1Q24 results largely in line with our expectations

China Merchants Expressway announced its 1Q24 results: Revenue rose 49.1% YoY to Rmb3.02bn, and attributable net profit fell 4.1% YoY to Rmb1.29bn, largely in line with our expectations. The firm's revenue grew rapidly due to the consolidation of China Merchants China Railway Holdings.

Trends to watch

The firm's toll revenue may be under pressure in 1Q24. We mainly

attribute the YoY decline in 1Q24 profit to pressure on toll revenue growth, which resulted from 1) the impact of bad weather on bus travel in 1Q24; 2) a two-day increase in toll-free days during the 2024 Chinese New Year holiday; 3) a high base for travel built last year following the optimization of COVID-19 policies. We expect high-speed passenger transport to maintain steady growth in 2024 and freight transport to gradually recover as the economy improves quarter by quarter.

We expect the firm's earnings to maintain solid growth in

2024. According to the firm's announcement, it has completed the acquisition of Road King Expressway asset package, which we think can be consolidated in 2Q24. Road King (China) Infrastructure's net profit over January-July 2023 reached Rmb0.24bn, which should further boost the firm's investment income after its consolidation.

In addition, the firm continued to increase its stake in Yuexiu Transport Infrastructure and already held a 10% as of April 2, which may be accounted for under the equity method in the future, in our view. The firm's Bofu REITs project is progressing steadily, and we think the firm will book some value-added income if it is listed this year. Therefore, we expect the firm to grow steadily through organic growth and M&A.

Dividend policy stable; dividend per share to grow year by year.

According to the firm's 2022-2024 shareholder return plan, its annual dividend should not be lower than 55% of attributable net profit (after deducting distributions to holders of equity instruments such as perpetual bonds). We believe the firm attaches great importance to shareholder returns, and it will distribute 55% of the asset revaluation gains generated by the consolidation of China Merchants China Railway Holdings to　　investors in 2023. We expect the firm's dividend per share to grow steadily along with its earnings.

Financials and valuation

We maintain our 2024 and 2025 earnings forecasts. The stock is trading at 11.2x 2024e and 12.5x 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb13.52, implying 13.2x 2024e and 14.7x 2025e P/E, offering 18.0% upside.

Risks

Disappointing deconsolidation of REITs and/or economic growth.