Analysis Key positives from Daqin’s 3Q results include: (1) Investment incomefrom Shuohuang line (41.2%-owned) continues to be an importantearnings contributor accounting for 15% of Daqin’s net earnings (+8% qoq).(2) Healthy cashflows: 3Q capex was down 63% yoy to Rmb367mn whileoperating cash flow increased by 21% yoy to Rmb4.9bn; (3) Improvingdebt structure: Company paid back Rmb7.5bn of short-term borrowings in3Q that we think should help lower finance costs from 4Q. Key negatives include: (1) SG&A costs increased by 37% yoy in 3Qindicating some labor cost pressure; (2) Partially affected by the Septemberannual maintenance, 3Q throughput growth of Daqin line was only 5% yoy.This led to a 6% revenue growth yoy and a decline in EBIT margin of 6pptsyoy to 33% (flat qoq). Implications Given Daqin’s strong balance, stable business, and upside potential to itsdividend payout (2011E: 6% dividend yield), we reiterate our Buy rating (onCL) of Daqin Railway. However, we place our earnings and target price ofDaqin Railway under review pending more information from the companyon its costs and volume outlook.

We expect stronger 2H11 earnings (+33% yoy) than 1H, to be drivenby: (1) our forecast of 9% coal throughput yoy growth on Daqin line in 2H,on track to meet 440mn tons throughput for the full year; (2) a slower 5%yoy increase in costs for 2H (from +11% yoy in 1H) on a high base in 2H10. Meanwhile, we lift our dividend forecast for 2011E/12E/13E by 7%-19%to Rmb0.48/0.55/0.62 as we think the Ministry of Railway’s need for capitalwill drive higher dividend payout to >50%. Our 2H11E EPS and 2011Edividends are 5%-10% above Bloomberg consensus. We forecast 9.3% EPS CAGR in 2011E-2013E driven by unit cost control,earnings from its 41.2%-owned Shuohuang line, a pick-up in earningsgrowth on its rail lines in Shanxi province from 2012E (2011E-2013Eearnings CAGR of 31%) and higher interest income given our forecast ofRmb18bn of cash on the balance sheet by 2013E (Rmb3bn net cash). Wethink the current 2012E P/E of 7.5X under-appreciates the earnings growthoutlook to be driven by Shuohuang line and rail lines in Shanxi province. Implications。 We reiterate our CL-Buy on Daqin, as we see 28% potential upside to ournew 12-m TP, strong earnings visibility and potential dividend upside,given the MOR’s high debt-to-asset ratio (58% by end-June 2011). Meanwhile, we think another freight rate hike is possible over the nextsix months, given rising operating cost pressures at the MOR. Valuation。 We fine-tune our 2011E-2013E EPS by -2% to 1% and revise our 12-m TP toRmb9.30 (from Rmb12.00) with 28% potential upside based on 1.32XEV/GCI (from 1.70X), underpinned by 2011E-2013E CROCI of 17.2% (from16.3%) but a lower sector multiple and LT discount to the sector of -6%. Key risks。 Unfavorable volume/pricing policies; capex and costs.

After the August 29 market close, Daqin Railway reported 1H 2011 netprofits of Rmb6.2bn (EPS of Rmb0.42, +20% yoy vs. our forecast of +24%yoy), broadly in line with our expectations, reaching 46% of our 2011E EPSforecast. Key positives include: (1) Ton-mile effect: Solid 1H revenuegrowth of 9% yoy was supported by longer ton-mile (i.e. RFTK up 9% yoyvs. tonnage growth of 4% yoy) and higher cargo yields (+1% yoy helped byordinary freight rate hike in 2Q11); (2) The 41.2%-owned Shuohuang railline was the key earnings growth driver in 1H, contributing 15% to thebottom line. We remain bullish on the prospects of the Shuohuang lineover the next few years as China’s second busiest coal rail line; (3) Capexwas down 43% yoy in 1H to Rmb2.1bn as most capacity expansion workis near completion. We think increasing free cash flow should support ourforecasted dividend payout going forward. Negatives mainly came fromthe cost side on higher repair costs (+43% yoy in 1H) due to 2Qmaintenance work and labor costs (+16% yoy in 1H) that led to a decline inEBIT margin by 1ppt to 36% in 1H11 vs. 1H10. Analysis。 We think Daqin line remains on track to meet our 440mn tons coalthroughput forecast for 2011, and this target was re-affirmed bymanagement’s positive outlook statement in the interim results. We thinkthis supports our view of a sequentially stronger 2H for Daqin Railwaydriven by continued resilient coal throughput growth in July/August andless disruption from maintenance work in 2H (a 15-day scheduled heavymaintenance in 2H vs. a one-month process in 1H11). Implications。 We maintain our CL Buy but place our earnings estimates and target priceunder review as we wait for more details from management on costoutlook, capex, and thoughts on MOR reform at the investor meeting (withdial-in facilities) at 3:30pm Beijing time August 30.

