1Q19 results in line with our expectations
Anhui Expressway （AHE） announced 1Q19 results. Revenue wasRmb750mn, up 3% YoY. Net profit was Rmb289mn or Rmb0.17 pershare, up 8% YoY, largely in line with our expectation of +5% YoY. Grossprofit increased 8% YoY and gross margin climbed 2.6ppt YoY.
Traffic of Hening fell 8 % YoY with revenue down 11% YoY due to theroad extension project. National Trunk 205, Lianhuo, Gaojie andGuangci benefited from improving road conditions （traffic volume+21%, +19%, -1%, and +7% YoY; revenue +27%, +27%, +7%, and +10YoY）。 Traffic of Ninghuai kept growing slowly due to traffic diversionfrom Suyang expressway （traffic volume flat YoY; revenue +1% YoY）。
Traffic growth of Xuanguang slowed because of the traffic controlduring the Spring festival （traffic volume +2% YoY; revenue +1% YoY）。
Traffic and revenue of the newly opened Ningxuanhang expresswayposted YoY growth of 48.0% and 34.5%.
Trends to watch
We expect single-digit earnings growth in full year 2019 based on thefollowing assumptions: 1） 1.3% growth in toll revenue as guided; 2）decline in labor cost due to change in operating mode; and 3） highermaintenance costs ahead of road inspections in 2020. We expectslower earnings growth in 2H19.
We suggest watch Hening’s progress （it will likely boost AHE’s earningsafter the road extension work in 2020）。
Given AHE’s low debt ratio and adequate cash on hand, we think it willlikely raise the dividend payout ratio after the reconstruction iscompleted.
Earnings forecast
We maintain our 2019 and 2020 EPS forecast of Rmb0.71 （+5% YoY）and Rmb0.77 （+8% YoY）。
Valuation and recommendation
The stock is trading at 6.5X 2019e P/E with 5.7% 2019e dividend yield.
We maintain our BUY rating based on its low valuation and a TP ofHK$6.16 （or 8x 2019e P/E, 18% upside）。
Risks
Traffic volume misses expectation; slower-than-expected extensionprogress; toll reduction for trucks.