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 Shenzhen), the Company will Target Price HK$5.21 focus on infrastructure and correlated businesses within the Bay Area. Up/downside +25% Current Price HK$4.16 Average daily traffic of Western Delta Route will maintain double-digit growth. Hanbo Xu Western Delta Route was fully opened in 2013, and is still experiencing fast growth. In 2018, Tel: (852) 3761 8725 average daily traffic of Western Delta Route increased 10% YoY. Net profit contribution Email: [email protected] increased 34% YoY to RMB 162mn. The increase benefitted from the opening of HZM Equity Research Bridge. As utilization of HZM Bridge enhances, we believe Western Delta Route will Wenjie Ding, PhD maintain double-digit growth in the future. We forecast average daily traffic of Western Tel: (852) 3900 0856/ Delta Route will grow 14%/12%/10% YoY in CY19/20/21E. (86) 755 2367 5597 Email: [email protected] GS Superhighway will remain a stable source of revenue. GS Superhighway was China Infrastructure Sector opened in 1997. In 2018, average daily traffic of GS Superhighway decreased 1% YoY. Net profit contribution decreased 3% YoY to RMB 527mn. The decline was mainly due to traffic Mkt. Cap. (HK$mn) 12,820 diversion and macroeconomic headwinds. As GDP and car ownership of Guangdong 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 District 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 Pearl River 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 Guangzhou, Dongguan and Shenzhen with Hong Kong. The Western Delta Route runs from Guangzhou, Foshan, Zhongshan to Zhuhai, 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 Hengqin, 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%