20 Mar 2019 Securities Analysis

Hopewell Infrastructure (737 HK)

Focusing on infrastructure within Greater Bay Area

 The major overseas-listed platform under SIHC focusing on infrastructure within BUY (Initiation) Greater Bay Area. The Company operates GS Superhighway and Western Delta Route in the Greater Bay Area. As the major overseas-listed platform under SIHC (a major platform of technology and financial investment (科技金控平台) for ), the Company will Target Price HK$5.21 focus on infrastructure and correlated businesses within the Bay Area. Up/downside +25% Current Price HK$4.16  Average daily traffic of Western Delta Route will maintain double-digit growth. Hanbo Xu Western Delta Route was fully opened in 2013, and is still experiencing fast growth. In 2018, Tel: (852) 3761 8725 average daily traffic of Western Delta Route increased 10% YoY. Net profit contribution Email: [email protected] increased 34% YoY to RMB 162mn. The increase benefitted from the opening of HZM

Equity Research Bridge. As utilization of HZM Bridge enhances, we believe Western Delta Route will Wenjie Ding, PhD maintain double-digit growth in the future. We forecast average daily traffic of Western Tel: (852) 3900 0856/ Delta Route will grow 14%/12%/10% YoY in CY19/20/21E. (86) 755 2367 5597 Email: [email protected]  GS Superhighway will remain a stable source of revenue. GS Superhighway was Infrastructure Sector opened in 1997. In 2018, average daily traffic of GS Superhighway decreased 1% YoY. Net

profit contribution decreased 3% YoY to RMB 527mn. The decline was mainly due to traffic Mkt. Cap. (HK$mn) 12,820

diversion and macroeconomic headwinds. As GDP and car ownership of Avg. 3mths t/o (HK$mn) 2.46 52W High/Low (HK$) 4.68/3.76 Province grow, GS Superhighway is operating near full capacity. We believe that under the Total Issued Shares (mn) 3,081.7 premise of smooth traffic, GS Superhighway will remain a stable source of revenue, and see Source: Bloomberg low single-digit growth in the future. Given macroeconomic pressure in 2019, we forecast Shareholding Structure average daily traffic of GS Superhighway will grow 1%/3%/3% YoY in CY19/20/21E. Shenzhen Inv’t Holdings 71.83% China Vanke 9.90%  Monetization of land value along GS Superhighway - Xintang interchange. In 2018, the China Taiping 9.45% Source: HKEx Land Resources and Planning Bureau of Zengcheng issued notices, where it proposed to change the land use from for roads only to for both roads and Type II residential. Share performance Absolute Relative The land use right of Xintang interchange is owned by the GS Superhighway JV. The relevant 1-mth 4.3% 0.5% land parcel does not involve compensation for demolition. GS Superhighway JV can receive 3-mth 5.6% -7.3% 6-mth -4.1% -11.7% cash compensation if the government confirms to change land use planning of Xintang Source: Bloomberg interchange. 12-mth price performance (HK$) 737 HK HSI (rebased)  Initiate with BUY; TP of HK$ 5.21. Currently, the Company is trading at 2.25/2.24x 5.0 FY19/20E P/B, higher than peer average of 1.20/1.13x. We use SOTP valuation method to 4.5 estimate fair value of the Company. Firstly, we value two toll roads by DCF method (1) up to 4.0 3.5

1H CY27E FCF of GS Superhighway JV, (2) FCF of Western Delta Route JV, and (3) NAV of 3.0 property development in Xintang interchange. Our target price is HK$ 5.21, implying upside 2.5 2.0 potential 25%. Initiate with BUY. 3/2018 6/2018 9/2018 12/2018 3/2019

Source: Bloomberg Earnings summary (YE 31 Dec) CY17A CY18A CY19E CY20E CY21E Auditor: Deloitte Net toll revenue (RMB mn) 2,188 2,160 2,274 2,387 2,489 Net profit (RMB mn) 714 601 753 822 888 Web-site: www. hopewellhighway.com EPS (RMB) 0.23 0.20 0.24 0.27 0.29 EPS CHG (%) 35.2 (15.8) 25.2 9.2 8.0 PBR (x) 2.12 2.28 2.39 2.58 2.83 PER (x) 15.4 18.3 14.6 13.4 12.4 Yield (%) 6.5 5.5 6.8 7.5 8.1 ROE (%) 13.4 12.0 15.9 18.5 21.7 Source: Company, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 20 Mar 2019

Table of contents

INVESTMENT THESIS ...... 3

FOCUS CHARTS ...... 6

COMPANY PROFILE ...... 7

INVESTMENT SUMMARY ...... 11

The Company will benefit from the development of Greater Bay Area ...... 11

The Company benefits from economic growth in Guangdong Province ...... 13

Favorable policy environment ...... 14

GS Superhighway will remain a stable source of revenue ...... 15

Western Delta Route will become new growth driver ...... 17

Monetization of land value along GS Superhighway - Xintang interchange ...... 19

INDUSTRY ANALYSIS...... 20

FINANCIAL ANALYSIS ...... 22

FINANCIAL STATEMENTS ...... 26

VALUATION ...... 28

KEY INVESTMENT RISKS ...... 30

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2 20 Mar 2019

Investment thesis

The major overseas-listed platform under SIHC focusing on infrastructure within the Greater Bay Area

The Company operates roads and related infrastructure projects of strategic importance in Guangdong Province in PRC, and in particular the Delta (PRD) region. Currently, the Company operates GS Superhighway, and Western Delta Route via two JVs.

Shenzhen Investment Holdings Co. Limited (SIHC) is the ultimate parent company of the Company, now possessing 71.83% shareholding of the Company. SIHC is a major platform of technology and financial investment (科技金控平台) for Shenzhen.

The Board proposed to change company name to “Shenzhen Investment Holdings Bay Area Development Company Limited”. As the major overseas-listed platform under SIHC, the Company will focus on infrastructure and correlated businesses within the Bay Area. We think name change and business scope expansion will expose the Company to vast development opportunities stimulated by the burgeoning Greater Bay Area.

The Company will benefit from the development of Greater Bay Area The Company’s two expressways lie at the heart of the Greater Bay Area. The GS Superhighway is the main expressway connecting , and Shenzhen with . The Western Delta Route runs from Guangzhou, , to , and its southern end is connected to the HZM Bridge. It not only is the solely main expressway between the city centers of Guangzhou and Zhuhai, but also offers convenient access to , Macao and Hong Kong.

Cities in the Greater Bay Area will benefit from policy support, R&D investment, and regional economic integration. With the implementation of “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area” realized, we believe cities in the Greater Bay Area will see GDP growth and population concentration.

The Company benefits from economic growth in Guangdong Province From 1995 to 2017, GDP of Guangdong Province increased at CAGR of 13.1%, to RMB 8,971bn. Car ownership closely follows GDP growth. During the same period, car ownership in Guangdong increased at CAGR of 13.6%, reaching 18.9mn. Most of the increase in car ownership came from passenger vehicles. Share of passenger vehicles increased from 39.0% in 1995 to 89.3% in 2017.

The Company benefited from the increase in car ownership in Guangdong. Average daily traffic volume of GS superhighway increased from 93,000 vehicles in 2013 to 102,000 in 2018, representing a CAGR of 1.9%. During the same period, average daily traffic volume of Western Delta Route increased from 28,000 to 54,000 vehicles, representing a CAGR of 14.1%.

Favorable policy environment On 20 Dec 2018, Ministry of Transport published “the Regulation on the Administration of Toll Roads (Revised Draft)” (《收费公路管理条例（修订草案）》) and the "Highway Law (Draft Amendment)" (《公路法修正案（草案）》).

The above Drafts suggested: (1) to attract private capital, concession period can exceed 30 years for toll road projects with large initial investment and long payback period. (2) Compensation for losses due to policies such as early termination, toll reduction and exemption shall be made to toll road operator. (3) Operators could manage toll roads after the

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3 20 Mar 2019 expiration of concession period. We think the above revision improves investment environment and promotes industry development.

