Deutsche Bank Markets Research Asia China Transportation Road / Rail Industry China Toll Road Sector Date 19 August 2016 Recommendation Change Attractive risk-reward sector; prefer ZJE and SZE; D/G JSE on valuation Positive on China's toll road sector; top picks ZJE/SZE; downgrading JSE ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Phyllis Wang Research Analyst (-) - - phyllis.wang@db.com Key Changes Company Target Price Rating 0177.HK 10.68 to 10.90(HKD) Buy to Hold 0548.HK 7.31 to 8.87(HKD) - 0576.HK 9.78 to 9.84(HKD) - Source: Deutsche Bank Top picks Zhejiang Expressway Ltd (0576.HK),HKD8.78 Buy Shenzhen Expressway-H (0548.HK),HKD8.09 Buy Source: Deutsche Bank Companies Featured Jiangsu Expressway-H (0177.HK),HKD11.34 Hold 2015A 2016E 2017E P/E (x) 15.2 16.1 15.1 EV/EBITDA (x) 8.9 9.4 8.6 Price/book (x) 2.1 2.3 2.2 Shenzhen Expressway-H (0548.HK),HKD8.09 Buy 2015A 2016E 2017E P/E (x) 20.3 14.7 12.8 EV/EBITDA (x) 7.7 8.1 7.6 Price/book (x) 1.0 1.1 1.0 Zhejiang Expressway Ltd (0576.HK),HKD8.78 Buy 2015A 2016E 2017E P/E (x) 11.6 11.7 10.9 EV/EBITDA (x) 5.3 5.2 4.9 Price/book (x) 2.0 1.7 1.6 Source: Deutsche Bank Related recent research Date Relatively safe haven in a volatile market; upgrading SZE; Top pick: ZJE Phyllis Wang 4 February 2016 Source: Deutsche Bank China’s toll road sector has risen 12% year-to-date, outperforming the HSCEI index (+1%) due to the sector's defensiveness. In a weak economy, we suggest investors stay with the sector in 2H16 given solid earnings growth and a good dividend yield (4-5%). We believe China's toll road operators will see solid toll income growth for the rest of this year thanks to continued healthy passenger traffic growth. Our analysis indicates that the probability of tariff cuts in Zhejiang, Jiangsu and Guangdong is low. Also, the government may accelerate its study of regulation amendment, which could benefit the sector with potential extensions of concessions and more M&As. Low risk of tariff cut in JS, ZJ and GD; potential positive policy change Recently, Hubei province cut tariffs by 10% and Shanxi/Guizhou offered ETC promotions (for trucks only). We think the impact on expressway operators is limited given the short-term nature of most ETC promotions. Our analysis indicates that the probability of tariff cuts in Guangdong, Jiangsu and Zhejiang (JSE’s, ZJE’s and SZE’s major locations) is low as their toll fee standards are lower than the national average when considering local disposal income. According to Chinahighway.com, the MoT may accelerate the study of an amendment to the Regulation on the Administration of Toll Roads. We expect the MoT to possibly officially publish it before the end of this year, which could support the sector via potential extensions of concession periods and more M&As. ZJE would likely be the biggest beneficiary of this change. Continued solid toll road business in 2H16, supported by passenger traffic ZJE, JSE and SZE’s toll income grew 4-26% in 1H16, benefitting from strong passenger traffic growth and asset acquisitions. Healthy toll income growth should continue for the rest of this year. We believe passenger traffic will remain the key driver of traffic growth as a result of continued growth in sedan ownership/personal disposal income. Also, based on management guidance, there should be no traffic diversion for JSE, ZJE and SZE’s major toll roads in the next 1-2 years. We forecast toll income growth of 4-18% for ZJE, JSE and SZE in 2H. Potential asset injection may further benefit their long-term outlook. Raising SZE TP on new SZ outer-ring projects; D/G JSE to Hold on valuation We cut our SZE 2016E earnings by 4%, mainly on a larger FX loss, and fine-tune 2017E earnings, but we raise our TP to HK$8.87 (from HK$7.31) as we include the new Shenzhen outer-ring project (Shenzhen government agreed to grant 25-year concession rights for Outer Ring Section A to SZE in March). We slightly raise our earnings forecasts and target price for JSE and ZJE. ZJE and SZE are our top picks due to their visible earnings profiles in 2016-18 with good dividends. JSE’s share price has outperformed the index ytd due to its more visible earnings growth and because it is the largest beneficiary of the launch of SH Disn