HSBC Qianhai Securities Limited: Guangdong Expressway: Third-quarter profit falls as expansion spending and toll reforms affect long-term cash flow

Why did third-quarter profit fall?

Guangdong Expressway reported third-quarter 2026 revenue of 1.24 billion yuan, down 0.8% year on year, and net profit of 456 million yuan, down 6.5% year on year, broadly in line with HSBC Qianhai’s and market expectations.
HSBC Qianhai believes traffic shifting to alternative routes during the expansion of the Guanghui and Guangzhou–Zhuhai East expressways, together with higher depreciation expenses at the Fokai Expressway, were the main reasons for the decline in earnings.
Expressway traffic in Guangdong province rose 4.6% year on year during the National Day holiday. The bank believes this demonstrates resilient regional travel demand, helping support the company’s underlying traffic in the fourth quarter.

Based on the share price used in the report, HSBC Qianhai forecasts a dividend yield of approximately 4% for the company in 2026–2028, compared with a Chinese 10-year government bond yield of approximately 1.6% over the same period. The bank believes dividends and stable cash flow help support the valuation.
However, spending will rise markedly during the expansion. The bank’s model forecasts capital expenditure of 3.72 billion yuan, 9.22 billion yuan and 10.22 billion yuan in 2026, 2027 and 2028, respectively; operating cash flow over the same period is forecast at approximately 3 billion yuan, 3.01 billion yuan and 3.03 billion yuan, respectively.
The model therefore shows free cash flow to equity of negative 723 million yuan, negative 6.211 billion yuan and negative 7.187 billion yuan, respectively; net debt is expected to rise from 5.682 billion yuan at the end of 2026 to 21.612 billion yuan at the end of 2028.

A draft revision to the Highway Law released in September proposes allowing toll roads to collect maintenance-related fees after their concession periods expire; Jiangsu, Fujian and other regions have also introduced policies to improve toll-road investment, financing and operations.
HSBC Qianhai believes these developments could lay the groundwork for whole-life-cycle highway management and subsequent revisions to toll-road regulations. If arrangements for investment compensation and tolling periods improve further, the sustainability and visibility of cash flow from road assets could increase; the company’s core expressways are being expanded, and the bank believes they could benefit.
The outcome of the expansion also depends on project progress and traffic growth after completion. Greater-than-expected traffic diversion to new expressways, or a greater-than-expected impact from differentiated toll policies on toll revenue, would also put pressure on revenue and profit.

HSBC Qianhai maintains its earnings forecasts for 2026–2028, its Buy rating and its target price of 15.50 yuan, implying approximately 16% upside from the 13.35 yuan share price used in the report.
The target price uses a two-stage discounted cash-flow model, with 2026 as the valuation base year. The first stage covers 2026–2055, the second-stage perpetual growth rate is 1%, and the weighted average cost of capital is 5%.