GS Superhighway will remain a stable source of revenue From 2001 to 2018, average daily traffic of GS Superhighway increased at CAGR of 6.6%, reaching 102,000 vehicles. In 2018, average daily traffic of GS Superhighway decreased 1% YoY. Net profit contribution decreased 3% YoY to RMB 527mn. The decline was mainly due to traffic diversion and macroeconomic headwinds. As GDP and car ownership of Guangdong Province grow, GS Superhighway is operating near full capacity. We believe that under the premise of smooth traffic, GS Superhighway will remain a stable source of revenue.

Western Delta Route will become new growth driver From 2014 to 2018, average daily traffic of Western Delta Route increased at CAGR of 14.1%, reaching 54,000 vehicles. In 2018, average daily traffic of Western Delta Route increased 10% YoY. Net profit contribution increased 34% YoY to RMB 162mn. The increase benefitted from opening of HZM Bridge, whose utilization will grow and drive traffic growth for Western Delta Route.

Monetization of land value along GS Superhighway - Xintang interchange On 29 May 2018 and 20 July 2018, the Land Resources and Planning Bureau of Zengcheng District issued notices, where it proposed to change the land use from for roads only to for both roads and Type II residential.

The land use right of Xintang interchange is owned by the GS Superhighway JV. The relevant land parcel does not involve compensation for demolition. GS Superhighway JV can receive cash compensation if the government confirms to change land use planning of Xintang interchange.

Financial analysis

Average daily traffic of GS Superhighway will remain stable GS Superhighway was opened in 1997. As a mature road, we believe that under the premise of smooth traffic, GS Superhighway will only see low single-digit growth in the future. Given macroeconomic pressure in 2019, we forecast average daily traffic of GS Superhighway will grow 1%/3%/3% YoY in CY19/20/21E.

Average daily traffic of Western Delta Route will maintain double-digit growth Western Delta Route was fully opened in 2013, and is still experiencing fast growth. As utilization of HZM Bridge enhances, we believe Western Delta Route will maintain double-digit growth in the future. We forecast average daily traffic of Western Delta Route will grow 14%/12%/10% YoY in CY19/20/21E.

Net toll revenue will grow at a slower pace than average daily traffic Since toll rate of passenger vehicles is lower than that of trucks, as share of passenger vehicles increases, average daily toll revenue will grow at a slower pace than average daily traffic. We forecast net toll revenue of GS Superhighway will increase 1.0%/2.1%/1.8% YoY, reaching RMB 1,475/1,507/1,534 mn in CY19/20/21E. By the same token, we forecast net toll revenue of Western Delta Route will increase 14.1%/10.2%/8.5% YoY, reaching RMB 799/880/955mn.

We forecast net profit of the Company will reach RMB 753/822/888mn, and ROE will increase to 15.9%/18.5%/21.7% in CY19/20/21E.

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Valuation

Initiate with BUY; TP of HK$ 5.21; Upside potential 25% Currently, the Company is trading at 2.25/2.24x FY19/20E P/B, higher than peer average of 1.20/1.13x. We use SOTP valuation method to estimate fair value of the Company. Firstly, we value two toll roads by DCF method (1) up to 1H CY27E FCF of GS Superhighway JV, (2) FCF of Western Delta Route JV, and (3) NAV of property development in Xintang interchange. Our target price is HK$ 5.21, implying upside potential 25%. Initiate with BUY.

Key investment risks

Macroeconomic headwinds weigh on highway transportation demand In 2019, we forecast GDP growth to gradually slow down to 6.3% YoY due to modest domestic consumption and investment growth, trade tensions, and etc. The Guangdong provincial government has also lowered its GDP growth target to 6.0%-6.5% YoY in 2019.

Uncertainties related to monetization of land value The Company is actively working with the Transportation Bureau with regard to change of land use of Xintang interchange. However, it is uncertain when exactly the monetization will realize. Thus, we did not factor in relevant cash compensation in our model.

More passenger transportation may switch to railway Since more high-speed railway and inter-city express railway network are being built up in the Greater Bay Area, e.g. Guangzhou–Dongguan–Shenzhen intercity railway, and conveniently connected to local public transportation, we do observe that passengers are switching to railway.

Traffic diversion from newly opened roads According to the 13th Five-Year Plan for Transportation System in Guangdong Province, highway mileage will amount to 11,000 kilometers in 2020 from 9,100 kilometers in 2018. Although most of the new highways will be built outside the core area where the Company operates, some planned highways and roads will divert traffic from the Company’s existing two highways.

Traffic diversion from existing roads due to toll discount As an industry-wide response to the government’s call to lower the costs of the logistics industry, some of the highways controlled by state-owned enterprises in Guangdong Province successively offered toll discount for trucks, so as to encourage more trucks to use the more efficient transportation network of expressways. Implementation of the toll discount will have a negative impact on the Company’s highway business.

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Focus charts

Figure 1: We forecast average daily traffic of GS Figure 2: We forecast average daily traffic of Western Superhighway will grow 1%/3%/3% YoY in Delta Route will grow 14%/12%/10% YoY in CY19/20/21E CY19/20/21E

Source: Company, CMBIS estimates Source: Company, CMBIS estimates

Figure 3: We forecast net toll revenue of GS Figure 4: We forecast net toll revenue of Western Superhighway will increase 1.0%/2.1%/1.8% YoY in Delta Route will increase 14.1%/10.2%/8.5% YoY in CY19/20/21E CY19/20/21E

Source: Company, CMBIS estimates Source: Company, CMBIS estimates

Figure 5: We forecast share of results of two Figure 6: We forecast the Company’s interests in two expressways will grow 23%/9%/8% YoY in JVs will be RMB 4,340/3,859/3,376mn in CY19/20/21E CY19/20/21E

Source: Company, CMBIS estimates Source: Company, CMBIS estimates

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Company profile

Company background

Operates two strategic highways in Pearl River Delta The Company’s primary business is to initiate, promote, develop and operate strategically important roads, tunnels, bridges and related infrastructure projects in Guangdong Province in PRC, and in particular the Pearl River Delta (PRD) region bordering Hong Kong. Currently, the Company has investments in JV of:

 The Guangzhou-Shenzhen Superhighway (GS Superhighway), and  Western Delta Route

All the existing projects are strategic components or links in the PRD’s developing highway network, and are held through Sino-foreign co-operative joint ventures.

Acquired by Shenzhen Investment Holdings Co. Limited in Apr 2018 The Company was listed on the main board of Hong Kong Stock Exchange in Aug 2003. In Oct 2012, it began to offer RMB-traded shares (80737 CH) under the “Dual Tranche, Dual Counter” model. In Apr 2018, Shenzhen Investment International Capital Holdings Infrastructure Co., Ltd (SIICHIC, a wholly owned subsidiary of Shenzhen Investment Holdings Co. Limited (SIHC)) acquired the Company from Hopewell Holdings Limited (54 HK, NR), at HK$4.80 per share. SIHC became the ultimate parent company of the Company. SIHC now holds 71.83% of the Company’s shares, followed by two strategic investors Vanke (9.90% of shares at HK$4.80 per share, introduced in Jul 2018) and Taiping (9.45% of shares at HK$4.80 per share, introduced in Aug 2018).

Figure 7: Shareholding structure of the Company

Shenzhen Invest- Other public China Vanke China Taiping ment Holdings shareholders 9.90% 71.83% 9.45% 8.82%

Hopewell Infrastructure (737 HK)

45% 50%

GS Superhighway JV Western Delta Route JV

Source: Company, CMBIS Note: profit sharing ratio in GS Superhighway JV decreased from 50% to 48% in 1 Jul 2007, and further decreased to 45% on 1 Jul 2017.

