What's new
　　According to Shenzhen International, on December 30, 2024, the Longhua Branch of the Shenzhen Bureau of Planning and Natural Resources announced that the land reserved for Phase I of the Southern China Logistics Park land preparation project (i.e., land parcel No.02-20-04) has been approved by the government of Longhua District, Shenzhen, and work will commence on the land supply. The announcement indicates that the firm is entitled to develop this land parcel. Subsequent development work will start after the land transfer procedures are completed.
　　Comments
　　Transformation of Southern China Logistics Park started; Phase I project launched. According to corporate filings, the Southern China Logistics Park project has the usage rights for about 109,000sqm and a gross floor area (GFA) of about 694,000sqm. The approved Phase I project covers about 22,000sqm, with a planned plot ratio of 5.8.
　　We estimate that the transformation of the Phase I project will generate after-tax land appreciation income of about HK$2.19bn, assuming a land price of Rmb23,900/sqm (based on the starting price of the land parcel A808-0025 next to the Southern China Logistics Park in Longhua, Shenzhen). Looking ahead, we estimate that this logistics park project will generate Rmb13.2-15.5bn in land appreciation and housing development income for the firm over the next six-to-eight years.
　　REITs removed from balance sheet in 1H24; toll road business recovered in 3Q24. In 1H24, revenue fell 4.5% YoY to HK$6.61bn, while net profit attributable to shareholders grew 609.1% YoY to HK$0.65bn. We attribute the rapid growth in 1H24 to HK$587mn of after-tax income from real estate investment trusts (REITs) and reduced FX losses.
　　In 2H24, we think the performance of the toll road and environmental protection businesses likely improved. In 3Q24, Shenzhen Expressway’s revenue fell 6.4% YoY to Rmb2.1bn, and attributable net profit slid 1.6% YoY to Rmb0.6bn. The decline in revenue and profit narrowed compared with 1H24. According to the monthly announcement of Shenzhen Expressway, toll revenue from road assets in which Shenzhen Expressway holds a controlling stake fell 2.9% YoY over October- November. We believe its profit is stabilizing.
　　Dividend policy stable; dividend yield attractive. The company has a stable dividend policy, with cumulative dividends of HK$15.65bn over 2013-2023 and an average dividend payout ratio of 51.0% in the past five years. Based on our earnings forecasts for 2024 and 2025 and assuming a dividend payout of 50%, the current price implies a dividend yield of 7.8% in 2024 and 10.3% in 2025, which is attractive.
　　Financials and valuation
　　We leave our 2024 and 2025 earnings forecasts unchanged (Shenzhen Expressway’s shareholding might be diluted after its private placement). We introduce our 2026 earnings forecast at HK$3.61bn. The stock is trading at 4.9x 2025e and 4.8x 2026e P/E. We roll valuation over to 2025e. Given the firm’s solid dividend policy, we raise our target price 23.3% to HK$9.38, implying 6.3x 2025e P/E, offering 29.4% upside. Maintain OUTPERFORM.
　　Risks
　　Slower-than-expected economic growth; impairment of logistics parks; disappointing housing sales.