Jiangsu Expressway Company
It’s also worth keeping an eye on for investors that want to see how China’s economy is performing under the weight of its current deleveraging efforts and the ongoing China/USA trade dispute.
Image Source: Google Finance
Overview and Opportunities
Jiangsu Expressway Company constructs and operates toll roads and bridges in China’s Jiangsu province. It’s a partially state-owned enterprise, but is also significantly owned by private investors. They also own some real estate and ancillary services like food and gas stations.
Shares of Jiangsu Expressway Company trade on the Shanghai Stock Exchange and Hong Kong Stock Exchange. In addition, an ADR has traded over the counter in the United States with the ticker JEXYY since 2002.
Jiangsu is a coastal province in China that is home to about 80 million people, which is roughly the population of Germany. The province has the second highest GDP of all provinces in China, and the highest GDP per capita. It’s located between Beijing and Shanghai, which is a great spot for toll roads.
The number of cars in China continues to grow substantially. There were 59 million vehicles in China in 2007, and 217 million in 2017. That’s nearly quadruple the number of cars in ten years, In comparison, the number of vehicles in the United States only increased by a total of 6% over the same period, or basically flat. Jiangsu Expressway’s 2017 report stated that the number of cars in Jiangsu Province increased 12.9% year-over-year compared to 2016.
There are still major opportunities for growth. For every 1,000 people in the United States, there are about 900 cars. Most other developed countries are in the 400-800 range for cars per 1,000 people. China is still very low, with less than 200 cars per 1,000 people. Even if this figure just reaches 300 or 400 cars per 1,000 people and stops growing, that’s a 50-100% increase from current numbers.
Jiangsu Expressway Company has grown revenue from 7.8 billion CNY in 2012 to 9.4 billion CNY in 2017. Over the past 12 months, covering much of 2018, revenue is up to 10.1 billion CNY. In dollar terms, that’s just under $1.5 billion USD in annual revenue, so it’s a fairly small business overall. The company makes about 76% of its revenue from toll roads, 19% from ancillary services (rest stop sales of food, gas, and merchandise), and 5% from real estate.
The company’s earnings per share increased by 86% between 2012 and the past twelve months. The dividend has only increased by 25% over the same time period as the company has smartly reduced its payout ratio to just over 50%. Over the past 15 years, the company has consistently raised its dividends. A handful of years saw flat dividend rates, but there has never been a dividend cut. The current dividend yield is approximately 5%.
The company’s balance sheet is solid, with 40% debt-to-equity and an interest coverage ratio over 10x. The company oddly holds approximately $2 million worth of gold as part of an investment portfolio, which I think is a good idea under current conditions.
As for valuations, the company trades with a price-to-earnings multiple of 11x and a price-to-book multiple of just over 1.8x.
As part of a diversified approach to asset allocation, I think investing in foreign stocks or ETFs is a smart move for investors, especially considering that stock markets in most countries are much lower-valued than stocks in the United States. I wouldn’t put a large allocation into Jiangsu Expressway stock, but as a small portfolio position it’s an interesting income opportunity.
Investors are closely watching China for signs of an economic slowdown due to its current deleveraging efforts and the impact of tariffs. One of the interesting metrics worth watching is traffic volume, which also happens to be the most important metric for this company.
As of the most recent quarter, Jiangsu’s traffic volumes continue to grow at a healthy pace:
Image Source: Jiangsu Expressway Company Website
All of their expressways are showing a year-over-year increase in traffic volumes and toll revenue. The only exception, Nanjing-Lianyungag Highway, only decreased because they ceased to charge tolls in the middle of 2018, so that is not an apples-to-apples comparison.
All of this seems like it should be a no-brainer investment. Investing in a Chinese toll road company that operates as a regional monopoly with a 5% dividend yield, a long history of dividend growth, substantial top-line growth, a solid balance sheet, and a P/E ratio of 11 seems like an obvious buy. Considering that the number of cars in China is growing by double-digit percentages per year with a long potential runway of growth still ahead is a very nice trend for the company.
The catch, however, is that toll roads in China are temporary. Toll road operators can only collect tolls for the first 25-35 years of an expressway or bridge’s life of operation. After that, they can’t collect tolls. In other words, Jiangsu Expressway has temporary rights to collect tolls for a finite time period, and doesn’t really own the toll roads.
The company lists these toll road rights as intangible assets currently worth about 20 billion CNY, and they depreciate at about 1.2 billion CNY per year. The company’s reports also don’t break down exactly which expressways’ toll rights expire in which years, although the average is around 15 years from now.
The company continues to build new toll roads and expand toll roads, but this is a constant game of replacing assets that will eventually run out (although we can’t be sure when) because there is a limit on how many expressways can be built in the province. The company’s investments in ancillary services and real estate can offset some of these toll expirations, but it remains to be seen what the company will invest in over the next 15+ years as its ability to collect tolls on major expressways expires. If the company starts getting more and more of its revenue from non-toll sources, then the risks of the company could change substantially.
The company also faces risks from the Chinese government. Tolls in China have a well-known reputation of being very high, and the government could force toll rates lower. On the flip side, the government occasionally grants extensions to the amount of time that companies can collect tolls from highways.
Lastly, there is currency risk for U.S. investors. The company generates revenue and pays dividends in CNY (Renminbi). If CNY depreciates relative to USD, then it will impact the dollar-denominated metrics for the company. Alternatively, if the U.S. dollar weakens relative to China’s currency, U.S. investors can reap additional rewards from a stake in this company as all the metrics will be boosted in dollar terms.
Overall, Jiangsu Expressway Company is an interesting small foreign business with a wide economic moat that pays growing dividends with a 5% yield.
The balance sheet is solid, and the growth potential is very significant, but the huge caveat is that their various pieces of revenue only have 25-35 year lifetimes and need to be replaced by new sources of revenue over time, which has a limit eventually. The company has 10-20 years of operation for many of its current assets, and is still constructing or expanding assets that will have long lifetimes.
For investors that want yield and foreign exposure, it’s certainly worth a look. The business has given investors solid returns over the past decade, and may continue to do so for at last another decade or two.