Strong shareholder background and support

SIHC - the major platform of technology and financial investment (科技金控平台) for Shenzhen SIHC, wholly owned by the State-owned Assets Supervision and Administration Commission of Shenzhen (Shenzhen SASAC), is the largest municipal SOE in Shenzhen in terms of total asset (RMB 536bn as of 30 Sep 2018) and operates in a variety of sectors, such as financial services, science and technology parks, emerging industries and high-end services industries. According to the reform plan rolled out in Oct 2018, SIHC aims to become a major platform of technology and financial investment (科技金控平台) for Shenzhen.

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Figure 8: SIHC’s total asset reached RMB 536bn as of 30 Sep 2018

Source: SIHC, CMBIS

Six major business segments SIHC has six major business segments: financials, modern services, construction and real estate, transportation and logistics, manufacturing and trade, and others. In 2017, revenue from financials/modern services/construction and real estate amounted to RMB 12.8/10.6/16.6bn, representing 27.2%/22.5%/22.5% of SIHC’s total revenue. Revenue from transportation and logistics/manufacturing and trade/others reached RMB 8.6/3.8/0.7bn, representing 18.2%/8.1%/1.5% of total revenue.

Figure 9: SIHC has six major business segments Figure 10: 2017 Revenue contribution by business segments

Source: SIHC, CMBIS Source: SIHC, CMBIS

34 subsidiaries and 7 listed platforms as of YE17 As of YE17, SIHC has 34 subsidiaries and holds interests in 13 companies. Among these companies, 7 are public companies:

 Shenzhen International Holdings Limited (152 HK) is principally engaged in the investment, construction and operation of logistic infrastructure facilities in the Pearl River Delta, the Yangtze River Delta and the Pan-Bohai Rim in the PRC.  Guosen Securities Co., Ltd (002736 CH) is a national integrated securities company.  ShenZhen Special Economic Zone Real Estate & Properties Group Co., Ltd (000029 CH) is mainly engaged in real estate development and operation. Its investment centers are located in Shenzhen and cover all major cities in China.  Shenzhen Property Development (Group) Company Limited (000011 CH) has a diversified business structure including real estate development, property management, housing asset management, catering services, warehousing, and engineering supervision.

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 Shenzhen Tongchan Group Co., Ltd (002243 CH) specializes in plastic packaging and glass bottle packaging. It is the preferred packaging supplier for major international brands in the cosmetics industry and the beer industry. It also engages in investment in listed companies, as well as construction and operation of industrial parks. The company is currently integrating resources to promote transformation and upgrading to strategic emerging industries, and is actively creating innovative and entrepreneurial incubators.  Shenzhen Textile (Holdings) Co., Ltd (000045 CH) In recent years, the company has concentrated on developing polarizers for LCDs, a high-tech industry with independent intellectual property rights and broad market prospects. It has successfully transformed from the traditional textile and garment processing industry into the flat panel display industry.  Telling Telecommunication (000829 CH) is mainly engaged in communication product marketing services and mobile internet services. Its business integrates internet marketing, mobile internet, mobile communications, lottery and other services.

The main Hong Kong listed platform of SIHC Compared with the above listed platforms, the Company is specialized in infrastructure development and operation in Greater Bay Area, and is the main platform listed in Hong Kong (SIHC holds 45.143% of Shenzhen Int’l through Ultrarich International Limited). We believe the cooperation between the Company and SIHC is mutually beneficial, and leaves space for further strategic arrangements.

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Figure 11: As of YE17, SIHC has 34 subsidiaries and holds interests in 13 companies Subsidiaries (34 companies) Industry/business Shareholding Financials Guosen Securities Co., Ltd Securities industry 33.5% Modern services Shenzhen City Construction Development (Group) Company Property mgmt and leasing 100.0% Shenzhen Property Development (Group) Company Limited Property mgmt and leasing 63.8% Shenzhen Shenfubao (Group) Company Property mgmt and leasing 100.0% Shenzhen Toukong Property Management Limited Company Property mgmt and leasing 100.0% Shenzhen Toukong Property Development Limited Company Property mgmt and leasing 100.0% Shenzhen High-technology Investment Guarantee Co., Ltd Guarantee institutions 41.8% Shenzhen SME Credit Financing Guarantee Group Co., Ltd Guarantee institutions 74.5% Shenzhen Talent Group Co., Ltd Service industry 100.0% Shenzhen Municipal Design & Research Institute Limited Company Service industry 100.0% Shenzhen International Bidding Limited Company Service industry 100.0% Shenzhen Etop Information Corp. Service industry 60.0% Shenzhen City Traffic Planning Design Research Center Service industry 40.0% Shenzhen Water Planning Institute Service industry 50.0% Shenzhen Transportation Design & Research Institute Co., Ltd Service industry 100.0% Shenzhen Convention & Exhibition Center Service industry 100.0% Construction and real estate Shenzhen Jian'an (Group) Company Limited Construction industry 99.8% Shenzhen Special Economic Zone Real Estate & Properties Group Co., Ltd Real estate industry 63.6% Shenzhen Property Development (Group) Company Limited Real estate industry 63.8% Shenzhen City Construction Development (Group) Company Real estate industry 100.0% Transportation and logistics Shenzhen International Holdings Logistics and toll roads 44.2% Shenzhen Transportation Service Center Transportation industry 100.0% Manufacturing and trade Shenzhen Tongchan Group Co., Ltd Manufacturing industry 100.0% Shenzhen Textile (Holdings) Co., Ltd Manufacturing industry 45.8% Science and technology parks and others Shenzhen Bay Technology Development Co., Ltd Construction and operation 100.0% China Technology Kaifayuan Entrepreneurial incubation 100.0% Shentou Education Education industry 100.0% Shenzhen Shentou Culture Investment Co., Ltd Trade 100.0% Shenzhen Sports Center Operation Management Co., Ltd Sports service 100.0% Shenzhen Information Pipeline Co., Ltd Telecommunication pipe mgmt 100.0% Shenzhen Shentou Environment Technology Co., Ltd Environmental protection 100.0% Shenzhen Experimental Preschool Education Group Co., Ltd Preschool industry 100.0% Hebei Shentou Investment Development Co., Ltd. Business service industry 100.0% Guoren P&C Insurance industry 41.0%

Other invested companies (13) Industry/business Shareholding Ping An Insurance Insurance industry 5.27% Bank of Communications Banking industry 0.01% Guotai Junan Securities Securities industry 8.18% Shenzhen Guangju Energy Co., Ltd Electric power industry 0.14% China Southern Asset Management Fund 30.00% Shenzhen Universe Group Concrete industry 8.91% Zhongjian Group Nanfang Electronic Product Testing (Shenzhen) Co., Ltd Testing and certification 40.00% China Merchants Life Insurance Insurance industry 15.00% China State-owned Capital VC Co., Ltd. Investment mgmt 15.69% Kunpeng Capital Fund 25.00% China Merchants PingAn AMC Investment mgmt 8.00% Guotai Junan Investment Management Investment mgmt 11.48% Telling Telecommunication Telecommunication 17.40% Source: SIHC, CMBIS

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Investment summary

The Company will benefit from the development of Greater Bay Area

The Company operates two strategic expressways - the GS Superhighway, and the Western Delta Route. The GS Superhighway is the main expressway connecting Guangzhou, Dongguan and Shenzhen with Hong Kong. The Western Delta Route connects Guangzhou, Foshan, Zhongshan and Zhuhai. It is not the solely main expressway between the city centers of Guangzhou and Zhuhai, but also offers convenient access to Hengqin, Macao and Hong Kong.

Figure 12: The Company’s two expressways lie at the heart of the Greater Bay Area

Source: Company, CMBIS

The Greater Bay Area is one of the most open and economically vibrant regions in China The Guangdong-Hong Kong-Macao Greater Bay Area (Greater Bay Area) is one of the most open and economically vibrant regions in China. It consists of Hong Kong, Macao as well as the municipalities of Guangzhou, Shenzhen, Zhuhai, Foshan, , Dongguan, Zhongshan, and in Guangdong Province, covering a total area of 56,000 square kilometers with a combined population of approximately 70 million at the end of 2017.

Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area According to “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area” (the Outline), by 2022, the framework for an international first-class bay area that is highly innovative with an optimized industrial structure should essentially be formed. By 2035, the Greater Bay Area shall become an economic system mainly supported by innovation, with its economic and technological strengths vastly increased.

Specifically, development of Greater Bay Area will build on the four core cities of Hong Kong, Macao, Guangzhou and Shenzhen as core engines:

- Hong Kong will consolidate and enhance its status as international financial, transportation and trade center as well as an international aviation hub, strengthen its status as a global offshore RMB business hub, and promote the development of high-end and high value-added financial, commercial and trading, logistics and professional services.

- Macao will develop into a world-class tourism and leisure center and a commerce and trade cooperation service platform between China and Lusophone countries.

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- Guangzhou will leverage its leading function as a national core city and an integrated gateway city, strengthen its functions as an international commerce and industry center and integrated transport hub, enhance its function as technological, educational and cultural centers, and develop into a global metropolis.

- Shenzhen will leverage its leading role as a special economic zone, a national economic core city and a national innovation city, expedite its transformation into a modern and international city, and strive to become a capital of innovation and creativity with global influence.

Also, development of Greater Bay Area will build on cities of Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing as key node cities:

- Foshan will develop an industrial belt for advanced equipment manufacturing on the west bank of the Pearl River spearheaded by Zhuhai and Foshan, launch pilot projects for integrated reform in manufacturing transformation and upgrading, cooperate with Hong Kong in offshore trading, and promote cooperation in high-end services among Guangdong, Hong Kong and Macao.

- Dongguan will develop a globally influential and competitive cluster of world-class high-end manufacturing industries, such as electronic communications, on the east bank of the Pearl River with Shenzhen and Dongguan as its core. It will also cooperate with Hong Kong in the development of the Dongguan Binhaiwan New District, form a cluster of headquarters of high- end manufacturing industries, develop modern service industries, and develop a R&D base for strategic emerging industries.

- Zhongshan will take forward innovation in biomedical technologies, promote in-depth cooperation with Macao in economic, social and cultural aspects.

- Zhuhai will set up general aviation demonstration zone, study and explore the development of a Macao-Zhuhai cross-boundary financial cooperation demonstration zone, and take forward the Demonstrative Functions of Hengqin of Zhuhai for In-depth Cooperation among Guangdong, Hong Kong and Macao.

In summary, cities in the Greater Bay Area will benefit from policy support, R&D investment, and regional economic integration. As the Outline realizes, we believe the cities in the Greater Bay Area will see GDP growth and population concentration.

Change of company name to focus on infrastructure and correlated businesses within the Bay Area in the future The Board proposed to change company name to “Shenzhen Investment Holdings Bay Area Development Company Limited”. As a major overseas-listed platform under Shenzhen Investment Holdings Company Ltd (SIHC), the Company will focus on infrastructure and correlated businesses within the Bay Area in the future. We think name change and business scope expansion will expose the Company to vast development opportunities stimulated by the burgeoning Bay Area.

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The Company benefits from economic growth in Guangdong Province

GDP and car ownership of Guangdong Province increased at CAGR of 13.1% and 13.6%, 1995-2017 From 1995 to 2017, GDP of Guangdong Province increased at CAGR of 13.1%, to RMB 8,971bn. Car ownership closely followed GDP growth. During the same period, car ownership in Guangdong increased at CAGR of 13.6%, reaching 18.9mn. Most of the increase in car ownership came from passenger vehicles. Share of passenger vehicles increased from 39.0% in 1995 to 89.3% in 2017.

Figure 13: Car ownership closely followed GDP Figure 14: Most of the increase in car ownership in growth Guangdong came from passenger vehicles

Source: Wind, CMBIS Source: Wind, CMBIS

Traffic increases as car ownership increases The Company benefited from the increase in car ownership in Guangdong. From 2013 to 2017, average daily traffic volume of GS superhighway increased from 93,000 to 103,000 vehicles. During the same period, average daily traffic volume of Western Delta Route increased from 28,000 to 49,000 vehicles.

To gauge the relationship between economic growth and traffic volume, we regressed average daily traffic of GS superhighway and Western Delta Route each against key enterprise manufacturing PMI in Guangzhou Province. Our findings suggest that 1ppt change in key enterprise manufacturing PMI in Guangzhou would increase traffic of GS superhighway by 3.5%, and would increase traffic of Western Delta Route by 4.1%.

Figure 15: The Company benefited from the increase Figure 16: Movements of economic growth and traffic in car ownership in Guangdong volume

Source: Wind, Company, CMBIS Source: Wind, Company, CMBIS

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Favorable policy environment

On 20 Dec 2018, Ministry of Transport published “the Regulation on the Administration of Toll Roads (Revised Draft)” (《收费公路管理条例（修订草案）》).

Several problems with the current Regulation include: (1) According to the “National Highway Network Plan (2013-2030)”, China's highway network will still be in a critical period of construction in the next 5-10 years, with new highways reaching midwest and mountainous regions. With increasing construction cost and declining project revenue, and given current toll rates and concession periods, many toll road projects are difficult to breakeven, resulting in a weak willingness of private capital to invest.

(2) Current toll rates lag behind the rapid development of toll roads, resulting in loss expansion and the debt accumulation. According to the 2017 National Toll Road Statistical Bulletin, debt balance of national toll roads increased RMB 429bn YoY to RMB 5,284bn. Revenue of national toll roads was RMB 513bn, while expenses was RMB 916bn, meaning a loss of RMB 403bn.

(3) After 30 years of rapid development, the highway network has been improving, and maintenance work is getting heavier. Currently, maintenance of toll roads is funded by toll revenue, while maintenance of other roads is funded by fuel tax, which is insufficient to meet maintenance needs. According to the current Regulation, toll roads will immediately fall into the predicament of "no money to maintain" after concession period ends.

Accordingly, the Revised Draft attempts to solve the above problems: (1) Concession period is determined according to the reasonable-return principle, generally be 30 years. To attract private capital, concession period can exceed 30 years for toll road projects with large initial investment and long payback period. Reassessment of concession period is possible for toll road expansion and reconstruction.

(2) Compensation for losses due to policies such as early termination, toll reduction and exemption shall be made to toll road operator, by extending concession period, subsidies, or in other forms.

(3) Meanwhile, the "Highway Law (Draft Amendment)" (《公路法修正案（草案）》) no longer specifies that toll collection right is managed by traffic authorities once concession period expires. It leaves space for operators to manage toll roads after the expiration of concession period.

Overall speaking, we think the above revision improves investment environment and promotes industry development.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 14 20 Mar 2019

GS Superhighway will remain a stable source of revenue

In 2018, share of results of joint ventures amounted to RMB 684mn, where GS Superhighway contributed RMB 527mn (76%), while Western Delta Route contributed RMB 162mn (23%).

Figure 17: Share of results of joint ventures in 2018

Source: Company, CMBIS

Facts about GS Superhighway The GS Superhighway is the main expressway connecting the PRD region’s three major cities - Guangzhou, Dongguan and Shenzhen with Hong Kong. It is 122.8km long, with a total of 6 lanes in dual directions, except for certain sections being 10 lanes. Concession period started from Jul 1997, and ends in Jun 2027. Profit sharing ratio is 50% for the first 10 years, 48% for the second 10 years, and 45% for the final 10 years.

Expanded in 2003, 2011 and 2012 In Jul 1994, the GS Superhighway was opened to traffic. In 2003, the section between Fuyong and Hezhou interchange of GS Superhighway was widened from a total of 6 to 8 lanes in dual directions. In 2012, it was further widened to 10 lanes. In 2011, the section between Wudianmei and Taiping interchange of GS Superhighway was widened from a total of 6 to 10 lanes in dual directions.

