In the past few years, A-share public utility stocks have come out of the big bull market that has surprised thousands of investors, including coal, electricity, and highways.

For example, in motorway tracks, many leaders have recently hit record highs. Since the release of the epidemic in October 2022 on the Ninghai-Shanghai Expressway, the stock price has risen 70% cumulatively. Over time, the current price is up 330% from its 2012 low.

As for the Ninghai-Shanghai Expressway, foreign investors are not skimping on their chips and are constantly raising their bets. Among them, BlackRock first bought 1.19% of Ninghu Expressway shares in the second quarter of 2011, then increased its positions one after another. By the end of Q3 2023, BlackRock held 2.17%, steadily occupying the third largest shareholder position, second only to Jiangsu Traffic Control and China Merchants Highway.

J.P. Morgan bought 1.22% of Ninghai-Shanghai Expressway's shares in 2012. As of the latest, the shareholding ratio is 1.46%, making it the 5th largest shareholder. Furthermore, Citibank, Mitsubishi UFJ Financial Group, etc. have also continued to increase their holdings, all ranking among the top ten shareholders.

Foreign giants received a very surprising return on their 10-year long-term investment. So, what did they like about the Ninghai-Shanghai Expressway, so that they have been with them for such a long time?

01

The Ninghai-Shanghai Expressway was established in 1992 and listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange in 1997 and 2001 respectively. The actual controller behind it is the Jiangsu State-owned Assets Administration Commission, with a shareholding ratio of 54.44%. The second largest shareholder is the central enterprise investment promotion road.

The company's business is not complicated. It is mainly engaged in the highway toll business. 2023H1 accounts for 63% of its revenue and 91% of gross profit. In addition, the company also has supporting service business, real estate development business, electricity sales business, advertising business, etc. Among them, the real estate business is greatly affected by the market, and its share continues to shrink.

Prior to the pandemic, in 2013-2019, revenue increased from 7.6 billion yuan to 10.08 billion yuan, a compound annual increase of 4.8%. Net profit attributable to mother increased from 2.7 billion yuan to 4.2 billion yuan, a compound annual increase of 7.6%.

With the outbreak of the epidemic in 2020, performance was impacted. Revenue plummeted by 20% and profit to mother fell by 41%. Later, the business was quickly repaired. In 2022, revenue was 13.2 billion yuan, and profit to mother was 3.7 billion yuan.

By the first three quarters of 2023, revenue was 11.6 billion yuan, surpassing the full year of 2019, with a year-on-year increase of 22.4%. Net profit attributable to mother was 4,037 billion yuan, a year-on-year increase of 29.84%. On the one hand, 2022 is still affected by sporadic outbreaks, and the performance base is relatively low. On the other hand, after the disruptive factors of the 2023 epidemic were eliminated, traffic on the core road network increased dramatically.

From 2013-2019, gross sales margin was above 50% all year round. In 2020-2022, due to the impact of the pandemic and changes in accounting standards, gross margin dropped to 33.3% in 2022. It has already rebounded to 42.77% in the third quarter of 2023. In a horizontal comparison, this indicator is lower than Guangdong Expressway A and the Wantong Expressway, and higher than the Shandong Expressway and China Merchants Highway.

As of the end of the third quarter of 2023, the net interest rate for the Ning—Shanghai Expressway was 36.3%. Excluding income/cost items during the construction period (the two are equal and not profitable), the net interest rate has rebounded to 40%, returning to pre-pandemic levels.

In terms of three fees, the sales expenses rate has been declining all year round, and it has reached 0.07% in 2023Q3. The management fee rate dropped from 2.3% in 2013 to the latest 1.45%. The financial expense ratio fluctuated greatly, from 3.85% in 2013 to 8.25% in 2022. The latter is a sharp increase in loan interest charges after the Wufengshan Bridge was opened to traffic in June 2021. You need to know that financial expenses are a very core operating cost for expressway companies. In a horizontal comparison, the total cost ratio of the Ninghai Company during the period was at a low level in the industry.

In 2022, the return on net assets of the Ninghu Expressway was 11.23%, down from before the pandemic. The main reason was that the net interest rate level declined, while the asset turnover ratio did not change much, and the equity multiplier increased to a certain extent.

In terms of dividends, as of the end of the third quarter of 2023, the total dividend since the launch of the Ninghai-Shanghai Expressway was launched, with a dividend rate of 65%, ranking first in the expressway sector. In the last 5 years, the annual dividend was 2,317 billion yuan, or 0.46 yuan per share. Under high dividends, the overall dividend ratio of the Ninghai-Shanghai Expressway remained at a high level.

Overall, Ninghai's rapid performance growth is steady, profitability is very strong in the industry, and dividends are maintained at a high level, which is ultimately favored by the market.

02

Tolling on expressways is a good business. It is similar to operating a hydropower station. After it was put into the power plant in the early stages, it was a steady stream of money printers in the later stages, and there was basically no compensation.

