Invest in tollroad operators along asset lifecycle. Following the lifecycle
investment concept introduced in Asia Infrastructure Ecosystem: Life cycles
and cash returns in Asian infrastructure, 6 November 2012, we review
operators’ asset life based on operating concession weighted by length, and
compare the return profiles. It is worth noting that tollroad project returns are
normally depressed at the initial stage (first 3-5 years) before traffic ramps up
due to high fixed costs and financial expenses. Yuexiu Transport and Shenzhen
Exy are classified as young operators with 17-20 concession years left, while
the others are mature with around 15 concession years left. Overall, we prefer
Jiangsu Exy and Yuexiu Transport as they are generating better returns at
their respective project lifecycles. We downgrade Shenzhen Exy-A to N.
 Jiangsu Exy and Zhejiang Exy should see more upside from acquisitions.
Tollroad M&A activity has been increasing since 2012. After reviewing gearing
level and FCF profile, we expect Jiangsu Exy and Zhejiang Exy to see higher (9-
10%) earnings upside from M&A growth in FY13. Meanwhile, we believe
Yuexiu Transport will slow its M&A growth and focus on improving existing
project returns, having acquired three projects since 2010.
 Dividend visibility check. We expect Jiangsu Exy’s overhang, G312 potential
impairment, to be removed soon with cash compensation coming from the
government. As a result, we expect its recent underperformance to revert as
dividend visibility improves. Zhejiang Exy also has good dividend visibility,
which has been reflected in its recent outperformance.
 Traffic recovery trend continues; operators are turning more constructive
on 2013. Although October traffic numbers were distorted by the
implementation of the passenger toll wave policy, we notice that the traffic
recovery trend continued in November/December. Zhejiang Exy’s consolidated
average daily toll revenue recorded a 13% YoY increase, recovering well from
its 11% YoY decline in October, and this is also the strongest YoY growth
YTD. In addition, non-passenger vehicle traffic recorded 20%/ 9% YoY growth
in Shanghai-Hangzhou Exy and Hangzhou-Ningbo Exy, respectively.
 Recommendations. Our previous sector top picks were Anhui Exy and
Zhejiang Exy. We now switch our preference to Jiangsu Exy, with the removal
of impairment loss as a near-term catalyst; Shenzhen Exy-H is our medium-term
pick due to our belief that the stock has been over-penalized by the delay in
profitability ramp-up in Qinglian Exy. Yuexiu Transport also stands out from a
profitability-vs-maturity perspective.