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in the past three months, the dividend index has fallen 11%, while the shanghai composite index has retreated 8%.

it can be clearly seen that the dividend sector has undergone a deep adjustment, and even the bank stocks with the largest weight have not been spared.

however, it is found that the transportation sector represented by highways has survived this big correction, and many related concept stocks have hit record highs. in fact, this trend has been maintained for the past three years.

why has capital favored this sector alone in the past three months?

among the many dividend assets, will highways continue to be comparable to hydropower assets represented by china yangtze power in the future?

01

wind data shows that the shenwan highway index (851731) has risen by 9.85% this year, significantly higher than the shanghai composite index during the same period.

in the past three years, the index's annual growth rates in 2021, 2022 and 2023 were 6.9%, -0.3% and 17.5% respectively, and it has outperformed the shanghai composite index for three consecutive years.

in terms of individual stocks, anhui expressway, shandong expressway and nanjing-shanghai expressway ranked the top three in terms of growth this year, up 51.91%, 45.09% and 44.29% respectively. guangdong expressway a and china merchants expressway followed closely behind, both with growth rates exceeding 30%. 65% of the stocks in this sub-sector had positive returns.

if the timeline is extended, the gains of many highway stocks are even more astonishing.

for example, since january 2020, the price of anhui expressway has increased by about 250% in more than four years. during the same period, shandong expressway has increased by 163.52%, guangdong expressway a has increased by 84.89%, china merchants expressway has increased by 74%, and ning-shanghai expressway has increased by 61.83%.

there are only a few criteria for evaluating high-yield stocks: 1) low valuation; 2) high dividend ratio; 3) a solid performance foundation.however, with a wave of increases at the beginning of the year, the dividend yields of high-dividend targets in many industries have become lower and lower, and they have gradually lost their attractiveness. in addition, the business model also has certain flaws, and cannot guarantee continuous and stable dividend output. therefore, funds are more stringent and picky in selecting dividend assets, and it is not easy to choose the best from the best.

the business model of expressways is very simple and transparent: borrow money to build roads in the early stages, and collect rent to repay the loans in the later stages.at first glance, it seems to be somewhat similar to the model of building a hydropower station. as long as the initial investment is in place, there will be a steady flow of cash over a long period of time.

moreover, the industry itself has a certain degree of monopoly, with clear and regulated price standards.the fluctuations caused by macroeconomic factors are much smaller than those in many industries.

therefore, the performance of listed highway companies has stable support. even if other conditions change, such as frequent extreme weather in the first half of the year and increased free passage time, the performance of listed companies will not decline significantly.

secondly, the toll collection period of highways is as long as 25-30 years. once the assets enter a stable period, they will guarantee stable income and dividends for a considerable period of time.in the past three years, companies in the sector such as guangdong expressway, anhui expressway, shandong expressway, china merchants highway, and nanjing-shanghai expressway have always maintained a high dividend ratio and are constantly increasing it.

moreover, considering that the controlling shareholders of major listed companies in the expressway sector are all from local transportation investment companies or state-owned assets, they have a large capital demand and will be motivated to require listed companies to maintain high dividends. with the introduction of the special valuation system, the requirements for the market value assessment of state-owned enterprises have become stricter, which is expected to further promote listed companies to increase their dividend ratio in the future.

in the transportation sector, valuation and profitability are also more advantageous than other sectors. comparing the interim net profit margin and the current price-earnings ratio, although 13 times for highways is not particularly low, its profitability is indeed among the best in many sub-industries.

from the perspective of market performance, the triggering of the highway sector's market is mainly related to two conditions: one is the capital structure, and the other is the overall decline in yields.

since mid-2020, the sector and the csi 300 have begun to show a clear negative correlation. in other words, when the overall market index performs poorly, the highway sector will gradually be sought after by funds. due to its own bond-like attributes, in a market environment with a high risk premium, as the proportion of long-term funds entering the market increases, the demand for bond-like assets is also expanding.

since august 2023, the policy has vigorously promoted the entry of medium- and long-term funds into the market, including relaxing restrictions on stock investment by insurance funds and annuity funds, and increasing the scale of equity investment. in fact, the expressway sector has also won the favor of long-term capital. for example, great wall life insurance, which continued to increase its holdings in ganyue expressway in the first half of the year, did not appear in the list of major shareholders last year, but ranked second in the first half of this year with a 6.18% stake.

on the other hand, the continued decline in the 10-year treasury bond yield shows that the market's risk appetite and the potential investment return rate of the whole society are adjusting downward, and there is insufficient investment and financing demand to take up liquidity. in such an environment, the difference between the dividend rate and the 10-year treasury bond yield amplifies the defensive attributes of the highway sector, enabling it to attract funds to avoid risks during periods of high uncertainty.

it's not just their stocks that attract funds, but also reits.

this investment product, which is relatively new to individual investors, has been on the market for more than three years. it is a fund that raises funds from investors to invest in real estate and infrastructure projects and distributes investment income. according to dividend regulations, more than 90% of the annual distributable amount should be distributed to investors.

for example, cicc and shandong hi-speed ​​company issued the cicc shandong hi-speed ​​group highway reit in october last year, raising 2.985 billion yuan for the shandong juanhe expressway project. so far, the four dividends have accumulated to 1.1224 yuan per share. calculated based on the current average net value on the base date, the dividend yield is as high as 16.10%. the current trading value in the secondary market has increased by about 2 yuan from the lowest 5.366 yuan, an increase of nearly 40%.