As of the first half of 2023, the Ninghai-Shanghai Expressway has participated in the operation or investment of 17 expressway projects, and the road traffic mileage it owns or shares has reached 910 kilometers. Among them, the Jiangsu end of the Shanghai-Nanjing Expressway (Nanjing Ma Qun to Shanghai Anting) is the company's core asset and has contributed to its absolute performance since opening in September 1996. In the first half of 2023, the Jiangsu section of the Shanghai-Nanjing Expressway contributed 36% of its revenue and 55% of gross profit.

In addition to the Shanghai-Nanjing Expressway, the company also owns all or part of toll roads located in Jiangsu Province, such as Ningchang Expressway, Zhenjiansu Expressway, Guangjing Expressway, Xicheng Expressway, Xiyi Expressway, and Zhendan Expressway.

These highways that have already been built also have endogenous growth drivers — traffic continues to grow slowly along with economic development.

The expressway section controlled by the Ninghu-Shanghai Expressway mainly includes the five major cities of Suzhou, Wuxi, Changzhou, Zhenjiang, and Nanjing and connects to Shanghai. The location advantage is quite obvious. Six cities account for 9.5% of the country's total GDP, and the five cities of Jiangsu account for 57% of the province's GDP. Over the past 20 years (2002-2022), the compound GDP growth rate of the six markets reached 12.4%. From 2002 to 2021, the average growth rate of car ownership in the six markets reached 16%.

The dividends of economic growth in developed regions will support higher traffic intensity and continue to raise traffic levels. According to some data, in 2019, the revenue per kilometer of expressways within Jiangsu ranked 5th in the country, after Shanghai, Beijing, Zhejiang, and Guangdong.

In addition to endogenous growth, the Ninghai-Shanghai Expressway can also increase total traffic flow by building new highways, expanding highways, and mergers and acquisitions of high-speed assets. For example, in 2018-2021, investment was made to build 3 highways: Zhendan Expressway, Changyi Expressway, and Wufengshan Bridge. In 2015, 1.16 billion yuan was spent to acquire 100% of the shares of Ningchang Zhenli Expressway and Xiyi Expressway.

However, the gross profit level of new high-speed projects is much lower than that of mature sections such as the Shanghai-Nanjing Expressway, and there is some room for improvement in the future. For example, in 2023H1, the gross profit margin of the Zhendan Expressway was 20.8%, Changyi Expressway 17.2%, and Yichang Expressway 27.4%, far lower than 68.3% of the Ninghai-Shanghai Expressway. However, 63.8% of the new Wufengshan Bridge was built. As can be seen, this also has a certain correlation with location advantages.

In addition to the main expressway toll business, the financial investment business can also contribute to performance growth. In 2018-2022, investment income was RMB 1,057 million, RMB 886 million, RMB 618 million, RMB 1,214 million, and RMB 1,868 billion, respectively. Among them, investment income in 2022 accounted for 50% of the total profit returned to mother.

The Ninghu-Shanghai Expressway took shares in the three joint road and bridge companies managed by Yanjiang, Yangzi Bridge, and Suzhou Expressway, accounting for 23.86%, 26.66%, and 25.15% of the shares, respectively. This portion of earnings will be as steady as the main business. In addition, it also participated in financial equity investments led by Bank of Jiangsu at 5.3%, Zijin Trust at 20%, and Jiangsu Leasing at 7.8%.

Of course, the main business of the Ninghai-Shanghai Expressway also faces certain policy risks — after 30 years of high-speed charging, the toll will be terminated. There are cases of this all over the country. For example, the Weihai-Yantai section of the Shandong Rongwu Expressway stopped charging at 00:00 on February 23, 2022, and the Guangfo Expressway, a subsidiary of Guangdong Expressway A, stopped charging at 00:00 on March 3, 2022.

Regarding the toll period for expressways, the “Toll Road Administration Regulations”, which came into effect on November 1, 2004, clearly stipulate this, that is, the maximum period shall not exceed 30 years. <收费公路管理条例（修订草案）>However, in 2018, the Ministry of Transport issued a “Notice Concerning Public Consultation”. Among them, it was mentioned that for toll roads with a large investment scale and a long payback period, it can last more than 30 years. The revised draft has been subject to controversy, and no substantial progress has been made so far.

In the future, after 30 years of toll charges on expressways, there is still great policy uncertainty about whether they can continue to be collected. Up to now, the company's routes that have mainly contributed to performance, such as the Shanghai-Nanjing Expressway, Ningchang Zhenjiang Expressway, and Guangzhou-Xicheng Expressway, are still 8, 8, and 6 years left, respectively.

03

Looking at it over the years, the rapid performance growth of Ninghai and Shanghai is still relatively slow. In years when the large market was better, domestic public funds or retail investors were simply unwilling to allocate, believing that the return rate was too low. However, if you look at it for a long time, slow is fast. BlackRock and J.P. Morgan Chase held shares in Ninghai for 10 years, which is surprising enough.

Today, the Ninghai-Shanghai Expressway continues to reach new all-time highs, yet there is no bubble in valuation. The latest PB is 1.77 times, which is below the valuation average since listing in 2001. If you shorten it to 5 years, PB has returned to a relatively high level.

Of course, with leading public utilities such as the Ninghai-Shanghai Expressway, don't think about getting rich overnight; what is more realistic is to think of them as long-term bonds; having a steady return on investment is enough.