Of all the big boys waiting to list in Shanghai in July, Sichuan Expressway (0107.HK) was among the most significant. Consequently, once the small cap stocks had got the ball rolling in Shenzhen, the toll road operator from western China – which is already listed in Hong Kong – was one of the first to reach the bourse in Shanghai.
The firm raised US$264 million in its IPO on July 17, selling 500 million shares at a price of US$0.53 (RMB3.60) per share, the upper end of its indicated price range. At time of writing, the shares had not yet made their Shanghai trading debut.
Expressways are not the most alluring of investments, but the best of them combine growth with stable cash flows from toll revenues. Sichuan Expressway has three expressways and analysts said the western province’s road network expansion and strong economy maps a road to long-term growth.
"The government policy of moving west appears to be getting traction and we are seeing a lot of funding directed there,"Anderson Chow, an analyst with Macquarie Securities in Hong Kong told CHINA ECONOMIC REVIEW.
Chow has an "Outperform"rating on Sichuan Expressway’s H-shares and the firm is one of Macquarie’s top picks in the expressway sector. He expects 2009 revenues will reach US$263.4 million from US$197.2 million in 2008. Net profits are estimated to be US$136.4 million, up from US$80.5 million last year.
The firm’s shares trade at a price-to-earnings ratio of 6.9 times estimated 2009 earnings, compared with a ratio of 13 for its peers.
Proceeds from the A-share listing will be used for a US$161 million acquisition of Chengle Expressway as well as to pay off other debts. While this doesn’t leave much left for further expansion, the company’s balance sheet provides options.
"For the future expansion they may actually raise more equity or they can raise their gearing ratio because that is actually quite low at the moment,"said Cho Fook Tat of Tai Fook Securities in Hong Kong. The firm’s gearing ratio at the end of 2008 was 26.51%, down from 29.60% the previous year, according to company documents.
Cho has a "Hold"rating on the firm’s H-shares but said that Sichuan Expressway has "long term growth prospects"compared with expressways on China’s eastern coastal regions.
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Yao Can, an analyst with SooChow Securities in Suzhou, said that rising toll fees will be another crucial growth driver for the company. A 20% discount on tolling by weight for freight vehicles in Sichuan province will be rescinded on September 1, 2010 to the benefit of the bottom line.
Additionally, Sichuan Expressway has further room for toll price hikes for light vehicles. The company charges RMB0.34 (US$0.05) per kilometer, compared to the RMB0.55 per kilometer for new toll roads in the province, Macquarie’s Chow said.
Traffic growth is expected to be robust this year partially due to weakened traffic in 2008 following the Sichuan earthquake. The Chengle Expressway saw average daily traffic volume rise by 44.7% to 22,588 from January to May. Sichuan Expressway’s worst performer, Chengya Expressway, still saw traffic grow by 8.9% to 16,672 in the same time period.
"Longer term, the western parts of China like Sichuan will see a structural shift up in terms of the traffic volume growth," said Macquarie’s Chow.