Zhejiang Expressway (576.HK)              BUY (TP: HK$8.22)

8.8% YoY decline in traffic volume (FY09A)

Zhejiang Expressway announced its 2009 traffic volume and toll revenue on 10th Feb 2010, and will announce its final results on Sunday, March 14th.  The company had reported an 8.8% YoY decline in traffic volume for FY09, resulting in a 9.9% YoY decline toll revenue to Rmb3,111.8m, which is Rmb21m below our forecast. As such, we nudged down our FY09e profit forecast by Rmb13m to Rmb1,730.4m. We believe that the market has factored this into the share price. Going forward, the progressively fade diversion from neighbouring expressways and bridges, stable economic recovery in Zhejiang province and neighbouring Shanghai municipality, the implementation of toll-by-weight, and the Shanghai Expo 2010, shall improve revenues and net profit by 6.8% and 8.5% CAGR over FY10e-12e. We reiterate our BUY rating, with a HK$8.22 price target. This translates to a 17.7% upside over the next 12 months.

9.9% YoY decline in toll revenues, but buffered by securities arm. Economic slowdown in Zhejiang province, exacerbated by spill-over effects from traffic diversion to Shanghai-Hangzhou-Ningbo Expressway and Shangsan Expressway, contributed to Zhejiang Expressway’s average daily traffic volume declined 8.8% yoy in FY09a, translating to a 9.9% yoy decline in toll revenue. In FY09e, we expect the significantly improved A-share market would account for about 30% of the company’s total revenues viz the 51.9%-owned Zheshang Securities, and reflecting a 66.5% YoY growth in segmental revenues. Hence, for FY09e, total consolidated revenues is estimated at RMB6.2bn, reflecting a marginal 2.0% YoY drop.

Near and long-term growth catalysts. Our estimated 2.2% recovery in traffic volume for FY10e is based on improving economic conditions in Zhejiang province,  neighboring Shanghai municipality and stabilization of traffic diversion from neighboring Hangpu Expressway and Hangzhou Bay Bridge, sustained export recovery resulting in improved mix towards freight, and knock-on effects of the Shanghai Expo 2010. Conservatively, we have not factored the rapidity of growth in car ownership in Zhejiang and neighboring provinces.

Fine-tuned earnings forecast, maintained rating and TP. Apart from nudging down our previous forecast for FY09e, we also changed minor proportion of our FY10e-12e full year revenue forecasts, and fine-tuned our earnings forecasts --- all within a 1% range from our previous estimates. We reiterate our BUY rating with a HK$8.22 price target, implying an upside potential of 17.7% on a 12 month’s view.