Beyond the main business of “modern logistics + toll roads”, the Company has been expanding into ports, air cargo, and others to build a comprehensive logistics ecosystem. Among them, the modern logistics business focuses on the development and operation of high-standard warehouses and urban high-end logistics complexes. It has a nationwide presence in nearly 40 logistics hub cities, with a total area of over 4.5mn sqm (90% of which are high-standard warehouses). The overall rental occupancy rate of mature logistics parks is ~82%. The Company’s unique dual closed-loop business model has continued to unleash the value of high-quality assets. Among them, the short closed-loop “Investment, Construction, Financing and Operation” business model is continuously developing, with an expected annualized net profit contribution of Rmb700mn-900mn over the next three years. The long closed-loop “Investment, Construction, Operation and Transformation” development model maximizes the value of logistics park assets. We estimate that the total profit contribution of the South China Logistics Park could reach Rmb15.22bn-18.27bn. Over the next 3-5 years, the South China project will contribute incremental profits to the long closed-loop business.
　　Additionally, the Company’s expressway and port businesses provide stable cashflow amid the recovery in demand, and we expect a gradual net profit recovery in 2023-24. We anticipate the Company’s net profit to recover to HK$2.2bn in 2023E. Assuming a dividend payout ratio of ~50%, this translates into a dividend yield of nearly 8% in 2023, enhancing its attractiveness to investors. Based on the Company’s average valuation of 6.5x PE in the past five years, we assign 6.5x 2024E PE to derive a target price of HK$9 and initiate coverage with a “BUY” rating.
　　The sole SOE in Shenzhen with focus on transportation and logistics possesses scarce logistics park network resources; We expect its net profit to rise by 83% YoY, corresponding to ~8% dividend payout ratio. Established in 1951, Shenzhen Int’l has continuously explored and solidified its core business in “modern logistics + toll roads”, extending its operations throughout the entire value chain. The Company’s toll roads and large environmental protection business, along with contributions from the logistics parks, constitute the majority of its net profit. The unique closed-loop business model of the logistics parks, releasing the value of the Company’s high-quality assets, is likely to persist. Its modern logistics business aims to become a “top-tier logistics industry comprehensive service provider in the Guangdong-Hong Kong-Macao Greater Bay Area and a leading logistics player nationwide”. It is anchored in Shenzhen, deeply rooted in the Greater Bay Area, and actively expanding its presence nationwide. As of 1H23, the Company's logistics park operating area exceeds 4.5mn sqm, ranking eighth nationwide, with 90% being high-standard warehouses. Additionally, the Company, through its controlling subsidiary, holds equity interests in toll road mileage totaling 643km. In 1H23, the Company’s attributable net profit (ANP) decreased by 84.2% YoY, influenced by non-recurring and financial expenses. However, during the same period, the core business of toll roads and logistics　　parks showed positive net profit growth, highlighting the resilience of the main operations. Considering the expected sustained efforts backed by future policy support, we expect the Company’s net profit to recover to HK$2.2bn in 2023.
　　The Company’s park operations focus on the development and operation of high-standard warehouses.
　　The supply of high-standard warehouse facilities is likely to remain scarce in the long term. Currently, high-standard warehouses account for only 9% of the total logistics warehouse area in China, indicating significant growth room in the future. On the demand side, the stable demand for warehouse logistics driven by the development of ecommerce is likely to persist. The supply-demand gap for high-standard warehouses may continue, and the Company is poised to maintain its leading position. Additionally, the economic support of the hinterland is crucial. The continuous expansion of the ecommerce market share, the high-speed development of Shenzhen's economy and complete transportation network construction will likely drive the needs for high-standard warehouses. We expect the benefits from short closed-loop key projects to be gradually realized in 2023-26, and the Company's Shenzhen (Longhua) Liguang Digital Logistics Hub (“SZ Liguang Project”) and Shenzhen (Yantian) Intelligent Logistics Hub ("SZ Yantian Project") in the Comprehensive Bonded Zone to be put into operation in 3Q23. Moreover, through placing into logistics industry funds and real estate investment trusts (REITs) public offerings to achieve asset securitization, the Company promotes rapid expansion of the logistics operations. We estimate that the Company’s logistics park securitization in 2023 will contribute ~Rmb300mn to its ANP and expect logistics park operations to continue generating profit in the future, with an annual contribution of Rmb700-900mn during 2023-2025.
