Investment positives

We initiate coverage on Sichuan Expressway Company Limited with an OUTPERFORM rating and a target price of Rmb6.85 for A-shares. We assign an OUTPERFORM rating and target price of HK$5.61 for H-shares.

Our valuations imply dividend yields of 4.5% and 4.7% for A-shares in 2025 and 2026, and 6.0% and 6.4% for H-shares in 2025 and 2026, based on the dividend yield valuation method. The company is the only toll road name in Sichuan province listed in the A-share and H-share markets.

Why an OUTPERFORM rating?

Core road assets in Chengdu and Chongqing, with strong

profitability. Supported by Shudao Investment Group, the company's road assets total about 900km. They are mainly radial or circular lines connecting Chengdu, the provincial capital, with key cities in the province. Most of these roads facilitate travel beyond Sichuan, extending towards Chongqing, Guizhou, and Yunnan. The company benefits from strong regional transportation demand. Its core road assets started operations early, and its investment cost is relatively low. The firm has achieved operational maturity, with GM averaging 52.8% in the past decade, which places its profitability among the highest in the industry.

Continued reinvestment in the main business; profit has growth

potential. The remaining toll collection period of the firm's core road assets is relatively short. The firm actively carries out reconstruction, expansion, and M&A to enhance its sustainable operation ability. 1) The reconstruction and expansion of the Chengdu-Leshan Expressway started in 2017, and the project is in the final stage. We expect the firm to raise toll rates and extend the toll collection period after the Chengdu-Leshan Expressway opens to traffic. 2) The firm has won the bid for the expansion project of the Chengdu- Ya'an Expressway. It will contribute about Rmb4.9bn, and the toll collection period is 29 years and 305 days. 3) The firm acquired the Chengdu Second Belt Expressway (west　　section) and signed a performance-based compensation clause.

According to corporate filings, the Chengdu Second Belt Expressway (west section) will contribute Rmb160mn of profit to the firm in 2025, which, combined with an estimated cumulative compensation of Rmb31.48mn over 2023-2024, should contribute high incremental profit in 2025.

High dividends and low valuation; dividend yield among the

highest in the industry. Securing shareholder returns is important for the company. According to its shareholder return plan for 2023- 2025, the firm aims to maintain a dividend payout ratio of at least 60%, representing a significant increase from previous years. The firm's 2024 dividend yield was 5.2%, already high in the toll road industry. Based on a 60% dividend payout ratio, the current stock price implies a dividend yield of 5.5% for 2025 and 5.8% for 2026, which we see as quite attractive.

How do we differ from the market? The market is concerned about the short toll collection period of the firm's core road assets. However, we

believe that the firm can effectively extend the remaining toll collection period and expand the scale of its toll road business through reconstruction, expansion, and M&A. In addition, the firm has high-quality road assets, and its earnings have growth potential and sustainability.

Potential catalysts: Reconstruction, expansion, and opening of Chengdu-Leshan Expressway; asset acquisition.

Financials and valuation

We expect the firm's EPS to be Rmb0.51 in 2025 and Rmb0.54 in 2026, implying a CAGR of 6.3% over 2024-2026. The average 2024 dividend yield of A-share expressway companies is 3.5%. Given the reconstruction and expansion of its core road assets, we assign the firm a risk premium.

Based on a dividend yield of 4.5%, our 2025 target price for A-shares is Rmb6.85, implying 13.3x 2025e and 12.7x 2026e P/E, offering 21.9% upside. The average 2024 dividend yield of H-share expressway companies is 5.7%. Considering the risk premium, we assign a 2025 target price of HK$5.61 for H-shares based on a 6% dividend yield, implying 10.0x 2025e and 9.4x 2026e P/E, offering 14.5% upside. We assign an OUTPERFORM rating to A-shares and H-shares.

Risks

Higher-than-expected capex; slower-than-expected economic growth; risks from diversified operations.