Events:
Zhejiang Expressway (ZJE) released its 1~3Q08 results: Operating revenue declined by 4.2% YoY to Rmb5.0bn, and net profits decreased 22.8% YoY to Rmb1.43bn, with an EPS of Rmb0.33, 6.5% higher than our previous forecast of Rmb0.31/share. 1~3Q earnings represent 86.6% of ou r full-year forecast.
Our Comments:
Toll road business deteriorating; unlikely to improve much in coming two years
•           ZJE’s 1~3Q08 toll revenue recorded a 4.2% YoY decline to Rmb5.0bn, in line. Major expressways, Shanghai–Hangzhou, Hangzhou–Ningbo and Shangsan all saw a drop in daily average traffic volume, by 17.5%, 0.6% and 4.6%, respectively, as compared with 1~3Q07.
•           As we have repeatedly stressed, traffic has been significantly diverted away from ZJE’s toll roads by the Hangpu Expressway and the Hangzhou Bay Bridge. Looking forward, the Shanghai–Hangzhou and Hangzhou–Ningbo Expressways will likely see a greater impact from the traffic diversion, following opening of the Hangzhou Bay Bridge to heavy truck traffic from October 11, 2008.

•           Zhejiang is heavily affected by the current economic downturn, due to the dominance of the local economy by export-oriented SMEs, creating difficulties in maintaining economic growth and increasing the province’s exposure to the impact of declining US and European demand.
•           Although ZJE is negotiating with Hangpu expressway on the distribution of toll revenue from regional traffic, and a result favorable to the listco is likely, this is unlikely to be enough to change the fundamentals of its main business. The growth profile of ZJE’s existing toll roads over the next two years is not promising, and with the Hangzhou Bay Bridge open to truck traffic since October 11, 2008, the Hangzhou–Ningbo segment and Shangsan Expressway are facing more diversions. The only hope is an asset injection.
Securities segment performance a little better than expected, but prospects still lackluster
•           Contributing 18% of ZJE’s revenue and 26% of its gross profit in 1~3Q08, the securities business is performing a little better than our last forecast, even though it has suffered significantly from the sharp correction in prices and the major decline in turnover of China’s securities market, recording a 36% YoY decline in 1~3Q08. We revise up our securities revenue forecasts from a 48% YoY decline to a 40% YoY decline.
•           We think the prospects for the company’s securities business in 2009 are gloomy, given the poor outlook for the Chinese economy and the securities market. To be conservative, we leave our 2009 earnings forecast for the security business unchanged, meaning we expect a 40% YoY decline in the contribution from the securities business for the whole year.
Earnings forecasts revised upwards; HOLD rating maintained
•           As we now think results of the securities business will be a little better than our earlier – dire – forecasts, we revise our 2009 earnings forecasts up 3.2% to Rmb1.72bn. or Rmb0.396 per share, and we increase our target price to HK$3.93 (6.5% higher than the current price) on the basis of our current earnings forecast. The stock is trading at 8x 2008 P/E and 1.0x 2008 P/B. Downside risks are relatively limited, but there is also little upside, given the poor outlook for both the toll roads and securities segments. HOLD rating maintained.