China Expressways：Accelerating in a lower gear

THIS CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO)   FY14 earnings largely in line; largest earnings disappointment at Sichuan Expressway  Traffic growth forecast to further moderate in 2015 vs. 2014 as China's growth adjusts to the "new normal"  Our preferred pick in the sector is YueXiu Transport Infrastructure (Buy, TP HKD6.0); we downgrade Shenzhen H and Anhui H from Buy to Hold and Zhejiang from OW to Hold on valuation FY14 earnings were largely in line with estimates: Overall FY14 sector earnings came in 2% below HSBC and 1% above consensus estimates. Anhui Expressway saw the largest earnings beat vs. HSBC because of stronger-than- forecast margin expansions and other gains. Sichuan Expressway saw the largest miss vs. HSBC because of lower-than-forecast other income, and higher-than-forecast admin costs. China’s “new normal” remained the most common theme across companies: Factoring in the “new normal” for Chinese growth, targeted at around 7% in FY15e. Most of the companies expect traffic growth to slow in FY15 vs. FY14. Four of the six companies under our coverage which reported their results this March gave lower traffic volume growth guidance for FY15 vs. FY14. Consensus downgrade risk for 2015: Our 2015 sector earnings growth estimate is 5.4% vs. the consensus estimate of 8.8%. We see particular risk of earnings downgrades for Sichuan Expressway and Jiangsu Expressway, where our FY15 earnings estimates are 13% below consensus for both. Our preferred pick in the sector is YueXiu Transport Infrastructure (1052HK, Buy, TP HKD6.0), with upside of 17.9%. We downgrade Shenzhen H and Anhui H from Buy to Hold and Zhejiang from OW to Hold on valuation. In this report we establish a Buy rating on Yuexiu (YTI), a Hold rating on Zhejiang and a Hold rating on Hopewell (HHI), per the new rating system implemented by HSBC. We set fair value target prices of HKD6.0 for YTI, HKD10.6 for Zhejiang Expressway and HKD4.0 for HHI. Industrials China Infrastructure China Expressways Accelerating in a lower gear China expressways sector ratings and target price summary Company Ticker Rating Last Price TP (lcy) Up/ Down side (%) Yuexiu 1052 HK Buy 5.096.0 17.9Hopewell 737 HK Hold 3.774.0 6.1Anhui (H) 995 HK Hold 5.806.0 3.4Anhui (A) 600012 CH Reduce 7.114.9 -31.1Zhejiang 576 HK Hold 10.4610.6 1.3Shenzhen (H) 548 HK Hold 6.436.0 -6.7Shenzhen (A) 600548 CH Reduce 9.305.0 -46.2Jiangsu (H) 177 HK Reduce 10.029.1 -9.2Jiangsu (A) 600377 CH Hold 7.827.3 -6.6Sichuan (H) 107 HK Reduce 3.542.7 -23.7Sichuan (A) 601107 CH Reduce 6.282.3 -63.4Source: Thomson Reuters Datastream, HSBC estimates Note: * Last price was of 03 April 2015 closing Note: ** Hopewell Highway already reported Jul-Dec 2014 results on 26 Jan 2015 B = Buy; H = Hold; R = Reduce, per HSBC’s newly introduced stock rating system from 23 March 2015. For details please see our published research or our Global Research website 7 April 2015 Wei Sim* Analyst The HongKong and Shanghai Banking Corporation Limited +852 2996 6602 weisim@hsbc.com.hk Shubhi Bansal* Associate Bangalore View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: The Hongkong and Shanghai Banking Corporation Limited Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it 2 Industrials China Infrastructure 7 April 2015 abc 2014 results largely in line with estimates FY14 NPAT for the China Expressway companies under our coverage came in broadly in line with our and consensus forecasts (summarised below). Anhui Expressway saw the largest earnings beat vs. HSBC because of stronger-than-forecast margin expansion and other gains. Sichuan saw the largest miss vs. HSBC because of lower-than-forecast other income, and higher-than-forecast admin costs. We hit the bull’s eye with our FY14 earnings forecast for Shenzhen Expressway, and came very close on Zhejiang. FY14 y-o-y NPAT growth vs. HSBC and Bloomberg estimates (excluding HHI) Source: Bloomberg, Company data, HSBC estimates FY14 net profit summary (RMBm unless otherwise specified) Company Ticker FY13A FY14A Y-o-Y _________ FY14E** __________ ________ Var (%)*** _________HSBCConsensus HSBC ConsensusSichuan 107 HK 1,015 976 -4%1,139 1,031 -14%-5%Jiangsu 177