Downgrading toll road sector; we prefer JSE in 2013

Transcription

1 Deutsche Bank Markets Research Asia China Transportation Industry China Toll Road Sector Date 5 February 213 Recommendation Change Downgrading toll road sector; we prefer JSE in 213 Downgrading ZJE/SZE from Buy to Hold; prefer JSE as a top pick We are less positive on the sector due to an unexciting earnings outlook. ZJE s share price is up 2% in the past three months on attractive dividend yield, expectation of traffic recovery and securities business improvement, but we believe the earnings outlook may be weak due to the negative impact of traffic diversions in 4Q13 (Jiashao Expressway). We are worried about SZE s outlook due to potentially worse-than-expected traffic growth on the Qinglian Expressway; we downgrade ZJE/SZE from Buy to Hold. We recommend Buy on JSE on its strong earnings visibility and high dividend yield. We forecast 6% dividend yield for JSE (one of the highest in the HK/China market). Traffic should recover, but only 1-2% toll income growth in 213 We forecast JSE/ZJE/SZE s toll income to grow 2%, 2% and 1%, respectively, in 213 (vs. -1%, 1% and -1% in 212). We think toll income growth will recover in 213, as Jun Ma (our China chief economist) expects a rebound in GDP. However, this will likely be partly offset by negative impact from the toll waiver for passenger cars during public holidays (implemented last October). Most positives in the price; downgrading ZJE and SZE to Hold We cut earnings forecasts for ZJE and SZE by 4% and 14% on average due to lower traffic growth. We lift our target price for ZJE to HK$7.12 (from HK$6.5) due to target price date rollover and a higher P/B multiple for the securities business. We forecast ZJE s net profit to only rise 3% in 214 (vs. 5% in 213) based on the impact of traffic diversions caused by the opening of the Jiashao Expressway. We cut our SZE target price to HK$3.47 (from HK$4.1) due to an earnings cut and lower long-term growth of the Qinglian Expressway. JSE is our top pick on highest dividend yield and strongest earnings visibility We cut our E earnings by 4% to reflect lower traffic growth. We raise our target price to HK$8.9 (from HK$8.24) on target price date rollover and lower WACC. We like JSE in 213 due to its strong earnings visibility: 1) JSE can benefit more from economic recovery, due to its higher exposure to trucks; 2) SZE s near-term outlook still looks less favorable due to the continued negative impact from the toll rate cut and weak traffic performance on the Qinglian Expressway and 3) we see no major new traffic diversions on JSE s existing expressways in JSE underperformed ZJE recently, due to market concerns about its dividend visibility in 212, led by the removal of four toll stations on G312 Highway; but we think it should catch up soon, with the problem being solved. JSE has highest dividend yield of the three. DCF-based valuation; risks of traffic growth; tariff cuts We value toll road operators core business mainly based on DCF over the entire concession period. Key downside risks are lower traffic growth and tariff cuts. The key upside risk is stronger traffic growth. Figure 1: Valuation comparables Company Ticker New Old New TP Old TP % chg % P/E (x) P/B (x) Div yield rating rating (HK$) (HK$) upside 13E 13E 13E JSE 177.HK Buy Buy % 13% % ZJE 576.HK Hold Buy % 7% % SZE 548.HK Hold Buy % 7% % Source: Deutsche Bank, Phyllis Wang Joe Liew, CFA Research Analyst Research Analyst (+86) (+65) phyllis.wang@db.com joe.liew@db.com Top picks Jiangsu Expressway-H (177.HK),HKD7.91 Companies Featured Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 72/4/212. Buy Shenzhen Expressway-H Hold (548.HK),HKD A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x) Zhejiang Expressway Ltd Hold (576.HK),HKD A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x) Jiangsu Expressway-H (177.HK),HKD7.91 Buy 211A 212E 213E P/E (x) EV/EBITDA (x) Price/book (x) This report changes ratings, target prices, and/or estimates for several companies under coverage. For a detailed listing of these changes, see figure 19 and figure 2.

