SHANDONG HI-SPEED(600350)：COVID-19 RESURGENCE WEIGHS ON 2022 EARNINGS;UPBEAT ON GROWTH OF TOLL ROAD BUSINESS

　　2022 results miss our expectations
　　Shandong Hi-speed announced its 2022 results: Revenue rose 14.1% YoY to Rmb18.49bn. Net profit attributable to shareholders fell 6.5% YoY to Rmb2.86bn. In 4Q22, revenue rose 3.2% YoY to Rmb6.40bn. Net profit attributable to shareholders fell 41.5% YoY to Rmb577mn. The firm's results missed our expectations as COVID-19 weighed on the firm's toll road business as well as truck toll cuts in 4Q22, and it recognized an estimated Rmb502mn loss from the transfer of its equity in Shandong Hi-Speed Jidong Development as a non-operating expense.
　　The firm paid a dividend of Rmb0.4/sh in 2022, implying a payout ratio of 67.6%.
　　Trends to watch
　　Impact of COVID-19 on the toll road business was relatively moderate, and the firm has completed the disposal of its real estate business. By business: 1） Road and bridge operation: The firm’s revenue from tolls fell 4.8% YoY to Rmb9.30bn in 2022. Specifically, revenue from Jiqing Expressway fell 8.5% YoY due to COVID-19 resurgence and truck toll cuts in 4Q22. Toll revenue from Jingtai Expressway grew 26.6% YoY thanks to the expansion and opening of the Jinan-Tai’an section. 2） Investment: In 2022, the firm’s investment income rose 78.5% YoY to Rmb1.74bn, mainly due to the disposal of the real estate business. 3） Rail and transit service: In 2022, revenue from this business reached Rmb4.43bn, and net profit rose 12.2% YoY to Rmb389mn. Specifically, full-year rail freight volume rose 27.2% YoY.
　　We believe the firm still has growth potential:
　　Continues to reinvest in main business: The firm has consolidated Luzhou Southeast Expressway and Qilu Expressway Company Limited into its financial statements since 2021. Meanwhile, the firm plans to renovate and expand its core road assets such as the Qihe-Jinan section of Jingtai Expressway and Jihe Expressway （controlled by Qilu Expressway）。 We believe that the expansion will enhance the capacity and service quality of the company's road assets, thereby increasing toll revenue. The company is located in Shandong, a major economic province, is backed by Shandong Hi-Speed Holdings Group, and manages high-quality road assets. We believe that the company's core business will continue to expand, and that its toll road business has notable growth potential.
　　Non-main businesses to boost profit: In addition to its main toll road business, the firm continues to expand its investment in the toll road value chain, as well as in the financial and environmental protection sectors, and seeks financial investment projects with reasonable returns to boost its earnings. For example, the firm acquired a 51% stake in Yikang Technology in 2021, which contributed about Rmb139mn to attributable net profit in 2022.
　　Financials and valuation
　　We maintain our 2023 earnings forecast and introduce our 2024 earnings forecast of Rmb3.75bn. The stock is trading at 8.4x and 7.9x 2023e and 2024e P/E. We maintain an OUTPERFORM rating and a target price of Rmb6.83, implying 9.3x 2023e and 8.8x 2024e P/E, offering 11.2% upside.
　　Risks
　　COVID-19 resurgence; progress of reconstruction and expansion projects slower than expected.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。