In China, most of the toll road projects have a maximum concession of only 30 years.
To sustain profitability and pave the way for future growth, toll road companies need to plough back part of their profits into new projects.
This is what Yuexiu Transport Infrastructure (01052.HK) has been doing.
With no construction arm of its own, Yuexiu has been focusing only on brownfield projects – buying existing road assets from local governments or private owners.
EJ Insight recently paid a visit to two of its projects in the provinces of Hubei and Hunan to find out the progress since Yuexiu bought them.
Suiyuenan Expressway in Hubei was acquired more than a year ago. It broke even and yielded a moderate profit in the first half of 2016.
Following the acquisition, Yuexiu rolled out several measures to boost the toll road’s profitability.
For starters, the company has replaced costly bank loans with cheaper funds, partly through the issuance of Panda bonds.
Interest rates of Yuexiu’s panda bonds are more than 1 percentage point lower.
The benefits of lower finance costs will gradually kick in, Yuexiu’s general manager Hu Shengchun said.
Part of the future cashflows generated by the road will be used to retire debt, and that will further reduce finance expenses.
To lower costs, the company also renegotiated maintenance contracts by taking advantage of cheaper oil prices, to which the price of core road surfacing material bitumen is closely linked.
The economics of different roads vary a lot; different geographical locations mean different capture areas and traffic types.
Suiyuenan Expressway draws 70 percent of its truck traffic from outside the province, which is related to the movement of steel, grains and coal from the northern regions to southern China and the transportation of consumer goods of all sorts from south to north.
Hence, future growth of toll revenue depends a lot on China’s overall economic performance.
By contrast, Changzhu Expressway in neighboring Hunan province relies much more on local economy for traffic feed.
Yuexiu bought 90 percent of the expressway project in 2010 and the remaining 10 percent last year. The project turned profitable last year.
Changzhu links up Changsha and Zhuzhou, two of China’s fast-growing cities.
Changsha’s gross domestic product has grown 460 percent over the past 10 years.
The provincial capital is expected to expand 9.3 percent this year, according to Changsha Evening Newspaper, even though the country’s economic growth was only 6.7 percent in the third quarter.
Top construction equipment makers like Sany Heavy Industry (600031.CN) and Zoomlion (01157.HK) as well as carmakers like SAIC Volkswagen all have their production facilities in Changsha.
Meanwhile, Zhuzhou boasts transportation equipment makers like Zhuzhou CRRC Times Electric (03898.HK) and a developing industrial park.
The best thing to have these large companies around is that the road will gain from the flows of trucks that bring in the materials and those that ship out the products.
Changzhu Expressway doubles as a key road for intra-city traffic. It is also an important highway for Zhuzhou airport. Passengers cars make up about 80 percent of the road’s traffic flow.
Yuexiu’s key initiative to boost the financial performance of Changzhu Expressway lies in its marketing effort to attract more truck drivers, typically more profitable for the road operator.
“Compared to the alternative route through the parallel Jingzhu Expressway [linking Beijing and Zhuhai], our road is less congested and shorter, which means drivers can get to their destination faster and safer, at the same toll fee,” said Chen Hui, vice general manager of Hunan Changzhu Expressway Development Co., Yuexiu’s operating subsidiary in charge of the road.
Chen said they are trying to reach out to more drivers through the radio and distribution of flyers.
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