􀀗 Potential catalysts: Traffic growth to
rebound in 2H09; M&A by end-2009
􀀗 Positive mix: Earnings clarity, operating
leverage, and exceptional dividends
􀀗 We initiate coverage of Jiangsu (177)
and Zhejiang (576) with OW(V) ratings
Above-consensus earnings drivers: (a) We expect traffic
growth to begin to rebound in 2H09. (b) We anticipate a
realistic M&A opportunity to acquire projects from parent
companies by end-2009. (c) Expanding operating leverage is
set to boost margins.
Earnings clarity, high dividend. China’s toll road
companies offer (a) a predictable income stream from tolls,
(b) exceptional dividends (65-85% payout) on strong cash
flow, and (c) earnings clarity from the release of monthly
traffic volumes. This compelling mix of qualities leads us to
initiate our sector coverage with Overweight (V) ratings on
Jiangsu Expressway (177 HK), the biggest operator in terms
of aggregate toll road length (our HKD7.10 target price
implies a 43.5% potential total return), and Zhejiang
Expressway (576 HK), which has the highest profitability
per km (our TP of HKD7.73 suggests a potential total return
of 39.6%).
Valuation. Our TPs are DCF based owing to the companies’
predictable cash flow. From a PE angle, we suggest a target
of only 14.3-16.9x on 2010e earnings. This is in-line with
the sector’s 10-year market-cap-weighted average. We have
also performed a sensitivity analysis on various traffic flow
scenarios.
Risks. The economic slowdown may not be fully reflected in
traffic volumes. In addition, rate cuts could reduce interest
income.

Investment summary 3
Traffic flow forecast: The key
growth driver 8
Getting to our TPs 18
Earnings sensitivity 21
Key charts 23
Valuation comparison 27
The regulatory framework 33
Consensus change 36
Risks 38
Company profiles 39
Jiangsu Expressway 41
Zhejiang Expressway 51
Disclosure appendix 61
Disclaimer 64