2 Traffic should recover, but only 1-2% toll income growth in 213 JSE/ZJE s November-December 212 data indicate a slight recovery in traffic JSE s consolidated toll revenue in November and December 212 increased by.9% YoY and.1% YoY respectively, (vs. -1.5% in September and -1.2% in August), indicating a slight recovery in traffic, which JSE explained as mainly due to a pick-up in truck traffic. Trucks accounted for 29% of total traffic volume in 2H12 (vs. 26.6% in 1H12 and 29% in 211). ZJE s consolidated toll revenue in November and December 212 increased by 13% and 5% YoY respectively (vs. % in September and 1% in August). JSE and ZJE s toll income pick-up in the last two months of 212 does confirm a recovery in traffic, especially from trucks. We believe the truck traffic recovery may suggest some economic recovery. But, this recovery will likely be weak, and we expect only 1-4% toll income growth in 213 Slowdowns in both China s economy and the global macro-economy, as well as the new toll waiver for passenger cars during public holidays (which began last October), affected traffic growth in 212. We believe JSE/ZJE/SZE s toll income should start to recover in 213, mainly due to exports and China s economic recovery, based on estimates from Deutsche Bank s China chief economist, Jun Ma. However, until 2H13, this recovery will be partly offset by the continued negative impact from the toll charge waiver policy. The General Office of the State Council released the new policy on toll roads last August. The government will waive the toll charge for passenger cars with no more than seven seats during major public holidays (including Spring Festival, Tomb Sweeping Day, Labor Day and National Day, totaling 2-21 days). The policy was first implemented last October. Based on the traffic data from the most recent last national holiday, we believe this policy will continue to drag toll income down by 2-3% in 213. We currently forecast JSE/ZJE/SZE s toll income to grow only 2.5%, 1.9% and.5% in 213, respectively, vs. -1%, 1% and -1% in 212. Figure 2: Yoy and qoq annualized GDP growth forecasts YoY % qoq %, saar 211Q1 9.7% 9.1% 211Q2 9.5% 1.% 211Q3 9.1% 9.5% 211Q4 8.9% 7.8% 212Q1 8.1% 6.6% 212Q2 7.6% 7.4% 212Q3 7.4% 9.1% 212Q4F 7.7% 8.5% 213Q1F 7.9% 8.2% 213Q2F 8.2% 8.2% 213Q3F 8.4% 8.6% 213Q4F 8.5% 9.% Source: Deutsche Bank,, CEIC Page 2

3 Figure 3: Toll income growth vs. GDP growth Source: Deutsche Bank, CEIC, Company data Traffic diversions on ZJE s existing expressways and worse-than-expected traffic on Qinglian Expressway (owned by SZE) to drag down toll income The Jiashao Expressway will launch before the end of this year, which will mainly have a negative impact on ZJE in 214. The traffic diversions will drag toll income down by 4-5%. We currently forecast that ZJE s toll income will only increase 1% in 214 (vs. 2% in 213). However, ZJE said it is possible that the new road will be opened in the middle of this year. If this is true, this would further drag down ZJE s 213 net profit. In addition, toll income for the Qinglian Expressway (owned by SZE) in November and December 212 dropped 1.9% YoY and 3.6% YoY respectively (vs. 18% growth in 1M12), which is below our expectation. The performance for the Qinglian Expressway was weak, partly because the positive impact of the completion of the Yilian section in October 11 faded away. Based on the latest traffic data, we believe the outlook for the Qinglian Expressway may be disappointing and it is expected to make a profit in (vs. our previous expectation of ). We currently forecast JSE/ZJE/SZE s toll income to grow 8%, 1% and 4% in 214, respectively. JSE s toll income growth in 214 is stronger than ZJE and SZE s as 1) we see no major new traffic diversions on JSE s existing expressways in ; 2) JSE can benefit more from an economic recovery, due to its higher exposure to trucks. We forecast trucks to account for 3-32% of JSE s total traffic in 214, vs. 2-25% of SZE and ZJE s. JSE s toll income growth in 214 is higher than ZJE and SZE s Figure 4: JSE (Shanghai-Nanjing Expressway) traffic volume breakdown Source: Deutsche Bank, Company data Page 3

4 JSE/ZJE/ZJE s toll income growth is lower than GDP growth over E as their core toll assets are mature and most of them have already been in operation for more than 1 years. Normally, traffic growth in the first 1 years after opening should be higher than GDP growth, and then the growth rate slows down to a single-digit level (below local GDP growth). 212 traffic performance slightly below expectations ZJE s consolidated toll income rose.6% YoY in 212, while JSE and SZE s consolidated toll revenue dropped 1.2% YoY and.7% YoY, respectively. Their traffic performance in 212 was slightly below our expectations. We believe this was mainly due to the lower traffic contribution from trucks, which resulted from the economic slowdown in China, as well as worse-than-expected truck traffic performance during the last national holiday, which was the result of a new policy that provided toll waivers for passenger cars on public holidays (effective last October). Jiangsu Expressway Consolidated toll revenue in 212 decreased 1.2% YoY, which is lower than our previous full-year estimate of 2.6%. Average daily traffic volume on the Shanghai Nanjing Expressway (SNEX JSE s core asset) increased 4.6% YoY in 212, while the toll charge per vehicle declined 4.9% during the same period. Figure 5: JSE s 212 toll operation YTD -Daily traffic (no. of vehicles) YTD -Daily revenue (Rmb m) YoY chg YoY chg National Highway ,935 19, % % SNEX 66,12 63, % % Guangjing 47,122 44, % % Xicheng 5,416 46, % % Ninglian 4,53 4, % % Jiangying Bridge 56,147 5, % % Sujiahang 42,3 38, % % Source: Deutsche Bank, Company data Figure 6: JSE YTD consolidated toll income YoY growth Source: Company data Zhejiang Expressway Consolidated toll income rose.6% YoY in 212, slightly below our previous estimate of 2.2% growth. Toll revenue on the Shanghai-Hangzhou-Ningbo Expressway increased.5% YoY in 212, while revenue from the Shangsan Expressway rose 2% YoY. Average daily traffic on the Shanghai-Hangzhou-Ningbo Expressway and the Shangsan Page 4

