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Shandong Expressway:In line with expectations: earnings recovery on track; Conv Buy

发布时间:2010-08-16    研究机构:高盛高华证券

What surprised us。

On August 13 after market close, Shandong Expressway (SDE) reportednet profit of Rmb534mn for 1H 2010. This was roughly in line with ourexpectation of Rmb550mn. Key highlights include: (1) Operating marginimproved to 46% in 1H10 from 41% in 1H09 and we expect sequentialmargin improvement in 2H10E (49%) driven by higher traffic volumes, (2)Toll revenue recorded strong recovery in 1H10, +14% YoY, but petroleumproduct sales (12% of revenue) declined 33% YoY due to a scaling down inthe low-margin petroleum coke sales business, and (3) Investment lossesfrom associates (including the 49% owned Weilai Expressway) narrowedto Rmb-19mn in 2Q10 from Rmb-34/-31mn in 2Q09/1Q10. 1H10 operatingmargin of Xuyu Expressway was -12%, from -20%/-15% in 1H/2H09.

What to do with the stock。

We trim 2010-2012E EPS by 2%-4% to reflect lower revenue contributionfrom ancillary businesses. We reiterate our Buy (Conviction list) on SDE aswe believe the stock is attractively valued at 1.0x EV/GCI (vs sector averageof 1.2x) against its 2010-2012E average CROCI of 13%. We continue toexpect completion of the asset restructuring with its parent (announced onJune 30) to help remove near term uncertainty on asset injection and wesee upside potential to the dividend payout ratio post-completion of therestructuring given its parent company will subscribe to new shares tofund the asset injection.

Valuation: Our Director’s Cut 12-month target price remains Rmb6.50,based on EV/GCI of 1.3x — implying 2011E P/E of 15X.

Downside risks: Weaker-than-expected traffic growth, earnings dilutiveasset injections and worse-than-expected diversion from parallel roads.

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