Sichuan Expressway (107.HK)           BUY (TP: HK$5.06)

22.7% traffic growth pushed revenue up by 16.7%

Sichuan Expressway (SE) delivered a 16.7% YoY revenue growth, to RMB1.88bn, in line with our estimates. We believe that the knock-on effects of economic growth in Sichuan/Chongqing and surrounding areas, car ownership penetration, and improving local tourism, shall collectively contribute to our estimated 10.1% CAGR in traffic growth for FY10e-12e. We maintain our revenue forecast in which we estimate revenue CAGR of 12.6% for the same period. We also fine-tuned our net profit forecasts, revising up our previous 11.6% CAGR slightly to 11.7% for FY10e-12e. We reiterate our BUY call with a target price of HK$5.06.

FY09A revenue increased 16.7% YoY. This anticipated growth was attributed to a 22.7% improvement in average daily traffic flow on its 4 major toll expressways. Funds raised through their A-share offering in FY09 were used to reduce debts, causing net debt/equity to drop from 26% in FY08A to 11% in FY09A and resulting in a 37% reduction in net interest expenses. As a result, net margin expanded to 44.0% for FY09A as compared to the 37% recorded in FY08A.

Chengdu Meishan Expressway for completion in 2013. After the acquisition of the Chengle Expressway in July 2009, no new acquisiton has been planned for. As such, the company would not be adding new toll income until the Cheugdu-Meishan Expressway is completed in 2013. Construction of this new expressway began in mid-2009, and is expected to cost about Rmb7.2bn, for which Rmb5.8bn will be funded by external debts.

Benefitting from on-going economic growth in Sichuan and Chongqing. We believe that the promising economic outlook of Sichuan and Chongqing area and export-led recovery of the coastal provinces shall boost traffic growth by 13.6% in FY10F. Networking effects emanating from surrounding provinces should boost traffic growth by 10.1% CAGR for FY10e-12e, translating to a 12.6% CAGR in core toll revenues over the same period – before accounting for any new acquisitions.

Valuation. Maintain our FY10F-12F full year revenues, we fine-turned our earnings estimates – all within 1% range. We reiterate our BUY call and HK$5.06 price target.