We joined a guided tour at Guangzhou City Northern Ring Road, NWS’s top toll road in terms of traffic flow, to see its smart toll booths and control centre. We expect Roads to remain NWS’s top business segment (32% of Attributable Operating Profit in FY20E), and there could be further acquisition opportunities in this core business.
- Smart toll booths help enhance efficiency. Guangzhou Northern Ring Road began implementing integrated smart toll booths in Jul 2017. Such smart booths allow shifting between manual/auto toll collection modes, self-serviced function and serve as unmanned booths in certain time slots. They collect information of passing vehicles for big data analysis to help enhance operating efficiency in the long run.
- Further acquisition of roads is possible. While we do not expect NWS to make significant capital outlay in near future after splashing out HK$21.5bn last year to fully acquire FTLife, there could be more acquisition of toll roads at attractive price (possibly in Hunan & Hubei provinces) given the tight credit condition in Mainland China. Besides, the Management believes that some SOEs would prefer to sell a stake of their toll roads to offshore investors so as to enjoy certain policy exemptions.
- Other potential catalysts: 1) Spin-offs: we believe NWS’s aviation (aircraft leasing) and environment (SUEZ NWS) segments have potential of spin-off, and the former may be more likely given the current sector valuations. 2) Disposal of non-core businesses such as transport, facilities management and strategic investments.
- Expect interim AOP to rebound. NWS is expected to announce 1H FY20E results in late Feb. We forecast Attributable Operating Profit to rebound by 10% (1H FY19 decreased by 9%), with growth mainly from aviation and construction, and insurance contributing two months of profit.
- Maintain BUY as a yield play. NWS announced in Sep 2019 to adopt a progressive dividend policy, i.e. annual DPS not less than the previous year. FY20E dividend yield is 5.3%. We maintain BUY rating and TP at HK$15.4, based on 20% discount to FY20E NAV.
