On October 17, 2022, the company announced that it intends to acquire 100% equity of Henan Yuexiu Lanwei Expressway Co., Ltd. (“Jinlan Project”) from Yuexiu Group. The Jinlan Project is another practice of Yuexiu Transport to obtain high-quality assets in the mode of “parent incubation” after the Rhododendron Project and also an important measure of the company to implement the development strategy of its “14th Five-Year Plan” and realize three-major-platform interaction. It serves as a milestone for the company to seize opportunities of road toll right auction in a similar platform interaction way in the future.
Since 2010, Yuexiu Transport has observed the trend that the manufacturing industry in the eastern coastal areas has moved to the labor-intensive central provinces, seized the strategic opportunities for promoting the rise of central China and continuously explored high-quality projects in central China. It has merged and acquired 7 projects in Henan, Hubei and Hunan and has formed the development pattern of “being based on the Greater Bay Area and enhancing businesses in central China”. This acquisition is the company’s another asset expansion move for entering central China. Upon the completion of the acquisition, the company can immediately obtain net profit contribution and enjoy increased asset size, revenue scale and profitability. The toll mileage under its control will increase by 12.3% from 495.2km to 556.23km. The internal return on the investment is expected to be 9.5%.
The location of Lanwei Expressway is good and the traffic growth is strongly supported
The Lanwei Expressway acquired by Yuexiu Transport this time is located in Henan Province with the largest economic aggregate in central China, and in Zhengzhou metropolitan area, the core area of the Central Plains city agglomeration zone. The cities along the Lanwei Expressway have a good economic foundation and will continue to benefit from the policy of “promoting high-quality development in central China” and the regional development policies for constructing city agglomeration in central China and the Zhengzhou metropolitan area. In addition, the Lanwei Expressway is one of the 16 north-south longitudinal channels in the expressway network planned by Henan Province. It is an important economic channel from central and western China and Central Plains to the coastal areas of Shandong Province. The advantageous location will provide great support for stable traffic growth in the future. Besides the surrounding road network being relatively perfect, mature and stable, it is expected that there will be few new surrounding roads in the future, and there will be no obvious competitive relation between the Lanwei Expressway and adjacent new roads, so the traffic diversion effect is very small.
The historical performance of the target asset is sound and the acquisition can generate immediate net profit contribution.
The Lanwei Expressway has been in operation for nearly 17 years. It is a mature asset and needs no cultivation period. The announcement shows that Henan Yuexiu Lanwei Expressway Co., Ltd. earned about 309 million yuan, with a pre-tax net profit of about 36.01 million yuan in 2021.
Despite the impact of COVID-19, the company still maintained considerable profit in 2021. The revenue from January to July 2022 increased by about 10.51% year on year and the net profit before tax increased significantly by nearly 44.37%. Based on this, it is expected that the Lanwei Expressway will continue to bring net profit contribution to Yuexiu Transport from the first year after the completion of the acquisition, namely 2023.
The announcement has disclosed that the internal return of this acquisition is expected to reach 9.5%. In addition, the total transaction price will be paid with internal financial resources and bank loans for merger and acquisition. The capital-loan ratio of Yuexiu Transport will only slightly increase from 48.4% to 52.5%, and basically the company’s financial soundness will not be affected.
The company will continue to optimize the regional layout, control and management to improve benefits.
Since the Lanwei Expressway is located in Henan Province, this acquisition will further increase the income contribution of the projects in Henan Province of Yuexiu Transport while moderately reducing the revenue proportion of the projects in Hubei Province, and helping optimize the regional structure of the company's assets. The decrease in regional concentration will help the company in response to uncertain factors including lockdown measures against COVID-19 and reduce the impact of regional risks and incidents on the company's performance.
In addition, the Lanwei Expressway is directly connected to the Weixu Expressway, which is currently under the control of Yuexiu Transport. The two have the same operation and management conditions. In other words, the existing management team of Weixu Company will be in charge of the operation and management of the Lanwei Expressway. The regional management and control mode can help make more full use of management resources, produce scale benefits, and is conducive to improving management efficiency.
Through this transaction, Yuexiu Group will inject stable and profitable high-quality assets into Yuexiu Transport. This is another support given by the parent company to Yuexiu Transport for enhancing and expanding its main business following the three expressway projects in Hubei Province. The acquisition is also a beneficial supplement for Yuexiu Transport’s asset portfolio in order to increase shareholder value after the split and the REIT listing of Hubei Han-Xiao Expressway. The Lanwei Expressway will make a net profit contribution to the listed company in the first year after the completion of the acquisition, so the acquisition will improve shareholder earnings while maintaining financial soundness.