Zhejiang Expressway Co (H-share) is a Hong Kong-listed HK$45 billion ($7.33 billion) market capitalisation company that is primarily engaged in developing, constructing, operating and managing high-grade roads and toll roads in China’s Zhejiang province. Almost 60% of the company’s revenue comes from the toll road business segment, while close to 40% comes from the securities business segment. The securities business is conducted by its subsidiary, Zheshang Securities, a securities brokerage company listed on the Shanghai Stock Exchange. In its core business, the company has multiple projects to reconstruct and expand toll expressways, which should provide earnings visibility and support the company’s ability to pay dividends.
The case for Zhejiang Expressway is that it pays stable, consistent dividends and is financially sound. Zhejiang Expressway’s trailing and forward dividend yields are both at an attractive 5.5%, which is well above China’s current risk-free rate of 1.81%. For a dividend-based investor, accumulating the stock as the share price falls or reducing the position as the share price rises would be suitable. However, investors should be wary of excessive price declines, as they could indicate that the company’s ability to continue paying dividends is at risk. Conversely, investors should note upward price spikes, particularly if dividend yields no longer offer an attractive return relative to the risk-free rate.
Chart 1 shows Zhejiang Expressway’s historical dividend yield over a 10-year period. The company has paid dividends annually for the past 10 years. The average dividend yield throughout this period is healthy at 6.07%, with the lowest recorded yield at 3.70% and the highest at 9.03%. It is important to note that there are no outliers or special dividends, except for one paid in late 2017, which suggests that dividend-based investors can expect stable dividend payments. The lowest yield is also above the risk-free rate, which makes it a safer dividend stock investment.
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Furthermore, specifically for Zhejiang Expressway, dividends have been a significant contributor to investment returns. Over the same 10-year period, the price-only return is 20.43%, while the dividend-reinvested return is almost 6 times more at 116.37%. Similarly, over a five-year period, the price-only return was 19.90%, while the dividend-reinvested return was more than three times that at 63.57%.
Financially, Zhejiang Expressway has performed well over the past 10 years, with the most recent five years showing positive net income, operating cash flow, and free cash flow. Also, the forecast for the next two financial years is optimistic, indicating that the company should be able to pay attractive dividends, given its sufficient cash flow generation. In terms of Zhejiang Expressway’s competitive advantage, as reflected in its margins, it has not only maintained but also grown over this period. 10 years ago, the company’s gross, operating, and net income margins were 36.9%, 38.0% and 24.3%, respectively. Now, it is at 39.6%, 54.6% and 32.1%, respectively.
The company’s financial safety is decent. For liquidity, measured by the current ratio, the figure is 1.27, which is above the one-time benchmark. From a solvency perspective, the company’s net debt-to-equity ratio is not too concerning at 22%. Zhejiang Expressway’s interest coverage ratio is very healthy, at 6.3 times. Relative to regional peers, Zhejiang Expressway trades cheaply for its forward P/E, forward EV/Ebitda, forward EV/Revenue and forward P/B ratios, with 68%, 47%,12% and 49% discounts, respectively. This indicates that the company is an attractive pickup compared to its regional peers.
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Sentiment-wise, analysts have three “buy” calls, three “hold” calls, and no “sell” calls for Zhejiang Expressway, with an average target price almost 10% above its current trading price of HK$7.55 over the next 12 months. Based on a methodology that uses multiple valuation methods (see Charts 3a and 3b), the company’s fair value, including dividend reinvestments, is HK$8.62, which is almost 15% above its current trading price. Singapore investors seeking to purchase this stock can do so without much hassle through their international trading account, as the company is listed on the Hong Kong Exchange.
