Vehicle Toll Pricing Measures" were issued, specifying that expansion and renovation projects could reassess the fee period and standards, with the fee period continuing the principle of "reasonable return", utilizing "one road one test" for fee standards and setting upper limits, with franchise operations following higher laws. 3) Jiangsu: In 2021, the "Jiangsu Province Highway Toll Pricing Mechanism" was issued, specifying the "user pays" principle, allowing expansion and renovation projects to adjust fees based on unit investment and setting upper limits. 4) Ningxia: In 2025, the "Ningxia Hui Autonomous Region Highway Vehicle Toll Pricing Measures" were issued, clarifying that expansion and renovation projects are subject to unified pricing management similar to new projects, with fee standards being progressively increased based on unit investment, allowing for adjustments, with upper limits. In addition, Henan, Yunnan, and Xinjiang have all recently revised local highway regulations and related policy measures, clarifying that expansion and renovation can reassess fee periods, etc. Five major trends in local expansion and renovation policies, possibly guiding the optimization of national expansion and renovation policies After summarizing various provincial expansion and renovation policies, the bank believes that five important trends are worth noting, which may guide the optimization and subsequent nationwide promotion and implementation of national expansion and renovation policies. 1) Expansion and renovation projects can not only reassess fee periods but also reevaluate and determine fee standards. 2) Expansion and renovation projects may be regarded as new projects, adopting the same principles and management methods. 3) Principle: Continuation of the basic principle of "reasonable return". 4) Fee period: reassessing, with franchise projects following the revised "Infrastructure and Public Utility Concession Management Measures" from 2024, extending the franchise period from 30 to 40 years, and projects with large investment and long return periods may be appropriately extended. 5) Fee standards: "one road one test", referring to unit investment and setting upper limits, with many provinces requiring that they not exceed the current local standard upper limit. Risk warning: Industry policy revisions falling short of expectations, economic fluctuations, changes in market trends.