1H18 results in line with expectation
Anhui Expressway announced 1H18 results: Revenue rose 4.96% YoY toRmb1.47bn. Net profit attributable to shareholders rose 5.96% YoY toRmb555.60mn, or Rmb0.335 per share. 2Q profit growth accelerated to+25% YoY, much better than -9% YoY in 1Q.
Toll road growth mixed, with passenger traffic volume +0.03% YoY and truckvolume +2.89% YoY. Toll road revenue was Rmb1.34bn, up 2.85% YoY. Grossprofit increased by 3.35% YoY to Rmb817mn and gross margin rose 0.33pptto 60.5%. By branch, Hening expressway traffic volume -5.87% with tollincome -6.15% mainly due to the extension project; Gaojie volume +9.24%with toll income +7.44%, and Xuanguang volume +11.21% with toll income+10.83%, both continuously benefited from Jiangsu & Zhejiang traffic volumetowards Wuhan & Guangzhou attracted by connection of the Xuanguang andNingxuanhang with Yanjiang expressways.
Trends to watch
Watch the expansion project of Hening expwy, which may extend itsconcession period by 17years. The project has finished 21% of the total costof Rmb6.4bn as of the end of 1H, a little slower than expected due to factorssuch as weather and material prices. Opening section by section afterconstruction can help prevent a sharp drop in revenue.
Ningxuanhang expwy: Liqiao-Xuancheng section enjoys rapid growth andXuancheng-Ningguo section has applied for extension of concession period.
Earnings forecast
We lower our 2018e and 2019e earnings forecasts by 8.7% and 5.7% fromRmb0.76 and Rmb0.80 per share to Rmb0.69 and Rmb0.75 due to thenegative influence of Hening expwy’s expansion on earnings.
Valuation and recommendation
The stock is trading at 5.2/4.8x 2018/19e P/E, with 6.7%/7.3% dividend yieldfor 2018/19e. We maintain BUY rating, but considering the adjusted earningsforecast and the sector-wide de-rating, we lower our TP 30.4% to HK$5.50（6.5x 2018e and 6.0x 2019e P/E）， 25% upside from the current price.
Risks
Traffic volume misses; slower-than-expected extension progress