Figure 18: Location of GS Superhighway

Source: Company, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 15 20 Mar 2019

Historical traffic growth of GS Superhighway was 6.6% per annum in 2001-2018 From 2001 to 2018, average daily traffic of GS Superhighway increased at CAGR of 6.6%, reaching 102,000 vehicles. In 2008, due to the global economic downturn, the growth of the imports and exports of Guangdong experienced a significant slowdown. As a result, average daily traffic of GS Superhighway decreased 9.3% YoY. In 2014, average daily traffic of GS Superhighway decreased 6.1% YoY. In addition to the diversion impact from the full opening of the Coastal Expressway, the GS Superhighway was also affected by the traffic diversion measures temporarily adopted by the police along the section from Huocun to Guangdan from 10 Sep to 24 Oct 2014 when the westbound of the Guangzhou Northern Ring Road was closed for maintenance.

Figure 19: Average daily traffic increased at CAGR of Figure 20: Average daily traffic breakdown by vehicle 6.6%, 2001-2018 type

Source: Company, CMBIS Source: Company, CMBIS

Mild traffic decline in 2018 In 2018, average daily traffic of GS Superhighway decreased 1% YoY while average daily revenue decreased 3% YoY to RMB 9.15mn. Net profit contribution decreased 3% YoY to RMB 527mn. The decline was due to (1) traffic diversion from Yanjiang Expressway, which offered 50% toll discount for trucks; (2) highway network upgrading; (3) impact of Typhoon Mangkhut; (4) traffic diversion from roads newly opened near the GS Superhighway; (5) macroeconomic headwinds.

Figure 21: Contribution from GS Superhighway (YE 31 Dec) CY17 CY18 YoY Jul-Dec 17 Jul-Dec 18 YoY GS Superhighway Average Daily Toll Revenue (RMB' 000) 9,419 9,154 -2.8% 9,723 9,242 -4.9% Avg Daily Full-Length Equivalent Traffic (No. of vehicles' 000) 103 102 -1.0% 106 103 -2.8% Source: Company, CMBIS

GS Superhighway will remain a stable source of revenue GS Superhighway was opened in 1994. As GDP and car ownership of Guangdong Province grow, GS Superhighway is operating near full capacity. We believe that under the premise of smooth traffic, GS Superhighway will remain a stable source of revenue, and we forecast low single-digit growth for GS Superhighway in the future.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 16 20 Mar 2019

Western Delta Route will become new growth driver

Facts about Western Delta Route The Western Delta Route connects Guangzhou, Foshan, Zhongshan and Zhuhai. It is the only main expressway between the city centers of Guangzhou and Zhuhai, and offers the most convenient access to Hengqin, Macao and Hong Kong. It is 97.9km long, with a total of 6 lanes in dual directions. It was fully opened in Jan 2013. Concession period of Phase I/II/III ends in Sep 2033/ Jun 2035/Jan 2038. Profit sharing ratio is 50%.

Figure 22: Location of Western Delta Route

Source: Company, CMBIS

Western Delta Route records double-digit growth From 2014 to 2018, average daily traffic of Western Delta Route increased at CAGR of 14.1%, reaching 54,000 vehicles. In 2018, average daily traffic of Western Delta Route increased 10% YoY while average daily revenue increased 10% YoY to RMB 3.95mn. Net profit contribution increased 34% YoY to RMB 162mn. The increase benefitted from opening of HZM Bridge, whose utilization will grow and drive traffic growth for Western Delta Route.

Figure 23: Contribution from Western Delta Route (YE 31 Dec) CY17 CY18 YoY Jul-Dec 17 Jul-Dec 18 YoY Western Delta Route Average Daily Toll Revenue (RMB' 000) 3,593 3,952 10.0% 3,804 4,222 11.0% Avg Daily Full-Length Equivalent Traffic (No. of vehicles' 000) 49 54 10.0% 52 58 11.5% Source: Company, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 17 20 Mar 2019

Figure 24: Average daily traffic increased at CAGR of Figure 25: Average daily traffic breakdown by vehicle 14.1%, 2014-2018 type

Source: Company, CMBIS Source: Company, CMBIS

Western Delta Route will become new growth driver Western Delta Route was fully opened in 2013, and is still experiencing fast growth. As utilization of HZM Bridge enhances, we believe Western Delta Route will maintain double-digit growth in the future. Moreover, it is expected that the West Route JV will be able to distribute dividend to the Company starting from 2020 at the earliest.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 18 20 Mar 2019

Monetization of land value along GS Superhighway - Xintang interchange

In May 2018, government in Zengcheng District of Guangzhou initiated works to change the nature of a parcel of land at Xintang interchange of the GS Superhighway. On 29 May 2018 and 20 July 2018, the Land Resources and Planning Bureau of Zengcheng District issued notices to consult the public on the change, where it proposed to change the land use from for roads only to for both roads and Type II residential.

The land use right of Xintang interchange is owned by the GS Superhighway JV. The relevant land parcel does not involve compensation for demolition. GS Superhighway JV can receive cash compensation if the government confirms to change land use planning of Xintang interchange. According to estimates from the Company, the land parcel will involve construction area of 600,000sq m for residential use. Land preparation, bidding and auction are expected to complete within the year. Currently, the Company is working with the Transportation Bureau to maximize the land value. We believe the Company will benefit from the appreciation of the land value.

Figure 26: The parcel of land at Xintang interchange

Source: Land Resources and Planning Bureau of Zengcheng, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 19 20 Mar 2019

Industry analysis

Economic and transportation artery of Guangdong Province

Economic artery of Guangdong Province Cities along GS Superhighway and Western Delta Route include Shenzhen, Guangzhou, Foshan, Dongguan, Zhongshan and Zhuhai. The above cities are in the top 10 cities in Guangdong Province in terms of 2018 GDP, and together accounting for more than 70% of GDP of Guangdong Province.

Figure 27: Cities along the two highways are in the Figure 28: Cities along the two highways combined top 10 cities in Guangdong Province in terms of 2018 accounted for more than 70% of GDP of Guangdong GDP Province

Source: Wind, CMBIS Source: Wind, CMBIS

Transportation artery of Guangdong Province The above cities are also in the top 10 cities in Guangdong Province in terms of 2018 car ownership, together accounting for more than 60% of car ownerships of Guangdong Province.

Figure 29: Cities along the two highways are in the Figure 30: Cities along the two highways combined top 10 cities in Guangdong Province in terms of 2018 accounted for more than 60% of car ownerships of car ownership Guangdong Province

Source: Wind, CMBIS Source: Wind, CMBIS

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Highway carries ~70% of traffic in Guangdong, growing steadily

Highway carries ~70% of passenger and freight traffic in Guangdong Province According to Guangdong Bureau of Statistics, in 2018, passenger traffic in Guangdong Province reached 1,547mn people. Highways/railways/civil aviation/waterways accounted for 68%/22%/8%/2% of total passenger traffic. Freight traffic reached 4,248mn tons, out of which highways/waterways/pipelines/railways/civil aviation accounted for 72%/24%/2%/2%/0.1% of total freight traffic.

Figure 31: Highway accounted for 68% of total Figure 32: Highway accounted for 72% of total freight passenger traffic in Guangdong Province in 2018 traffic in Guangdong Province in 2018

Source: Guangdong Bureau of Statistics, CMBIS Source: Guangdong Bureau of Statistics, CMBIS

Passenger and freight traffic in Guangdong Province grew steadily in 2018 In 2018, passenger traffic in Guangdong Province increased 3.9% YoY. Among which, railway traffic increased 18.5% YoY, benefiting from development of China Railway High-speed (CRH). However, highway traffic decreased 0.6% YoY, due to traffic diversion from other modes, especially CRH, private cars, and car-hailing platforms. If private cars, and car-hailing platforms were included, we estimate highway traffic would also show YoY growth. Freight traffic increased 6.0% YoY, of which railway traffic increased 3.2% YoY, and highway traffic increased 5.5% YoY.

