2Q19 results miss our forecast
Anhui Expressway announced that YoY revenue stayed flat atRmb1,468mn in 1H19, and net profit attributable to shareholders fell1% YoY to Rm548mn （Rmb0.33/sh）。 In 2Q19, net profit attributable toshareholders fell 10% YoY to Rmb259mn （vs. a rise of 8% YoY in1Q19）。 2Q19 results miss our estimates, due to a higher-thanexpectedrise in the road maintenance costs.
Toll road segment: Traffic volume grew steadily; toll revenues riseslightly; high maintenance costs weigh on gross profit. Toll revenuesrose 3% YoY, with gross profit falling 2% YoY. Gross margin dropped2ppt to 58%, on a marked YoY rise in road maintenance costs prior togovernment departmental inspections. Specifically, the HeningExpressway saw traffic volume and toll revenues drop 8% and 12%, asthey were affected by a construction project as traffic volume shiftedto other roads. Traffic volume and toll revenues on the GaojieExpressway rose 4% and 5%, thanks to improvements in the roadnetwork. The Xuanguan Expressway saw traffic volume and revenuesdecline 0.3% and 2%, as the firm halted services for trucks severalhours a day.
Trends to watch
ETC to cause less than 5% drop in 2019 and 2020 earnings. Truck andbus drivers that use electronic toll collection system （ETC） haveenjoyed 5% and 15% discounts in Anhui province. Thus, we believethat the increasing use of ETC will hurt earnings at Anhui Expressway.
We estimate that discounts offered to ETC users will cause a 1.4%drop in 2019 earnings and a 4% decline in 2020 earnings.
Financials and valuation
We trim our 2019 and 2020 EPS forecasts 4% and 2% to Rmb0.68（+0% YoY） and Rmb0.75 （+11% YoY） due to discounts offered to ETCusers and cost pressure on the firm. The stock is trading at 5.9x 2019eand 5.4x 2020e P/E, with 2019e and 2020e dividend yields of 6.2%and 6.9%. We maintain OUTPERFORM, but cut our target price 10%from HK$6.16 to HK$5.54, to reflect our lower earnings forecasts.
Our target implies 7x 2019e and 7x 2020e P/E, and offers 23% upside.
Risks: Hening Expressway project progress is slower than expected;effects of ETC discounts and removing toll collection booths arestronger than expected.