　　The long closed-loop maximizes the asset value of logistics parks, fully enjoying the dividend of urban functional transformation.
　　We expect the first and second phase of the Qianhai Project to contribute ANP of HK$14bn-15bn. The upgrade of SZI South China Logistics Park is on the agenda, which is likely to demonstrate resilience based on the previous experience. The "Investment, Construction, Operation and Transformation” development model seizes opportunities from urbanization, and promotes the transformation and upgrade of logistics park projects through land use change, renewal and reconstruction, development and operation, to maximize related asset values. The Qianhai Project as the Company's first project that has successfully implemented under the long closed-loop business model, has contributed more than Rmb11.5bn to the net profit as of the end of 2022, including the pre-tax revenue of Rmb8.18bn for the pre-construction work. The long closed-loop business model contributed ANP of Rmb2,440mn/2,187mn/ 3,553mn/846mn, respectively, from 2017 to 2021. We estimate it to contribute non-operating profit of HK$1.6bn in 2023. On Sep 29, 2023, the Planning and Natural Resources Bureau of Shenzhen Municipality made adjustments for some land plots of SZI South China Logistics Park, indicating that the upgrade is officially on the agenda. On Oct 31, 2023, the Company announced that it has been included in the Shenzhen Urban Renewal and Land Reconditioning Plan. We estimate that the first phase of South China Project will contribute Rmb15.22bn-18.27bn to the Company's net profit under different housing price scenarios.
　　The Company is perfecting its port networking and the general-environmental protection business and highway businesses will　　likely gradually recover.
　　The port business of Shenzhen Int'l is coordinated by the Company's Nanjing subsidiary. The Company is committed to becoming a market-competitive inland port operation service provider. We estimate that the port business will likely contribute Rmb110mn to the total profit in 2023. Since the beginning of the "14th Five-Year Plan" (14th FYP, 2021-25) period, China continues to further policy efforts on environmental protection. Since 2023, the highway traffic volume recovered rapidly, with the average daily traffic volume on national highways reached 60.43mn vehicles during the National Day and Mid-Autumn Festival holiday, an increase of 20.8% compared to the same period in 2019. In summary, we expect the Company's general-environmental protection and highway businesses to gradually recover, and expect these businesses to contribute HK$1.1bn of profit in 2023.
　　Potential risks:
　　Slower-than-expected progress of logistics park projects; less-than-expected expressway traffic recovery; significant decline in national economy; less-than-expected residential and apartment sales; lower-than-expected rental rates of high-standard warehouses; a sharp decline in property prices; slower-than-expected securitization progress of the logistics park assets.
　　Investment strategy:
　　Shenzhen Int’l is actively working to build the strength of SOEs in urban supporting development and operation, focusing on the “inland port networking, logistics parks, air cargo and railway freight logistics infrastructure + intelligent and cold chain logistics” ecosystem. Its scarce logistics park resources achieve a value rerating through the comprehensive dual closed-loop models. In 2023-24, the Company may usher in the recovery of earnings. Coupled with high dividends, its current valuation looks attractive. We predict the Company's ANP to be HK$2.2bn/3.4bn/3.7bn, corresponding to EPS forecasts of HK$0.92/1.42/1.55. Considering both the result of sum-of-the-parts (SOTP) valuation method and the Company's historical PE valuation, we set a target price of HK$9.0 out of prudence and initiate coverage with a “BUY” rating.