Figure 33: Passenger traffic in Guangdong Province Figure 34: Freight traffic in Guangdong Province increased 3.9% YoY in 2018 increased 6.0% YoY in 2018

Source: Guangdong Bureau of Statistics, CMBIS Source: Guangdong Bureau of Statistics, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 21 20 Mar 2019

Financial analysis

The Company generates revenues through operating two strategic expressways - the GS Superhighway, and the Western Delta Route. In 2018, net profit of two JVs increased 4% YoY, reaching RMB 689mn. Due to exchange losses arising from RMB depreciation, net profit decreased 16% YoY to RMB 601mn.

In 2018, average daily traffic of Western Delta Route increased 10% YoY. Net profit contribution increased 34% YoY to RMB 162mn. The increase benefitted from opening of HZM Bridge, whose utilization will grow and drive traffic growth for Western Delta Route.

Also, in 2018 average daily traffic of GS Superhighway decreased 1% YoY. Net profit contribution decreased 3% YoY to RMB 527mn. The decline was mainly due to traffic diversion and macroeconomic headwinds.

Figure 35: Contribution from the Company’s expressway assets (YE 31 Dec) CY17 CY18 YoY Jul-Dec 17 Jul-Dec 18 YoY At JV company level GS Superhighway Average Daily Toll Revenue (RMB' 000) 9,419 9,154 -2.8% 9,723 9,242 -4.9% Avg Daily Full-Length Equivalent Traffic (No. of vehicles' 000) 103 102 -1.0% 106 103 -2.8%

Western Delta Route Average Daily Toll Revenue (RMB' 000) 3,593 3,952 10.0% 3,804 4,222 11.0% Avg Daily Full-Length Equivalent Traffic (No. of vehicles' 000) 49 54 10.0% 52 58 11.5% Source: Company, CMBIS

Share of results of GS Superhighway and Western Delta Route

Average daily traffic of GS Superhighway will see low single-digit growth GS Superhighway was opened in 1994. As a mature road, we believe that under the premise of smooth traffic, GS Superhighway will only see low single-digit growth in the future. Given macroeconomic pressure in 2019, we forecast average daily traffic of GS Superhighway will grow 1%/3%/3% YoY in CY19/20/21E.

Average daily traffic of Western Delta Route will maintain double-digit growth Western Delta Route was fully opened in 2013, and is still experiencing fast growth. As utilization of HZM Bridge enhances, we believe Western Delta Route will maintain double-digit growth in the future. We forecast average daily traffic of Western Delta Route will grow 14%/12%/10% YoY in CY19/20/21E.

Figure 36: We forecast average daily traffic of GS Figure 37: We forecast average daily traffic of Western Superhighway will grow 1%/3%/3% YoY in Delta Route will grow 14%/12%/10% YoY in CY19/20/21E CY19/20/21E

Source: Company, CMBIS estimates Source: Company, CMBIS estimates

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Net toll revenue will grow at a slower pace than average daily traffic From 1995 to 2017, car ownership in Guangdong increased at CAGR of 13.6%, reaching 18.9mn. Most of the increase in car ownership came from passenger vehicles. Share of passenger vehicles increased from 39.0% in 1995 to 89.3% in 2017.

Figure 38: Most of the increase in car ownership came from passenger vehicles

Source: Wind, CMBIS

Since toll rate of passenger vehicle is lower than that of trucks, as share of passenger vehicles increases, average daily toll revenue will grow at a slower pace than average daily traffic. Profit sharing ratio of both JVs will remain stable in CY19/20/21E. We forecast net toll revenue of GS Superhighway will increase 1.0%/2.1%/1.8% YoY, reaching RMB 1,475/1,507/1,534mn in CY19/20/21E. By the same token, we forecast net toll revenue of Western Delta Route will increase 14.1%/10.2%/8.5% YoY, reaching RMB 799/880/955mn in CY19/20/21E.

Figure 39: We forecast net toll revenue of GS Figure 40: We forecast net toll revenue of Western Superhighway will increase 0%/2.1%/1.8% YoY in Delta Route will increase 14.1%/10.2%/8.5% YoY in CY19/20/21E CY19/20/21E

Source: Company, CMBIS estimates Source: Company, CMBIS estimates

We forecast share of results of two expressways will grow 23%/9%/8% YoY, reaching RMB 838/915/990mn in CY19/20/21E Amortization of the Company’s concession intangible assets is based on units-of-usage, i.e. the ratio of actual traffic volume of the underlying toll expressways for a particular period over the total expected traffic volume of the underlying toll expressways over the remaining concession periods of the service concession agreements. As remaining concession period dies out, and utilization increases, we expect an upward trend in amortization rate.

We forecast amortization rate of GS Superhighway will increase, from 9.6% in FY18, to 10.0%/10.5%/11.0% in CY19/20/21E. Also, we forecast amortization rate of Western Delta Route will increase from 3.6% in FY18, to 4.0%/4.5%/5.0% in CY19/20/21E.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 23 20 Mar 2019

As a result, we forecast share of results of two expressways will grow 23%/9%/8% YoY, reaching RMB 838/915/990mn in CY19/20/21E.

Figure 41: We forecast share of results of two expressways will grow 21%/9%/8% YoY in CY19/20/21E

Source: Company, CMBIS estimates

Interests in GS Superhighway JV and Western Delta Route JV

Outstanding debt of GS Superhighway is smaller than that of Western Delta Route As a mature road, outstanding debt of GS Superhighway is smaller than that of Western Delta Route. In CY18, indebtedness of the former was RMB 4,135mn, while that of the latter was RMB 6,191mn. We forecast indebtedness of GS Superhighway will gradually decline to RMB 3,149mn, and that of Western Delta Route will gradually decline to RMB 6,110mn in CY21E, and the Company’s interests in two JVs will be RMB 4,340/3,859/3,376mn in CY19/20/21E.

Figure 42: We forecast indebtedness of GS Figure 43: We forecast indebtedness of Western Delta Superhighway will gradually decline to RMB Route will gradually decline to RMB 6,110mn in 3,149mn CY21E

Source: Company, CMBIS estimates Source: Company, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 24 20 Mar 2019

Figure 44: We forecast the Company’s interests in two JVs will be RMB 4,340/3,859/3,376mn in CY19/20/21E.

Source: Company, CMBIS estimates

Net profit and ROE

Taking into consideration the above factors, we forecast net profit of the Company will reach RMB 753/822/888mn, and ROE will increase to 15.9%/18.5%/21.7% in CY19/20/21E.

Figure 45: We forecast net profit of the Company will reach RMB 744/813/879mn, and ROE will increase to 15.7%/18.3%/21.5% in CY19/20/21E

Source: Company, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 25 20 Mar 2019

Financial statements

Income statement YE 31 Dec (RMB mn) CY17A CY18A CY19E CY20E CY21E Share of results of joint ventures 771 684 838 915 990 GS Superhighway 545 527 541 553 563 Western Delta Route 121 162 185 207 229 Exchange gain (losses), withholding tax, and others 105 (6) 112 156 197 Other income and other expenses 40 (1) 16 17 17 Depreciation (0) (0) (0) (0) (0) General and administrative expenses (41) (32) (40) (43) (47) Finance costs (0) (1) (1) (1) (1) Profit before tax 769 649 813 888 959 Income tax expense (45) (39) (49) (54) (58) Profit for the year 724 610 763 834 901 Non-controlling interests (10) (9) (11) (12) (13) Owners of the Company 714 601 753 822 888 Source: Company, CMBIS estimates

Balance sheet YE 31 Dec (RMB mn) CY17A CY18A CY19E CY20E CY21E Bank balances and cash 417 140 372 512 618 Other current assets 3 1 1 1 1 Current Assets 419 141 372 513 619 Interests in joint ventures 4,903 4,798 4,340 3,859 3,376 Other non-current assets 5 12 12 12 12 Non-current Assets 4,908 4,810 4,353 3,872 3,389 Total Assets 5,328 4,951 4,725 4,384 4,007