Xiamen Airport announced a 25% yoy growth in passenger throughput to1.46mn in July, its highest monthly throughput on record, on an 18% yoyincrease in number of flights, recording the fastest passenger throughputgrowth among China’s top 15 airports (Beijing +4% yoy, Shenzhen +5% yoy). Analysis。 While Xiamen Airport has benefited from the higher slot capacity of 28flights per hour in 2011 from 25 last year, we think the demand picturehas been the key source of the positive surprise year-to-date aspassenger demand has continued to outpace flight capacity growth. In particular for July, Xiamen’s only inter-continental flight operated byKLM that was launched in March 2011 (Xiamen-Amsterdam) recordedstrong load factors of 96.8% for inbound flights and 83.2% for outboundflights in July (vs. 52% load factor in May), indicating strong ramp-up ininbound and outbound traffic demand into/out of the second-tier cityover just six months from launch. Amsterdam has already surpassedSeoul as Xiamen’s fourth largest outbound destination in July. We think Xiamen, as a second-tier city, is now entering into a high growthphase for both domestic and international aviation travel, where we thinkeach incremental international flight launch would be able to materiallyswing higher unit aeronautical and non-aeronautical revenues for XiamenAirport, and we think this is not yet factored in by the market. Implications。 Reiterate Buy on Xiamen Airport and see 33% potential upside to ourEV/GCI-based 12-month target price of Rmb18.80. We see upside to 1Hresults, to be released Aug 18 (we forecast +16% yoy net profit growth for1H; 2011E EPS of Rmb1.12), and expect this and strong traffic growth (weassume +12.5% passenger growth for 2011; year-to-date: +18.7%) to driveconsensus upgrades and share price performance. Risks: Unfavorablepolicies, political instability, and higher-than-expected HSR diversion.

After the August 18 market close, Xiamen Airport reported 1H 2011 netprofit of Rmb150mn (+13% yoy), broadly in line with our expectation ofRmb154mn. Key positives include higher-than-expected revenue growthof 18.4% yoy, driven by 18% passenger growth yoy, a 4% yoy increase inaeronautical charge per flight, and 1.4% yoy increase in rental/retailrevenue per passenger in 1H 2011. Higher revenues were, however, offsetby higher costs (staff costs increased by 13% yoy) that led to a 1.3pptdecline in EBIT margin to 45%. Operating cash flow was roughly flat atRmb195mn in 1H11 and capex was Rmb60mn in 1H11 (from Rmb24mn in1H10) as the Rmb230mn re-construction of its car park commenced thisyear, and is scheduled for completion by end-2012. What to do with the stock。 We lift our revenue growth forecasts to 17%/13%/14% (from 13%/13%/14%)as we raise our 2011E passenger throughput growth to 16% (from 12.5%)and raise our unit aeronautical revenue charge assumptions on betterthan-expected traffic growth year-to-date. However, we fine-tune our2011E/12E/13E EPS by -2%/-1%/-1% on the higher costs realized in the firsthalf. We cut our 12-m TP to Rmb17.70 (from Rmb18.80) based on targetEV/GCI of 1.85X (from 2.01X) underpinned by average 2011E-2013E CROCIof 19.9% (unchanged), reflecting a decline in sector Valratio since May2011. We see 28% potential upside to our 12-m TP. We expect the lowtraffic base last year in 2H10 and continued ramp-up of international flightsat Xiamen Airport to lead to even faster earnings growth in 2H11 (weforecast 2H earnings growth of 24% yoy). Risks: Unfavorable policies,political instability, higher costs, and higher-than-expected HSR diversion.