5 Expressway increased 3.7% YoY and 2.7% YoY, respectively. Average revenue per vehicle on the Shanghai-Hangzhou-Ningbo route decreased 3.4% in 212. Figure 7: ZJE s 212 toll operation YTD-Daily Traffic (no. of vehicles per day) YTD-Daily Revenue (Rmb m) YoY chg YoY chg Shanghai-Hangzhou 42,63 4, % % Hangzhou-Ningbo 41,466 4,268 3.% % Shanghai-Hangzhou- Ningbo 41,951 4, % % Shangsan 16,787 16, % % Source: Deutsche Bank, company data Figure 8: ZJE YTD consolidated toll income YoY growth Source: Deutsche Bank Shenzhen Expressway Toll revenue in 212 decreased slightly, by.7%, which is below our previous estimate of 1.9% growth. Average daily traffic on all sections showed single-digit growth in 212, except for Jihe (east) which showed double-digit growth. Average revenue per vehicle decreased on the Meiguan, Jihe (east), Jihe (west) and Wuhuang sections, while the Yanba, Yanpai, Nanguang and Qinglian sections realized a YoY increase of 1.4%, 2.7%, 1.8% and 7.2% in 212, respectively. Figure 9: SZE s 212 toll operation YTD-Daily traffic (no. of vehicles per day YTD-Daily revenue (Rmb m) YoY chg YoY chg Meiguan 124, ,976 5.% % Jihe East 131, , % % Jihe West 16,543 99,39 7.2% % Yanba 28,563 27,61 3.5% % Yanpai 41,464 38, % % Wuhuang 39,669 37, % % Nanguang 58,699 55, % % Qinglian 22,827 21, % % Source: Deutsche Bank, Company data Page 5

6 Figure 1: SZE YTD consolidated toll income YoY growth Source: Deutsche Bank, Company data 212E earnings preview We currently forecast JSE s 212 earnings to drop 1% to Rmb2,42m. In addition, we expect ZJE and SZE s 212 net profit to drop 5% and 18%, respectively. Versus Bloomberg Finance LP Finance consensus, our JSE, ZJE and SZE 212 earnings results forecasts are likely to be in line with market expectations. SZE and JSE are to release their interim results on 22 March and 24 March, respectively. ZJE is to announce 213 results in mid-march. Figure 11: Deutsche Bank earnings forecasts vs. Bloomberg Finance LP Finance consensus Company name Bloomberg Finance LP ticker Deutsche Bank rating Deutsche Bank earnings forecast (Rmbm) Consensus forecast (Rmbm) Deutsche Bank vs. Consensus (%) 212 Annual report date 212F 213F 214F 212F 213F 214F 212F 213F 214F Jiangsu Expressway 177 HK Hold 2,412 2,514 2,76 2,43 2,495 2,693 % 1% 2% 3/24/213 Zhejiang Expressway 576 HK Hold 1,712 1,798 1,85 1,76 1,796 1,786-3% % 4% To be decided Shenzhen Expressway 548 HK Buy % -1% -9% 3/22/213 Source: Deutsche Bank, Bloomberg Finance LP Valuation and investment strategy The sector (including JSE, ZJE and SZE) has increased about 8% YTD, outperforming the HSI index (see Figure 12), which was up 5% over the same period. Performance is especially impressive for ZJE, which has risen 13% YTD. We think this outperformance could be mainly attributable to the attractive dividend yield, expectations of a traffic recovery, and strong A-share market performance. In addition, the market s key concern about a tariff cut has been mostly removed for the near term, as all the local governments have finished self-checks, and measures to adjust tariffs were announced by local government and the central government in 212. Going forward, we believe China s toll road companies are unlikely to outperform, as most positives are already in the price. We are downgrading both SZE and ZJE to Hold from Buy on their weak earnings outlooks. We prefer JSE within the toll road sector on Page 6

