Investment positives

We initiate coverage on Henan Zhongyuan Expressway Co., Ltd (Zhongyuan Expressway) with an OUTPERFORM rating and a target price of Rmb5.17, based on dividend yield valuation methodology. Our target price implies 2025e and 2026e dividend yields of 4.0% and 4.3%. The firm is the sole road investment and operation platform in Henan province.

Why an OUTPERFORM rating?

Zhongyuan Expressway, which connects east to west and north to south via important traffic arteries in Henan province, has high- quality road assets and solid fundamentals. It is the sole listed toll road platform in Henan province, and its road assets are mainly located in the Zhengzhou metropolitan area. The firm's toll revenue grew at a CAGR of 4.3% over 2015-2024. Its core road asset, the Beijing-Hong Kong-Macao Expressway (accounting for 56% of total toll revenue), is an important traffic artery in China’s expressway network that connects northern and southern China. Its revenue per km is higher than the industry average, and its profitability is strong.

In the near term, we expect Zhongyuan Expressway's toll revenue to recover in 2025 thanks to a low base in 2024. In the long term, we believe the remaining toll collection period for the firm's road assets will be lengthy, and the Zhengzhou-Luoyang Expressway will drive the firm’s growth after it opens to traffic in 2026.

Consolidating businesses to reduce burden on the firm; impairment risk relatively limited. The real estate business weighed on Zhongyuan Expressway's profit in the past three years. In 2024, the firm made Rmb220mn in provisions for inventory impairment losses for the real estate business. We believe its provision for inventory impairment has been sufficient, and the risk of further impairment is relatively limited. In the long term, the firm will gradually divest non-core businesses with no competitive advantages as well as inefficient subsidiaries and equity investments, in our view, to optimize resource allocation. We expect these efforts to help reduce the burden on the firm’s operations.

Dividend payout ratio has upside potential with low valuation for the firm and high dividend yield. According to its announcement, Zhongyuan Expressway plans to pay a dividend of Rmb0.17/sh in 2024, implying a dividend payout ratio of 43.4%. Its dividend yield was 4.0% in both 2023 and 2024, higher than the industry average, mainly due to a low valuation. According to the firm's plan, the dividend payout ratio will not be lower than 40% per annum in the next three years, increasing the visibility of its dividend policy. In addition, we see further upside in the firm's payout ratio compared with its peers.

How do we differ from the market? The market is concerned about the potential risks of Zhongyuan Expressway's real estate and financial businesses. However, we believe the firm is gradually focusing on the main toll road business and integrating and optimizing non-main business segments. We believe the firm is a high-quality, high-dividend name backed by sound operations, manageable risks, and visible dividend payouts.

Potential catalysts: Optimization of the real estate business; an increase in dividend payout ratio.

Financials and valuation

We forecast its 2025 and 2026 EPS at Rmb0.47 and Rmb0.51, implying a CAGR of 14.0%. The stock is trading at 9.8x 2025e and 9.1x 2026e P/E. We adopt the dividend yield method for valuation. The current average dividend yield of A-share-listed high-speed companies is 3.1% based on 2024 dividend per share (DPS). Considering Zhongyuan Expressway has a diversified business portfolio, we assign it a risk premium. Based on a dividend yield of 4%, we assign a 2025 target price of Rmb5.17, which implies 12.8x 2025e and 11.9x 2026e P/E and 4.0% 2025e and 4.3% 2026e dividend yields, offering 11.7% upside. We initiate coverage with an OUTPERFORM rating.

Risks

Risks related to business diversification; disappointing economic growth; higher-than-expected capex.