1Q25 results in line with our expectations China Merchants Expressway announced its 2024 and 1Q25 results:

In 2024, revenue rose 30.6% YoY to Rmb12.71bn, and attributable net profit fell 21.3% YoY to Rmb5.32bn. We attribute the firm’s revenue growth to the consolidation of China Merchants China Railway Holdings (CMCR Holdings). We believe its earnings declined due to a high base from one- off asset revaluation gains recorded in 2023. In 2024, the firm recorded Rmb0.57bn in asset disposal gains from the issuance of Bozhou-Fuyang REITs and made provisions of Rmb0.31bn for asset and credit impairment losses.

We believe the firm’s 2024 results missed our expectations, primarily due to a decline in toll revenue from increased free days and adverse weather conditions, as well as provisions for asset and credit impairment losses in 4Q24.

In 1Q25, revenue fell 7.2% YoY to Rmb2.8bn, mainly due to the deconsolidation of Bozhou-Fuyang Expressway from its financial statements. Attributable net profit rose 2.7% YoY to Rmb1.33bn thanks to cost and expense reduction, in line with our expectations.

Trends to watch Toll road business maintained solid operation in 1Q25; cost and

expense reduction effective. Data from the Ministry of Transport shows that truck traffic on expressways grew 4.1% YoY in 1Q25. We think the firm's toll road business may perform solidly given its nationwide road assets. In addition, listed expressway companies and road assets in which the firm holds stakes contributed investment income of Rmb1.18bn, up 4.6% YoY. The firm's operating cost fell 8.4% YoY in 1Q25 and its gross margin rose 0.8ppt. In 1Q25, the firm's financial expenses fell 21.5% YoY or Rmb98.34mn.

Toll road business expanding; long-term growth potential. In 2024,

the firm acquired the Road King Infrastructure China asset package and the remaining 40% stake in Hunan Yonglan Expressway, and increased its stake in Yuexiu Transport Infrastructure. As of end-2024, the firm managed 26 road assets and held stakes in 16 high-quality listed toll road companies. We believe the firm's continued expansion in the toll road sector will likely drive further earnings growth."

Solid dividend policy to ensure reasonable returns for shareholders.

According to the firm's shareholder return plan for 2022-2024, the annual dividend payout ratio should not be lower than 55% of net profit attributable to shareholders, after deducting distributions to holders of other equity instruments such as perpetual bonds. The firm proposed a dividend of Rmb0.417/sh for 2024, and we estimate dividend yields at 3.3% and 3.5% for 2025 and 2026. We believe the firm's dividend may continue to rise along with its earnings growth.

Financials and valuation

We leave our 2025 earnings forecast largely unchanged. We introduce our 2026 earnings forecast of Rmb5.80bn. The stock is trading at 16.2x 2025e and 15.3x 2026e P/E. We maintain an OUTPERFORM rating. Given the firm's solid dividend payout, we raise our TP 6.5% to Rmb14.40 (17.8x 2025e P/E and 16.9x 2026e P/E with 10.4% upside).

Risks

Disappointing economic growth and/or renovation and expansion.