7 its strong earnings visibility in and because it has the highest dividend yield of the three. Figure 12: Stock performance Stock code Total market cap Closing price on Return Stocks (US$m) 4 Feb,213 1mth 3mth 6mth YTD (HK$) Jiangsu Expressway 177.HK 4, % 19% 13% 1% Zhejiang Expressway 576.HK 3, % 2% 25% 13% Shenzhen Expressway 548.HK 1, % 1% 2% 9% Simple average-overall 5% 17% 19% 8% MSCI China % 9% 22% 4% HSCEI Index 2% 12% 26% 6% HSI Index 2% 7% 2% 5% Source: Deutsche Bank, Bloomberg Finance LP Downgrading ZJE to Hold from Buy We are cutting our FY12-14E earnings for ZJE by 4% on average, mainly due to lower expected traffic growth based on 212 traffic data. We currently forecast toll income to grow only 1.8% in 213 to Rmb3,625m (vs. our previous forecast of Rmb3,76m) and.8% in 214 to Rmb3,653m (vs. our previous forecast of Rmb3,856m). Construction will be complete on the Jiaoshao Expressway and it will launch at the end of this year, which should drag down ZJE s toll income by 4-5%. Our model has reflected this traffic diversion. We are increasing our sum-of-the-parts (SOTP)-based target price to HK7.12 (from HK$6.5) mainly due to our target price date rollover, lower WACC and higher P/B multiple for the securities business, which together fully offset the earnings downgrade. We are rolling over our target price date to 213E from 212E. Our target price is based on an SOTP methodology, using DCF for ZJS s toll road assets and P/B for the securities business. For the toll road business, we use a WACC of 7.6% (risk-free rate of 2.9%, risk premium of 5.7%, and beta of.83) over the entire 25-year concession period with no terminal growth assumption. For the securities business, we currently use 1.4x P/B (previously 1x) based on a 25% discount to the 213E P/B of the average for Haitong Securities (Hold; HK$13.4) and CITIC Securities (Hold; HK$2), based on Deutsche Bank s latest forecasts. This is the lowest among the H-share-listed securities companies, and, in our view, the discount is justified by the small size of Zheshang (51.8% owned by ZJE, which is a mid-size securities company in China). Deutsche Bank currently guides for a 2.9% risk-free rate and 5.7% risk-premium (previously 3.1% Rf and 5.8% Rp). ZJE is trading at P/Es of 12.9x 213E and 12.5x 214E; this makes the company look fairly valued on the back of 5% EPS growth in 213E and 3% in 214E. Upside risks include 1) stronger-than-expected traffic recovery, 2) faster-than-expected asset acquisitions, and 3) stronger A-share stock market performance. Downside risks include 1) lower-than-expected traffic flow, 2) potential tariff cuts, 3) worse-thanexpected A-share market performance, and 4) unsustainably high dividend yield. Downgrading SZE to Hold from Buy We are cutting our E earnings forecast for SZE by 14%, mainly due to lower assumptions of toll income based on 212 traffic data (especially on the Qinglian Expressway). Toll income for the Qinglian Expressway in November and December 212 dropped 1.9% YoY and 3.6% YoY respectively (vs. 18% growth in 1M12), which Page 7

8 is below our expectation. The performance for the Qinglian Expressway was weak, partly because the positive impact from the completion of the Yilian section in October 11 faded away. Based on the latest traffic data, we believe the outlook for the Qinglian Expressway may be disappointing. We are downgrading our target price to HK$3.47 (from HK$4.1), mainly on our earnings downgrade and lower medium- to long-term growth in the Qinglian Expressway. We forecast net profit to drop 18% YoY in 212 partly due to the tariff cut (in June 212) and maintenance policy change (in 3Q11), and to decline 6% in 213 partly due to lower traffic growth on the Qinglian Expressway. Our 212E and 213E earnings are 2% and 1% below market consensus. Our target price is based on DCF over the entire concession period for each road (WACC of 7.5%, risk-free rate of 2.9%, risk premium of 5.7% and beta of.84) over the entire 25-3 year concession period with no terminal growth assumption. Deutsche Bank currently guides 2.9% risk free rate and 5.7% risk premium (previously 3.1% Rf and 5.8% Rp). Our target price implies a P/E of 9x for 213E. Upside risks include stronger traffic growth (especially on the Qinglian Expressway). Downside risks include regulatory risks (such as tariff cuts), worse-than-expected traffic growth, higher-than-expected interest rate increases, depreciation, and operational expenses. In addition, due to the tight financial situation, we see downside risk for the payout ratio. JSE is our top pick We are cutting our FY12-14E earnings for JSE by 4% on average, mainly due to lower traffic growth. We currently forecast toll income to grow only 2.5% in 213 to Rmb5,56m (vs. our previous forecast of Rmb5,124m) and 8.1% in 214 to Rmb5,463m. We are raising our SOTP-based target price to HK$8.9 (from HK$8.24) due to a target price date rollover, lower WACC and better long-term growth due to reduced loss on the G312 Highway. JSE s share price underperformed ZJE in the past two months, mainly due to market concerns about unsustainable dividend yield in 212, caused by the potential asset devaluation provisions for its demolished toll stations on the G312 Highway. In the middle of last year, the Jiangsu government demolished four toll stations on the G312 Highway (1%-owned by JSE). Management said it is talking with local government about compensation. We believe this issue should be resolved in the next few months. In addition, JSE guided that this road would generate losses of around Rmb15m in 211. Hence, we believe the removal of four toll stations could reduce the losses in the future. With the removal of this concern, we think JSE s share price should catch up soon. We prefer JSE to ZJE in 213 due to its cheaper valuation, higher dividend yield and stronger EPS growth in 214. JSE should outperform ZJE in 213 Our target price is based on an SOTP methodology, using DCF for JSE s toll road assets and a 7% discount to JSE s FY13E real estate NAV. For the toll road business, we use a WACC of 7.4% (risk-free rate of 2.9%, risk premium of 5.7%, and beta of.82) over the entire 35-year concession period with no terminal growth assumption. Deutsche Bank currently guides 2.9% risk-free rate and 5.7% risk premium (previously 3.1% Rf and 5.8% Rp). Given that JSE's property business is still in the initial stage, we apply a 7% discount to JSE's property NAV for valuing its real estate business. In the next six months, we particularly like JSE within the sector due to strong earnings visibility. 1) Because an economic recovery would support a truck traffic recovery, JSE stands to benefit more from a recovery than ZJE and SZE, due to its higher Page 8

