On 5 Nov, the Board passed the proposed acquisition of 100% of the equity interests in Yuexiu Hubei, and 38.5% of the equity interests in Hancai Expressway Company, at a total consideration of RMB 1,107mn. Essentially, the Company acquired 67% of Hancai Expressway (汉蔡高速), 100% of Han’e Expressway (汉鄂高速), and 90% of Daguangnan Expressway (大广南高速). We visited the above expressways during the reverse roadshow held on 24 Oct.
- The acquisition positions the Company to capture “Rise of Central China” opportunities. The target expressways are all located in Hubei Province, Central China. Hancai Expressway, Han’e Expressway, together with Hanxiao Expressway, are three out of the seven expressways radiating out of Wuhan, the capital city of Hubei. Daguangnan Expressway is the southern part of the Daguang Expressway connecting Daqing and Guangzhou. Together with Suiyuenan Expressway, the Company will hold concession rights over two out of six south-to-north national trunk lines running through Hubei. Given the nation’s “Rise of Central China” strategy, we believe future traffic growth of the Company’s expressway assets will be further enhanced.
- The acquisition extends the concession period of the Company's expressway assets. The concession rights of both Daguangnan Expressway and Han’e Expressway will expire in 2042, while that of Hancai Expressway will expire in 2038. After the acquisition, average remaining concession period of the Company's controlled expressways weighted by mileage will be extended from 17.2 years to 19.1 years, higher than Shenzhen Expressway (548 HK, NOT RATED) and Bay Area Development (737 HK, BUY), enhancing operational sustainability.
- Catalysts. (1) Shunfeng E’zhou Airport, positioned to become a national logistics hub and air cargo freight transshipment airport, which is expected to open in Sep 2021, may boost traffic growth of Han’e Expressway and Daguangnan Expressway. (2) Surrounding industrial parks may induce traffic growth of Hancai Expressway. (3) Traffic may be diverted to Daguangnan Expressway if the northern Hubei section of the Beijing-Hong Kong-Macau Expressway undergo expansion construction.
- Valuation. In 2018, toll revenue of the Daguangnan Expressway/ Hancai Expressway/ Han’e Expressway was RMB 360/ 304/ 211mn, equivalent to a total of 31% of the Company’s 2018A revenue. Third party traffic study forecasted that on average of the optimistic and conservative scenarios, average daily traffic of Daguangnan Expressway/ Hancai Expressway/ Han’e Expressway will increase 21.3%/ 9.4%/ 14.4% YoY in 2020E, higher than average of the Company’s existing portfolio. The stock is currently trading at 1.0x 2020E P/B, lower than peer average of 1.1x, but higher than historical average of 0.9x.
