1H25 results in line with our expectations

Sichuan Expressway announced its 1H25 results: Revenue fell 23.14% YoY to Rmb4,126mn, and net profit attributable to shareholders rose 19.93% YoY to Rmb837mn, in line with our expectations. In 2Q25, revenue fell 32.17% YoY to Rmb2.28bn, and net profit attributable to shareholders rose 24.2% YoY to Rmb381mn.

Trends to watch

Toll revenue falls slightly; expense reduction contributes to earnings. Toll revenue fell 2.25% YoY to Rmb2.27bn in 1H25. Toll revenue from core road assets Chengle Expressway and Chengyu Expressway rose 0.92% and 0.52% YoY. Toll revenue from Chengya Expressway fell 2.33% YoY, and that from Chengren Expressway declined 7.21% YoY, mainly due to the opening of the Renshou section of Tianfu Avenue and traffic diversion from the Chengyi high-speed rail and the Chengyi Expressway.

Toll revenue from the West Section of Chengdu Second Ring Expressway (Second Ring [Western] Expressway) decreased 6.09% YoY due to falling freight demand in neighboring areas. In 1H25, financial expenses fell 31.0% YoY and G&A expenses fell 14.8% YoY, with cost reduction and efficiency enhancement contributing to profit.

Continues to reinvest in main business; upbeat on growth potential. The expansion of Chengle Expressway, the firm’s core road asset, has entered its final stage, while Chengya Expressway has secured the expansion bid. We expect the upgrades to allow higher toll rates and longer tolling periods once the upgraded sections open to traffic.

In addition, the firm acquired Second Ring (Western) Expressway and signed a performance-based compensation clause. According to corporate filings, the Second Ring (Western) Expressway may contribute Rmb160mn in profit in 2025. Together with the projected cumulative compensation of Rmb31.48mn for 2023-2024, this represents a notable incremental contribution to the firm’s 2025 earnings.

High dividend and low valuation; dividend yield among the highest in the industry. The firm attaches great importance to shareholder returns, and its dividend payout ratio should not be lower than 60% according to its shareholder return plan for 2023-2025, a marked increase from the past. The firm's 2024 dividend yield stood at 6.4%, already among the highest in　　the highway sector. Based on a 60% dividend payout ratio, we estimate 2025 and 2026 dividend yields of 7.0% and 7.4%, which is attractive, in our view.

Financials and valuation

We maintain our 2025 and 2026 earnings forecasts. A-shares are trading at 10.9x 2025e and 10.4x 2026e P/E, and H-shares are trading at 8.6x 2025e and 8.1x 2026e P/E. For A-shares, we maintain an OUTPERFORM rating and TP of Rmb6.85, implying 13.3x 2025e P/E and 12.7x 2026e P/B, and offering 21.9% upside. For H-shares, we maintain an OUTPERFORM rating and our target price of HK$5.61, implying 10.0x 2025e P/E and 9.4x 2026e P/E with 16.4% upside.

Risks

Disappointing economic growth; higher-than-expected capex; risks related to business diversification.