Downgrading toll road sector; we
prefer JSE in 2013
Downgrading ZJE/SZE from Buy to Hold; prefer JSE as a top pick
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
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) 072/04/2012.
Phyllis Wang
Research Analyst
(+86) 21 2080 1665
phyllis.wang@db.com
Joe Liew, CFA
Research Analyst
(+65) 6423 8507
joe.liew@db.com
Top picks
Jiangsu Expressway-H (0177.HK),HKD7.91 Buy
Companies Featured
Shenzhen Expressway-H
(0548.HK),HKD3.23
Hold
2011A 2012E 2013E
P/E (x) 8.6 7.9 8.4
EV/EBITDA (x) 7.2 6.9 7.3
Price/book (x) 0.6 0.6 0.6
Zhejiang Expressway Ltd
(0576.HK),HKD6.64
Hold
2011A 2012E 2013E
P/E (x) 11.7 13.5 12.9
EV/EBITDA (x) 5.2 6.8 6.3
Price/book (x) 1.2 1.7 1.4
Jiangsu Expressway-H (0177.HK),HKD7.91 Buy
2011A 2012E 2013E
P/E (x) 12.9 13.3 12.7
EV/EBITDA (x) 8.0 8.2 7.7
Price/book (x) 1.6 1.7 1.6
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 20.
We are less positive on the sector due to an unexciting earnings outlook. ZJE’s
share price is up 20% 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 2013
We forecast JSE/ZJE/SZE’s toll income to grow 2%, 2% and 1%, respectively,
in 2013 (vs. -1%, 1% and -1% in 2012). We think toll income growth will
recover in 2013, 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 2012-2014 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 2014 (vs.
5% in 2013) 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 2012-2014E 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 2013 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 2013-2014. JSE underperformed ZJE recently,
due to market concerns about its dividend visibility in 2012, 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 tar