Deferred tax liability 70 70 70 70 70 Other non-current liabilities 0 0 0 0 0 Non-current Liability 70 70 70 70 70 Payables and accruals 14 11 11 11 11 Other current liabilities 0 0 0 0 0 Current Liabilities 14 11 11 11 11 Total Liabilities 84 81 81 81 81

Share capital 271 271 271 271 271 Share premium and reserves 4,937 4,569 4,345 4,006 3,631 Equity attributable to owners of the Company 5,207 4,839 4,615 4,277 3,902 Non-controlling interests 36 30 29 27 24 Total Equity 5,244 4,869 4,644 4,303 3,926 Source: Company, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 26 20 Mar 2019

Cash flow statement YE 31 Dec (RMB mn) CY17A CY18E CY19E CY20E CY21E NET CASH USED IN OPERATING ACTIVITIES (37) (39) (40) (44) (48)

Dividends received (net of PRC withholding tax) 835 1,040 1,245 1,343 1,414 Other investing activities 20 18 16 17 17 NET CASH FROM INVESTING ACTIVITIES 855 1,058 1,261 1,359 1,431

Dividends paid to: – owners of the Company (925) (953) (980) (1,164) (1,266) – non-controlling interests of a subsidiary (3) (6) (9) (11) (12) NET CASH USED IN FINANCING ACTIVITIES (928) (958) (989) (1,174) (1,278)

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (110) 61 232 141 106 CASH AND CASH EQUIVALENTS BROUGHT FORWARD 523 331 140 372 512 EFFECT OF FOREIGN EXCHANGE RATE CHANGES 4 2 0 0 0 CASH AND CASH EQUIVALENTS CARRIED FORWARD 417 394 372 512 618 Source: Company, CMBIS estimates

Key ratios YE 31 Dec (RMB mn) CY17A CY18A CY19E CY20E CY21E Revenue mix GS Superhighway 71% 68% 65% 63% 62% Western Delta Route 29% 32% 35% 37% 38%

Growth Share of results of joint ventures 31% -11% 23% 9% 8% GS Superhighway -2% -3% 3% 2% 2% Western Delta Route 67% 34% 14% 12% 11% Profit before tax 36% -16% 25% 9% 8% Profit for the year 35% -16% 25% 9% 8% Profit for the year attributable to owners of the Company 35% -16% 25% 9% 8%

Balance sheet ratios Gearing Net cash Net cash Net cash Net cash Net cash

Returns ROAE 13.4% 12.0% 15.9% 18.5% 21.7% ROAA 13.1% 11.7% 15.6% 18.0% 21.2%

Per share EPS (RMB) 0.23 0.20 0.24 0.27 0.29 DPS (RMB) 0.23 0.20 0.24 0.27 0.29 BVPS (RMB) 1.69 1.57 1.50 1.39 1.27 Source: Company, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 27 20 Mar 2019

Valuation

Initiate with BUY; TP of HK$ 5.21; Upside potential 25% We use SOTP valuation method to estimate fair value of the Company. Firstly, we value two toll roads by DCF method (1) up to 1H CY27E FCF of GS Superhighway JV, (2) FCF of Western Delta Route JV, and (3) NAV of property development in Xintang interchange. Our target price is HK$ 5.21, implying upside potential 25%. Initiate with BUY.

Figure 46: DCF valuation of toll roads

DCF Valuation (RMB mn) 0 1 2 3 4 5 6 7 8 9 10 CY19E CY20E CY21E CY22E CY23E CY24E CY25E CY26E CY27E CY28E CY29E Attributable EBIT from GS Superhighway 986 1,033 1,077 1,110 1,143 1,177 1,201 1,225 625 N/A N/A YoY 4.7% 4.3% 3.0% 3.0% 3.0% 2.0% 2.0% 2.0% Tax (235) (248) (261) (277) (286) (294) (300) (306) (156) Effective tax rate 25.4% 25.4% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Depreciation and amortisation 332 314 295 303 313 322 328 335 342 YoY -5.5% -6.2% 3.0% 3.0% 3.0% 2.0% 2.0% 2.0% Change in working capital (45) (47) (49) (50) (52) (53) (54) (55) (57) YoY 5.0% 4.7% 4.3% 3.0% 3.0% 3.0% 2.0% 2.0% 2.0% CAPEX (46) (46) (46) (46) (46) (46) (46) (46) (46) FCF 993 1,006 1,017 1,040 1,072 1,106 1,129 1,152 708 YoY 1.3% 1.0% 2.3% 3.1% 3.1% 2.1% 2.1% -38.6% PV 993 884 784 705 639 579 519 465 251

Attributable EBIT from Western Delta Route 455 507 556 606 649 694 743 780 819 860 903 YoY 11.4% 9.7% 9.0% 7.0% 7.0% 7.0% 5.0% 5.0% 5.0% 5.0% Tax (79) (92) (105) (152) (162) (174) (186) (195) (205) (215) (226) Effective tax rate 24.9% 24.9% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% Depreciation and amortisation 244 263 279 304.6 325.9 348.7 373.1 391.8 411.4 431.9 453.5 YoY 8.0% 6.1% 9.0% 7.0% 7.0% 7.0% 5.0% 5.0% 5.0% 5.0% Change in working capital (10) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) YoY 10.0% 11.4% 9.7% 9.0% 7.0% 7.0% 7.0% 5.0% 5.0% 5.0% 5.0% CAPEX (46) (46) (46) (46) (46) (46) (46) (46) (46) (46) (46)

FCF 564 621 673 700 752 808 868 913 961 1,012 1,064 YoY 10.1% 8.3% 4.0% 7.5% 7.4% 7.4% 5.3% 5.2% 5.2% 5.2% PV 564 546 519 474 448 423 399 369 341 315 291 Terminal Value 10,118 Source: Company, CMBIS estimates

Figure 47: WACC assumptions Assumptions WACC 13.8% Tax rate 6.1% Cost of debt 0.0% Risk free rate 1.7% Beta 0.90 Market risk return 15.2% Cost of equity 13.8% Debt/Assets 0.0% Terminal growth rate 3.0% Source: Bloomberg, CMBIS estimates

Figure 48: Valuation of land of Xintang interchange (RMB mn) CY20E CY21E CY22E CY23E CASH INFLOW Sales proceeds 0 4,000 4,000 4,000

CASH OUTFLOW Land cost (3,240) 0 0 0 Construction cost 0 (1,000) (1,000) (1,000) Interest expenses 0 (400) (400) (400) SGA 0 (200) (200) (200) Tax 0 0 (645) (645)

Net cash flow (3,240) 2,400 1,755 1,755 Discount factor 0.93 0.86 0.79 0.74 PV (3,000) 2,058 1,393 1,290 NAV 1,741 Source: Company, CMBIS estimates

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 28 20 Mar 2019

Figure 49: Land valuation assumptions Assumptions Gross Floor Area (GFA, sq m) 600,000 Average Selling Price (ASP, RMB/sq m) 20,000 Land cost (RMB/sq m) 6,000 Government land cost compensation (RMB/sq m) 600 Construction cost (RMB/sq m) 5,000 Interest expenses (RMB/sq m) 2,000 SGA (RMB/sq m) 1,000 Pre-tax profit (RMB/sq m) 5,400 Tax (RMB/sq m) 2,150 Net profit (RMB/sq m) 3,250 Profit sharing ratio 100% Discount rate 8.0% Source: Company, CMBIS estimates

Figure 50: SOTP (HKDCNY = 0.86) Equity Value GS Superhighway 4,825 Western 6,893 Land value of Xintang interchange 1,741 Net cash 372 Minority Interest (29) Equity Value (RMB mn) 13,802 HKDCNY 0.86 Equity Value (HK$ mn) 16,049 Weighted average number of ordinary shares (mn) 3,082 TP (HK$) 5.21 Source: Bloomberg, CMBIS estimates

Currently, the Company is trading at 2.25/2.24x FY19/20E P/B, higher than peer average of 1.20/1.13x.