02

from an industry perspective, domestic expressways have now entered a stage of high stock and low growth.

as of 2022, the total mileage of my country's expressways has reached 177,300 kilometers, with a compound growth rate of 5.4% over the past decade. most provinces in the east and central regions already have a mature and dense highway network system. the future construction focus will be on the west, and there is a lot of room for improvement in expressway density.

as highways are infrastructure, the companies involved in their construction and operation are basically controlled by the state-owned assets of the province, and the number of companies is controlled through franchising, which has formed certain policy barriers. in addition, highway construction requires large capital investment and a long payback period, and private enterprises have no advantages in long-term financing channels, so industry competition can be minimized to the greatest extent.

however, due to the influence of locational economics, economically developed regions usually have a high road network density and high node value, and naturally have a wider upper limit on traffic volume. the unit-kilometer revenue-generating capacity in beijing, the yangtze river delta, guangdong and other regions is obviously better. with this special competitive advantage, the market position of companies such as guangdong expressway and nanjing-shanghai expressway is more prominent.

from the perspective of business model, the main source of income for highway companies is tolls, which can be broken down into: traffic volume x unit mileage charge x mileage.

among them, the mileage price is the least flexible due to the strict control of local governments. this charging standard should take into account different factors such as the technical level of the highway, the total investment, the local price index, the loan repayment period, and the traffic volume. generally speaking, the charging level should be slightly higher in more developed areas and sections with higher construction costs.

however, in order to ease the repayment pressure after the project is put into operation, local governments will at least ensure a reasonable price level, for example, setting it at the break-even point of certain low-traffic density sections. generally speaking, it is very beneficial to the profitability of sections with high traffic density.

in addition, after the expansion of the expressway, in order to cover the increasing land and labor costs, there is reason to consider raising the toll standards. in the future, as expansion and reconstruction become the main form of investment for highway companies, it will bring some growth space for corporate revenue to a certain extent.

compared with prices, stable traffic flow is more important for corporate performance. traffic flow is divided into passenger car and truck traffic. the former is mainly affected by the number of cars and residents' travel willingness, while the latter is more closely related to the economic cycle.

as an indicator that can be observed on a daily basis, we found that traffic volume fluctuated repeatedly during 20-23 due to the impact of the epidemic, but in the long run it is expected to return to the trend of a slight increase before the epidemic. even the traffic volume on some sections managed by some highway companies has exceeded that of 2019.

the good recovery trend has actually been reflected in last year's annual report, with roe and gross profit margin showing an upward trend 。

03

the sustainable operating capacity of highway assets is the basis for stable dividends. it is not only affected by cyclical fluctuations in quantity and price, but also depends on the length of time the assets can continue to operate.

different from the roads that are loaned by the government, the roads that are operated by road corporate legal persons are called commercial roads. in fact, they are a kind of franchise right. the company builds and supports itself, but it needs to be transferred to the government after the operation period. unless there is a need for reconstruction during the period, the period can be appropriately extended. otherwise, it generally does not exceed 30 years.

currently, the average remaining operating period of road assets of listed highway companies is about 12 years. if the franchise period of newly built and expanded road assets can be extended in the future, it will undoubtedly be a great boon to the sustainability of performance.

investors are pleased that new industry policies have opened up new ground for them. my country has also revised the "regulations on the management of toll highways" in 2015 and 2018, requiring that the operating period must match the debt repayment period, and that for highways with large investment scales and long payback periods, a franchise period of more than 30 years can be agreed.

from the perspective of investment logic, the performance of companies with more renovation and expansion projects should be more resilient in the future, such as guangdong expressway a and anhui expressway.

in the long run, although highways are a business with stable cash flow, their valuation is still at a disadvantage compared to that of china yangtze power co., ltd., which is more than 20 times higher.

although the extension of the toll collection period after the reconstruction and expansion is a big benefit, it will be affected by the competition and diversion between highway assets. for example, the opening of huilong expressway and guanfan expressway will lead to a decrease in traffic volume on guanghui expressway, which is controlled by guangdong expressway, and then reduce toll revenue.

moreover, the power generation cost of hydropower assets is second to none among many energy sources. although there are seasonal influences, the power generation capacity is always stable and reliable, which lays the foundation for my country's power generation structure to rely on hydropower.

however, there are enough alternative means of transportation to roads. in addition to truck transportation, there are also shipping, water transportation, high-speed rail, subway and other modes. people's travel methods and preferences are not so dependent on roads. the proportion of road freight volume has remained above 70% for many years, and there is not much room for improvement.

secondly, the franchise period can be extended by charging fees through renovation and expansion, but there is always uncertainty for the market. the market tends not to overvalue a business that has long-term sustainable operation issues.

moreover, after the term expires, it will be returned to the government. if it can continue to operate under the entrusted management model and become a property management company, it may be possible to transform into a lighter asset operation model. although it has certain valuation advantages, the scale of revenue and profit may be greatly reduced.

in general, highway companies with valuations of around ten times will always be favored by big funds, especially when market risk appetite is declining. but just like the group assets that once collapsed when the price reaches an excessively high trading multiple, compare it with china yangtze power and think about why the market is willing to give such a high valuation.