9 exposure to trucks. We believe JSE s traffic recovery (for trucks) will be better than ZJE and SZE s. 2) SZE s near-term outlook still looks less favorable than ZJE and JSE s, due to the continued negative impact from the toll rate cut. In addition, the latest traffic performance figures imply that the Qinglian Expressway s performance may be below expectations, which is likely to further drag down SZE s net profit. 3) We see no major new traffic diversions on JSE s existing expressways in The Jiashao Expressway will launch in 4Q13, which will drag down ZJE s toll income by 4-5%. These factors also indicate that JSE s earnings are more visible, and dividend yield is more sustainable, than those of ZJE and SZE. JSE s dividend yield in is 6%, which is the highest among the three companies that we cover. It is also one of the highest-yield stocks in the HK/China market. Downside risks include a worse-than-expected Chinese economy, any unexpected toll rate reduction and lower-than-expected compensation from the government for its four demolished toll stations on G312 Highway. Figure 13: JSE rolling forward P/E band Figure 14: JSE dividend yield (5-year) Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP Page 9

10 Figure 15: ZJE rolling forward P/E band Figure 16: ZJE dividend yield (5-year) Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP Figure 17: SZE rolling forward P/E band Figure 18: SZE dividend yield (5-year) Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP Figure 19: Earnings forecast changes vs. Bloomberg Finance LP consensus Net profit 212E 213E 214E Comment Vs. Bloomberg Finance LP consensus (Rmbm) Jiangsu Expressway Old 2,478 2,678 2,859 New 2,42 2,514 2,76 Lower toll income growth % change -3% -6% -3% Zhejiang Expressway Old 1,768 1,854 1,964 Our 212E and 213E earnings are largely in line with market New 1,712 1,798 1,85 Lower toll income growth Our 212E earnings are 3% below market consensus, and our 213E earnings are largely in line with market % change -3% -3% -6% Shenzhen Expressway Old New Lower toll income growth Our 212E and 213 earnings are 2% and 1% below market consensus % change -6% -15% -21% Source: Deutsche Bank, Bloomberg Finance LP Page 1

11 Figure 2: Target price change Jiangsu Expressway Zhejiang Expressway Shenzhen Expressway Old New Reason for target price change Source: Deutsche Bank, Bloomberg Finance LP lower WACC, better longterm growth due to reduced loss from G312 Highway, target price date rollover lower WACC, higher P/B earnings downgrade in 212- multiple for securities 214 and lower medium- to business and target price long-term growth of Qinglian date rollover Expressway Figure 21: JSE sum-of-the-parts valuation Composition Basis for valuation (HK$m) Toll Projects Shanghai-Nanjing Expressway (1%) 37,475 Nanjing-Shanghai Class 2 highway (1%) 246 South Approach Expressway (85%) 2,657 North Approach Expressway (85%) 1,413 Nanjing-Lianyungang Class 1 Highway (1%) 267 Jiangyin Yangtze Bridge (26.63%) 1,69 Sujiahang (33.33%) 2,499 Yanjiang expressway (27.42%) 3,146 Suzhou city-ring Expressway SW (4.6%) 58 Suzhou city-ring Expressway NW (4.6%) 2 Suzhou city-ring Expressway Suhu (4.6%) 57 Suzhou city-ring Expressway Sukuntai (4.6%) 17 Property business NAV 32 Sub-total 49,955 Net Cash/(Debt) (5,117) Total 44,839 Shares outstanding (m) 5,38 Target price (HK$) 8.97 Source: Deutsche Bank estimates *Each line item discounted for the total concession period. To determine the discounted amount for each project, we discounted each year s free cash flow (i.e. EBIT*(1-tax rate) + depreciation - capex) for the concession period. The discount rate used is 7.4% DCF Figure 22: ZJE sum-of-the-parts valuation Composition (HK$m) Toll Projects (% of ownership)* Hangzhou-Ningbo (1%) 9,939 Shanghai-Hangzhou, Hangzhou (1%) 47 Shanghai-Hangzhou, Yuhang (51%) 229 Shanghai-Hangzhou, Jiaxing (1%) 7,946 Shangshan (73.6%) 4,38 Total value from the toll road assets 22,891 NAV of Zheshang Securities for FY13E 3,445 Target PB for FY13E 1.4 Value from Zheshang Securities 4,857 Sub-total 3,941 Net Cash 3,192 Total NAV 3,941 Shares outstanding (m) 4,343 Target price (HK$) 7.12 Source: Deutsche Bank estimates *Each line item discounted for the total concession period. To determine the discounted amount for each project, we discounted each year s free cash flow (i.e., EBIT*(1-tax rate) + depreciation - capex) for the concession period. The discount rate used is 7.6% Page 11

