Resuming Coverage

Investment positives

We resume coverage of Anhui Expressway’s (AHE) H-shares and initiate coverage of the A-shares with OUTPERFORM ratings, and with target prices for the H-shares of HK$15.12 (implying 2025e and 2026e dividend yields of 5.0% and 5.6%), and for the A-shares of Rmb17.32 (implying 2025e and 2026e dividend yields of 4.0% and 4.4%). AHE is the only A-H duallisted toll road company in Anhui province.

Why an OUTPERFORM rating?

AHE’s road assets are located in key interprovincial transportation routes, with strong profitability and long toll collection periods. AHE's road assets are largely located in interprovincial junctions. Anhui province, a home market for AHE, connects eastern and western China while also linking the southern and northern regions. They are located near rivers and seas. Anhui province has a strong automobile industry, with robust demand for passenger and freight transport.

AHE's core road assets started operations many years ago, and had an average gross margin of 59.5% over 2014– 2024. They have had a long toll collection period following renovation and expansion projects.

Project reconstruction1, acquisition, and investment to facilitate sustainable growth. In the near term, we believe the acquisition of the Anhui section of the Fuzhou and Sixu expressways as well as the completed reconstruction of the Xuanguang and Guangci expressways2 could contribute incremental earnings. We believe the acquisition of a 7% stake in Shandong Hi-Speed Company Limited may boost AHE’s investment income by about Rmb300mn in 2026. In the medium and long term, the reconstruction of Gaojie Expressway as well as AHE’s investment in the construction of new roads could make the firm’s growth sustainable.

Attractive dividend yield. The firm guides a dividend payout ratio of at least 60% for 2025–2027. We estimate that its A-shares are trading at 2025e and 2026e dividend yields of 4.5%3 and 4.9%, both among the highest in the Ashare expressway sector; the H-shares are trading at 2025e and 2026e dividend yields of 5.4% and 6.0%, also among the highest in the H-share expressway sector.

How do we differ from the market? The market is concerned about the firm's debt-to-asset ratio, financial expenses, and cash flow. However, we believe the vehicle traffic on the reconstructed roads could increase. We think the firm has solid financing options.

Potential catalysts: Increases in vehicle traffic on the rebuilt roads; expansion in investment gains.

Financials and valuation

We expect the firm's EPS to be Rmb1.15 in 2025 and Rmb1.27 in 2026, implying a CAGR of 14.0% over 2024–2026. The average 2025e dividend yield of A-share expressway stocks is currently 4.5%. Given AHE's focus on expressways, its highquality assets, and strong growth potential, we believe the market should pay AHE a valuation premium.

The average 2025e dividend yield of H-share expressway stocks is currently 5.9%. We set our target prices for AHE’s Hshares at HK$15.12 (based on a 5% dividend yield), implying 12.0x 2025e and 10.8x 2026e P/E and offering 8.0% upside, and for the A-shares at Rmb17.32 (based on a 4% dividend yield), implying 15.0x 2025e and 13.6x 2026e P/E and offering 12.0% upside. We initiate coverage of AHE’s H-shares and Ashares with OUTPERFORM ratings.

Risks

Disappointing economic growth; negative surprises in impacts of road reconstruction; changes in toll collection policies; vehicle traffic diversion by new roads.