Yuexiu Transport Infrastructure (1052) Is Undervalued!

INTRODUCTION

Yuexiu Transport Infrastructure (1052) is engaged in the development, management, and management of 15 x expressways/bridges (toll roads). Yuexiu has been a favourite amongst dividend investors as the DPU has been on an uptrend for over 2 x decades! Earlier in 2020, the government implemented a toll-free regulation on vehicles for 79 x days in response to the covid-19 crisis. Due to the impact on revenue, the management was forced to cut dividends, and share prices plunged > 40%! Toll collection has resumed to normal from 06/05/2020 - however, share prices have remained depressed.

QUALITY OF ASSETS

I determined the quality of the projects via the average daily toll traffic volume from 2015 - 2019. The vast majority of projects have seen an uptrend in the average daily traffic volume across the years. I paid attention to the top x 3 projects by revenue - GNSR, WEIXU, and SUIYUENAN have kept strong uptrends. The declines in traffic volume for CANGYU, JINXIONG, SHANTOU, and HUMEN were largely due to structural changes. However, I'm not too concerned because these projects don't make significant contributions to revenue. The exception will be HUMEN as it contributes 5-10% of revenue - I will need to keep it in view.

CONCESSION OF ASSETS

From my knowledge, the toll roads are loaned from the government for a duration of 20-25 years. This is a lot shorter compared to REITs that have tenures that range from 30 years - freehold! I believe that the shorter concessions -> greater depreciation in valuations -> share prices will be impaired. I will need to keep in view the impact of concessions on the valuations. I believe that the management is aware of the risk as evident from the recycling of projects over the years.

POTENTIAL FOR GROWTH

Yuexiu's management has proven to be able to acquire high-quality projects as evident from at least a decade of growing distribution per unit. This has been underpinned by rapid economic growth -> higher car ownership. I believe that China has a growing middle class -> higher car ownership -> organic growth in revenue.

FINANCIAL PROFILE

Yuexiu is highly dependant on debt as evident from the gearing ratio > 50%. However, management has been prudent in keeping the ICR at a healthy level across the years > 5. For this reason, it was able to survive the impact of the toll-free regulation on revenue. Despite the impact on revenue, the company was able to make payment on interest expenses.

VALUATION

• Historical P/B
• Highest = 1.19
• Lowest = 0.78
• Average = 0.99
• Historical yield
• Highest = 6.77%
• Lowest = 3.81%
• Average = 5.30%
• Current P/B = 0.78
• Current yield = 7.58%

I have based my calculations on prices from 2015 - 2019 - I didn't include the prices in 2020. The numbers speak for themselves...