12 Figure 23: SZE DCF valuation Composition Toll Projects (HK$m) Meiguan Expressway (1%) 2,318 Jihe Expressway (East) (1%) 4,358 Jihe Expressway (West) (1%) 3,812 Changsha Ring Road (51%) 235 Yantian-Bagang Expressway (1%) 1,544 Shuiguan Expressway (4%) 565 Yantian-Paibang Expressway (1%) 2,129 Project management contracts 35 Yanjing-Maoming Expressway (25%) 22 Jiangmen-Zhongshan Expressway (25%) 133 Guangzhou Western 2nd Ring Road (25%) 92 Nanjing Third Bridge (25%) 161 Nanguang (1%) 328 Guangwu Expressway (3%) 179 Wuhuang Expressway (55%) 541 Qinglian Expressway (76%) 1,582 Total 18,231 Net Cash/(Debt) -1,671 Total NAV 7,56 Shares outstanding (m) 2,181 Target price (HK$) 3.47 Source: Deutsche Bank estimates *Each line item discounted for the total concession period. To determine the discounted amount for each project, we discounted each year s free cash flow (i.e. EBIT*(1-tax rate) +depreciation-capex) for the concession period. The discount rate used is 7.5% Page 12

13 Page 13 Figure 24: Global toll road operators peer valuation Company Name Ticker Currency Deutsche Bank Current Price Market Cap Average Daily volume 5-Feb-13 Rating (local) (US$ m) m FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY12 FY13 FY14 FY13F Jiangsu Expressway * 177 HK HK$ Buy , % 5% 1% 5.7% 5.7% 6.2% 72% Zhejiang Expressway * 576 HK HK$ Hold , % 5% 3% 5.2% 5.4% 5.6% 7% Shenzhen Expressway * 548 HK HK$ Hold , % -6% 7% 5.1% 4.8% 5.1% 4% Anhui Expressway 995 HK HK$ n/a 4.8 1, % -1% -2% 5.% 5.1% 5.% 4% Sichuan Expressway 17 HK HK$ n/a , % % -13% 3.9% 4.% 3.4% 23% Hopewell Highway Infr. 737 HK HK$ n/a , % -22% 1% 7.7% 5.7% 5.8% 98% Average for Chinese peers % -1% 2% 5.5% 5.3% 5.5% 57% 4-Feb-13 Bangkok Expressway BECL TB THB n/a 42. 1, % 31% 126% 3.3% 3.5% 4.% 55% Lingkaran Trans LTK MK MYR n/a % 3% 4% 4.3% 4.3% 4.5% 68% Citra marga nusa CMNP IJ IDR n/a 1, % -13% 26% 2.4% 2.3% 1.9% 28% Abertis * ABE SM EURO Buy , % 1% 11% 5.% 5.2% 5.5% 7% Brisa Auto-Estrada BRI PL EURO n/a 2.2 1, % -28% -14% 14.1% 12.4% 14.1% 294% Sias SPA SIS IM EURO n/a 7.5 2, % 1% 5% 8.9% 6.5% 5.6% 73% Average for international peers % % 26% 6.3% 5.7% 5.9% 98% Overall average % % 14% 5.8% 5.5% 5.7% 78% Source: DB forecasts for companies with '*', Bloomberg Finance LP forecasts for all others P/E (x) (F) P/B (x) (F) EPS chg (%) (F) Div yield (%) (F) Payout ratio (%) 5 February 213