Figure 51: P/B valuation of the peers

P/B (x) P/E (x) ROE (%) Div.yield (%) Ticker Company FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E 107 HK EQUITY SICHUAN EXP-H 0.48 0.46 0.44 7.67 7.19 6.97 7.72 6.17 6.09 4.35 4.78 4.78 152 HK EQUITY SHENZ INTL HLDG 1.24 1.13 1.04 9.31 8.82 8.69 14.08 12.93 13.47 5.44 4.67 5.12 177 HK EQUITY JIANGSU EXPRES-H 1.90 1.76 1.65 11.32 11.41 11.17 17.13 15.79 14.99 5.23 5.35 5.21 548 HK EQUITY SHENZHEN EXPRE-H 1.14 1.06 0.98 7.27 8.68 8.09 23.09 12.52 12.18 8.24 6.10 5.65 576 HK EQUITY ZHEJIANGEXPRE-H 1.42 1.30 1.20 9.54 8.89 8.31 15.42 15.25 15.12 5.34 5.58 6.04 737 HK EQUITY HOPEWELL INFR 2.12 2.25 2.24 18.25 16.94 16.17 11.44 12.78 13.16 4.92 5.90 6.04 995 HK EQUITY ANHUI EXPRESS-H 0.72 0.67 0.64 6.64 6.59 7.86 11.43 10.61 8.38 5.24 5.24 4.46 1052 HK EQUITY YUEXIU TRANSPORT 0.91 0.86 0.82 8.63 8.50 8.12 11.13 10.67 10.82 6.25 6.25 6.43 1785 HK EQUITY CHENGDU EXPRES-H 0.94 0.91 0.87 5.39 6.35 5.93 18.16 16.71 15.08 12.93 11.24 11.80 Average of H-shares 1.21 1.16 1.10 9.33 9.26 9.03 14.40 12.60 12.14 6.44 6.12 6.17 000429 CH EQUITY GUANGDONG PROV-A 1.94 1.86 1.76 11.83 12.06 11.19 16.75 15.29 15.68 6.02 5.97 6.19 001965 CH EQUITY CHINA MERCHANT-A 1.24 1.17 1.11 14.60 13.63 12.27 8.10 8.18 8.49 N/A N/A N/A 200429 CH EQUITY GUANGDONG PROV-B 1.35 1.29 1.22 8.23 8.39 7.78 16.75 15.29 15.68 9.09 8.36 9.09 600012 CH EQUITY ANHUI EXPRESS-A 1.12 1.04 0.99 10.34 10.19 12.16 11.43 10.66 8.38 3.39 3.39 2.89 600033 CH EQUITY FUJIAN EXPRESS-A 1.07 1.02 0.97 14.41 12.39 10.70 7.70 8.20 9.01 N/A N/A N/A 600350 CH EQUITY SHANDONG HI-SP-A 0.83 0.80 0.77 9.71 10.38 10.60 8.40 6.45 6.29 3.51 2.61 2.61 600377 CH EQUITY JIANGSU EXPRES-A 1.94 1.81 1.70 11.66 11.73 11.36 17.14 15.70 15.11 5.03 5.13 5.05 600548 CH EQUITY SHENZHEN EXPRE-A 1.32 1.25 1.16 7.87 10.40 9.27 18.81 12.37 12.82 6.13 4.85 4.67 601107 CH EQUITY SICHUAN EXP-A 0.95 0.91 0.87 15.13 14.19 13.76 7.72 6.17 6.09 2.20 2.42 2.42 Average of A-shares 1.31 1.24 1.17 11.53 11.48 11.01 12.53 10.92 10.84 5.05 4.68 4.70 Overall average 1.26 1.20 1.13 10.43 10.37 10.02 13.47 11.76 11.49 5.75 5.40 5.44 Source: Bloomberg, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 29 20 Mar 2019

Key investment risks

Macroeconomic headwinds weigh on highway transportation demand

Macroeconomic growth is one of the most important fundamentals drivers of freight and passenger traffic demand. In 2019, we forecast GDP growth will gradually slow down to 6.3% YoY due to modest domestic consumption and investment growth, trade tensions, and etc. The Guangdong provincial government has also lowered its GDP growth target to 6.0%-6.5% YoY in 2019 (target in 2018 was “around 7.0%” and realized growth in 2018 was 6.8% YoY). However, regional growth opportunities from integration of the Greater Bay Area are likely to alleviate some of these macro headwinds.

Figure 52: 2018 Average daily traffic of GS Figure 53: 2018 Average daily traffic of Western Delta Superhighway Route

Source: Company, CMBIS Source: Company, CMBIS

Uncertainties related to monetization of land value

The Company is actively working with the Transportation Bureau with regard to change of land use of Xintang interchange. However, it is uncertain when exactly the monetization will realize. Thus, we did not factor in relevant cash compensation in our model.

Traffic diversion from railway

State plan to optimize freight transportation structure – impact is limited on the Company The State Council issued a three-year action plan to optimize freight transportation structure. According to the national plan, in 2020, the railway/waterway freight volume will increase by 1.1 billion/500 million tonnes or 30%/7.5% from that in 2017, respectively. Meanwhile, highway freight volume for bulk cargo will drop by 440 million tonnes from that in 2017.

The national plan will have limited impact on highway freight transportation in Guangdong, because 1) The plan will be implemented primarily in the Beijing-Tianjin-Hebei region, the Yangtze River Delta and the Fenhe and Weihe plain in Shanxi and Shaanxi provinces. These areas are China’s main battlefields against pollution. We presume impact on the Guangdong province will be relatively limited. 2) Reduction of highway freight volume will mainly affect bulk cargo, e.g. coal, ores, steel, cereals and etc. In Guangdong province, however, a big chunk of freight transportation is related to consumption goods given the region’s rapidly developing tertiary industry. 3) Highway plays a dominant role in Guangdong, accounting for over 70% of freight transportation while railway only accounts for 3%. Substitution effect will have minimal impact on highway freight traffic volume.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 30 20 Mar 2019

More passenger transportation, however, may switch to railway Since more high-speed railway and inter-city express railway network are being built up in the Greater Bay Area e.g. Guangzhou–Dongguan–Shenzhen intercity railway, and conveniently connected to local public transportation, we do observe that passengers are switching to railway.

Although economic growth of the Greater Bay Area and resulting population inflow will boost overall transportation demand, we think the above substitution effect will continue. Therefore, growth of highway transportation volume, in particular regarding passenger transportation, is likely to remain more modest than that of railway transportation volume.

Figure 54: The 13th Five-Year Plan for Railway System in Guangdong Province

Source: Guangdong Bureau of Transportation, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 31 20 Mar 2019

Figure 55: The 13th Five-Year Plan for Inter-city Express Railway System in Guangdong Province

Source: Guangdong Bureau of Transportation, CMBIS

Traffic diversion due to surrounding road networks

Traffic diversion from newly opened roads In CY2018, traffic diversion from surrounding roads, e.g. Guangzhou Northern Third Ring Road, was one of the reasons for sluggish traffic growth of the GS Superhighway. We believe such will continue to weigh on the Company’s highway business. According to the 13th Five- Year Plan for Transportation System in Guangdong Province, highway mileage will amount to 11,000 kilometers in 2020 from 9,100 kilometers in 2018. Although most of the new highways will be built outside the core Pearl River Delta area where the Company operates, some planned highways and roads will divert traffic from the Company’s existing two highways.

Traffic diversion from toll discount of existing roads As an industry-wide response to the government’s call to lower the costs of the logistics industry, some of the highways controlled by state-owned enterprises in Guangdong Province successively offered toll discount for trucks, so as to encourage more trucks to use the more efficient transportation network of expressways. Implementation of the toll discount will have a negative impact on the Company’s highway business.

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 32 20 Mar 2019

Figure 56: The 13th Five-Year Plan for Highway System in Guangdong Province

Source: Guangdong Bureau of Transportation, CMBIS

PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 33 20 Mar 2019

Disclosures & Disclaimers

Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.

CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS

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