14 Model updated:5 February 213 Running the numbers Asia China Shenzhen Expressway-H Reuters: 548.HK Bloomberg: 548 HK Hold Price (5 Feb 13) HKD 3.23 Target Price HKD Week range HKD Market Cap (m) HKDm 7,44 USDm 98 Company Profile Shenzhen Expressway Company Limited constructs, manages and operates toll highways and expressways in China. Price Performance Feb 11 Aug 11 Feb 12 Aug 12 Margin Trends Shenzhen Expressway-H HANG SENG INDEX (Rebased) E 13E 14E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 13E 14E Sales growth (LHS) ROE (RHS) E 13E 14E Net debt/equity (LHS) Net interest cover (RHS) Fiscal year end 31-Dec E 213E 214E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 2,181 2,181 2,181 2,181 2,181 Average market cap (CNYm) 7,652 7,52 5,659 5,659 5,659 Enterprise value (CNYm) 15,35 16,216 14,72 15,556 14,954 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm 1.6 Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 2,32 2,952 2,941 2,964 3,94 Gross profit 1,671 2,351 2,23 2,222 2,297 EBITDA 1,69 2,263 2,143 2,135 2,25 Depreciation Amortisation EBIT 1,64 1,576 1,382 1,32 1,37 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax 857 1, Income tax expense Minorities Other post-tax income/(expense) Net profit DB adjustments (including dilution) DB Net profit Cash Flow (CNYm) Cash flow from operations 1, Net Capex -1, , Free cash flow Equity raised/(bought back) Dividends paid Net inc/(dec) in borrowings , Other investing/financing cash flows 1, Net cash flow 56 1, Change in working capital ,98 2 Balance Sheet (CNYm) Cash and other liquid assets 535 2,168 1, ,469 Tangible fixed assets 1,31 1,215 2,181 2,332 2,25 Goodwill/intangible assets 17,954 18,963 18,963 18,963 18,963 Associates/investments 2,366 1,616 1,795 1,994 2,219 Other assets Total assets 22,661 24,69 25,97 24,861 25,525 Interest bearing debt 9,912 11,24 11,14 11,64 11,84 Other liabilities 3,371 2,97 3,187 2,93 2,136 Total liabilities 13,283 14,111 14,292 13,697 13,941 Shareholders' equity 8,691 9,24 9,557 9,951 1,47 Minorities 687 1,293 1,249 1,212 1,178 Total shareholders' equity 9,379 1,497 1,86 11,164 11,585 Net debt 9,377 9,37 9,589 1,679 1,336 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Phyllis Wang phyllis.wang@db.com Page 14

15 Model updated:5 February 213 Running the numbers Asia China Zhejiang Expressway Ltd Reuters: 576.HK Bloomberg: 576 HK Hold Price (5 Feb 13) HKD 6.64 Target Price HKD Week range HKD Market Cap (m) HKDm 28,838 USDm 3,718 Company Profile Zhejiang Expressway Co., Ltd., through its subsidiaries, designs, constructs, operates, and manages high grade roads, as well as develops and operates certain ancillary services, such as technical consultation, advertising, automobile servicing, and fuel facilities. Price Performance Feb 11May 11Aug 11Nov 11Feb 12May 12Aug 12Nov 12 Margin Trends Zhejiang Expressway Ltd HANG SENG INDEX (Rebased) E 13E 14E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 13E 14E Sales growth (LHS) ROE (RHS) E 13E 14E Net debt/equity (LHS) Net interest cover (RHS) Fiscal year end 31-Dec E 213E 214E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 4,343 4,343 4,343 4,343 4,343 Average market cap (CNYm) 27,412 21,51 23,169 23,169 23,169 Enterprise value (CNYm) 24,769 18,579 23,352 22,789 21,645 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 6,769 6,781 6,669 7,1 7,197 Gross profit 3,813 3,5 3,389 3,532 3,579 EBITDA 4, 3,564 3,45 3,593 3,64 Depreciation Amortisation EBIT 3,174 2,73 2,68 2,751 2,798 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax 3,111 2,784 2,64 2,773 2,853 Income tax expense Minorities Other post-tax income/(expense) Net profit 1,871 1,85 1,712 1,798 1,85 DB adjustments (including dilution) DB Net profit 1,871 1,85 1,712 1,798 1,85 Cash Flow (CNYm) Cash flow from operations 2,55 2,286 2,65 2,888 3,14 Net Capex Free cash flow 2,292 1,513 1,265 2,88 2,714 Equity raised/(bought back) Dividends paid -1,216-1,515-1,199-1,259-1,295 Net inc/(dec) in borrowings Other investing/financing cash flows ,2 Net cash flow 633-2, ,418 Change in working capital Balance Sheet (CNYm) Cash and other liquid assets 6,8 5,588 3,187 4,17 5,435 Tangible fixed assets 1,121 1,294 2,454 3,111 3,265 Goodwill/intangible assets 12,158 11,452 11,452 12,588 13,838 Associates/investments 1,429 1,767 1,76 1,753 1,746 Other assets 12,937 9,31 8,573 8,97 9,24 Total assets 33,652 29,133 27,426 3,439 33,489 Interest bearing debt 1,822 1,463 1,463 1,463 1,463 Other liabilities 14,135 9,71 8,269 8,722 9,79 Total liabilities 15,957 1,534 9,732 1,185 1,542 Shareholders' equity 14,723 15,179 14,26 16,327 18,753 Minorities 2,972 3,421 3,668 3,927 4,194 Total shareholders' equity 17,695 18,599 17,694 2,254 22,947 Net debt -4,186-4,126-1,725-2,554-3,972 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) 49. nm nm nm nm Source: Company data, Deutsche Bank estimates Phyllis Wang phyllis.wang@db.com Page 15

16 Model updated:5 February 213 Running the numbers Asia China Jiangsu Expressway-H Reuters: 177.HK Buy Bloomberg: 177 HK Price (5 Feb 13) HKD 7.91 Target Price HKD Week range HKD Market Cap (m) HKDm 39,849 USDm 5,138 Company Profile Jiangsu Expressway constructs, operates, manages and maintains expressways in China. The Company also provides passenger transportation and other ancillary services along including fueling stations, restaurants, car maintenance and repair and advertising. Price Performance Feb 11May 11Aug 11Nov 11Feb 12May 12Aug 12Nov 12 Margin Trends Jiangsu Expressway-H HANG SENG INDEX (Rebased) E 13E 14E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 13E 14E Sales growth (LHS) ROE (RHS) E 13E 14E Net debt/equity (LHS) Net interest cover (RHS) Fiscal year end 31-Dec E 213E 214E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 5,38 5,38 5,38 5,38 5,38 Average market cap (CNYm) 33,725 31,235 32,14 32,14 32,14 Enterprise value (CNYm) 38,92 34,491 36,346 35,426 34,292 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 6,578 7,215 7,529 7,774 8,3 Gross profit 4,423 4,473 4,65 4,783 5,133 EBITDA 4,259 4,289 4,458 4,585 4,921 Depreciation Amortisation EBIT 3,45 3,387 3,415 3,54 3,828 Net interest income(expense) Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax 3,332 3,263 3,267 3,417 3,751 Income tax expense Minorities Other post-tax income/(expense) Net profit 2,484 2,43 2,42 2,514 2,76 DB adjustments (including dilution) DB Net profit 2,484 2,43 2,42 2,514 2,76 Cash Flow (CNYm) Cash flow from operations 3,395 3,835 2,58 2,898 3,16 Net Capex Free cash flow 3,278 3,661 2,274 2,612 2,88 Equity raised/(bought back) Dividends paid -1,591-2,132-1,814-1,814-1,814 Net inc/(dec) in borrowings -1, Other investing/financing cash flows ,65 Net cash flow Change in working capital Balance Sheet (CNYm) Cash and other liquid assets ,29 Tangible fixed assets 19,33 19,728 2,642 19,883 19,88 Goodwill/intangible assets Associates/investments 1,885 1,933 2,94 2,265 2,458 Other assets 1,816 2,597 3,45 3,989 4,671 Total assets 23,65 25,375 26,868 27,163 27,737 Interest bearing debt 6,267 5,532 6,332 5,832 5,332 Other liabilities 66 1,236 1,292 1,338 1,411 Total liabilities 6,873 6,768 7,624 7,17 6,743 Shareholders' equity 16,316 18,145 18,733 19,434 2,38 Minorities Total shareholders' equity 16,777 18,68 19,244 19,994 2,994 Net debt 5,792 4,725 5,915 5,117 4,123 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Phyllis Wang phyllis.wang@db.com Page 16

17 Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure Shenzhen Expressway-H 548.HK 3.23 (HKD) 5 Feb 13 NA Zhejiang Expressway Ltd 576.HK 6.63 (HKD) 5 Feb 13 6 Jiangsu Expressway-H 177.HK 7.92 (HKD) 5 Feb 13 6 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Phyllis Wang Page 17

18 Historical recommendations and target price: Shenzhen Expressway-H (548.HK) (as of 2/5/213) 6. Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating 1. *New Recommendation Structure as of September 9,22. Feb 11 May 11 Aug 11 Nov 11 Feb 12 Date May 12 Aug 12 Nov /3/211: Buy, Target Price Change HKD /3/212: Buy, Target Price Change HKD /8/211: Buy, Target Price Change HKD /7/212: Buy, Target Price Change HKD4.1 Historical recommendations and target price: Zhejiang Expressway Ltd (576.HK) (as of 2/5/213) 8. Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating 1. *New Recommendation Structure as of September 9,22. Feb 11 May 11 Aug 11 Nov 11 Feb 12 Date May 12 Aug 12 Nov /9/211: Buy, Target Price Change HKD /7/212: Buy, Target Price Change HKD /3/212: Buy, Target Price Change HKD6.81 Page 18

19 Historical recommendations and target price: Jiangsu Expressway-H (177.HK) (as of 2/5/213) 1. Previous Recommendations Security Price Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9,22. Feb 11 May 11 Aug 11 Nov 11 Feb 12 Date May 12 Aug 12 Nov /3/211: Hold, Target Price Change HKD /3/212: Buy, Target Price Change HKD /9/211: Upgrade to Buy, Target Price Change HKD /7/212: Buy, Target Price Change HKD /3/212: Buy, Target Price Change HKD9.4 Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 27 were: Buy: Expected total return (including dividends) of 1% or more over a 12-month period Hold: Expected total return (including dividends) between -1% and 1% over a 12- month period Sell: Expected total return (including dividends) of -1% or worse over a 12-month period % 38 % 16 % 16 % 6 % 1 % Buy Hold Sell Companies Covered Cos. w/ Banking Relationship Asia-Pacific Universe Page 19

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