我们对厦门空港的首次评级为买入,因为我们对以下方面持积极看法: (1) 客流量增长:受益于中国二线城市迅速发展以及跑道容量增长; (2) 可持续的低成本结构:我们预计,受有利经营杠杆的推动2011-2013年将保持高的利润率,而且审慎的资本开支将使T4航站楼(将于2013年底完工)拥有较低的成本结构; (3) 货运业务具吸引力:公司拥有厦门国际航空港空运货站公司58%的股份,这项业务的利润率较高,我们认为其增长潜力巨大; (4) 我们预计来自高铁的影响很小。

After market close on February 25, Shandong Expressway (SDE) reported 2010net profit of Rmb1,251mn (EPS of Rmb0.37, up 19% yoy), roughly in-line withour expectations. Key highlights include: (1) Sequential margin improvement:We saw sequential operating margin improvement in 2H10 of 50%, from 46% in1H10. For the full year 2010, toll revenue was up 14% yoy, while toll businessoperating margin expanded by 3 ppt yoy to 49%. (2) Toll business in 4Q10 wasstrong: Toll operations were particularly strong in 4Q10 (especially Jiqingexpressway, with revenue up 18% yoy), but this was partly offset by higherlosses from Xuyu expressway where associate losses in 4Q10 was Rmb25mn,widened from loss of Rmb15mn in 3Q10. (3) SDE continued to downsize itspetroleum sales business, with revenues down 25% yoy, given the lowprofitability (breakeven on the operating line) of this business. What to do with the stock。 We fine-tune our 2011E/2012/E/2013E EPS by 0%-1% and reiterate our Buyrating on SDE as we think the stock is attractively valued at 0.9X forward 1-year EV/GCI versus sector average of 1.1X, while SDE delivers the highestCROCI amongst A-share listed expressways. Our Director’s Cut (EV/GCIbased)12-month target price of Rmb6.90 (unchanged) is based on anupdated EV/GCI multiple of 1.30X (from 1.32X), underpinned by average2011E-2013E CROCI of 14.7% (from 14.4%) and sector Valratio of 0.84X(from 0.87X). Key risks: (1) uncertain traffic growth and toll fee regulation,(2) further earnings dilutive asset injection, (3) earlier than expectedwidening of Jiqing expressway from 4-lane to 8-lane that would requirehigher capex, (4) worse than expected diversion from high speed rail andJinghu second expressway in 2013.

According to the MOR and China Coal Resource, Daqin line recorded 13.4%yoy increase in coal throughput at 37.1mn tons in January 2011, while coalrail lines in Shanxi province recorded flat throughput (on a high base inJan 2010) announced on February 18. Meanwhile, China Shenhua earlierannounced a 6.2% yoy throughput growth on its coal rail lines (includingShuohuang line) in January 2011 and Huanghua port recorded 23.5% yoyincrease in throughput. Qinhuangdao port recorded 14% yoy increase incoal throughput in January compared to the same period last year,according to Hebei Port Group. Analysis。 We think the set of coal rail and port throughput data in January continuesto support our bullish view on Daqin Railway, underpinned by our 10%volume growth forecast for Daqin line in 2011 (to 440mn tons, contributingto 75% of our 2011E EPS) and our above-market view on growth prospectsof the Shuohuang line over the next few years (contributing to 13% of our2011E EPS). In particular, 1) We think Daqin line gained share in Januaryamongst northern west-east coal rail lines as volume growth (especiallyfrom Inner Mongolia) outpaced other coal rail lines; 2) Port capacity islooking to be less of a limiting issue with improving port accessibility byrail and port expansions; 3) Easier comps for February should supporthigher yoy volume growth (from flat throughput in January) for Shanxilines in February (contributing to 12% of our 2011E EPS). Implications。 We reiterate our Buy rating on Daqin Railway (on Conviction List) andcontinue to see an attractive entry level for the stock at compellingvaluations of 9.5X 2011E P/E (vs. broader sector average of 13.8X) and over5% dividend yield. Our 12-m TP of Rmb12.00 is based on EV/GCI of 1.70XEV/GCI underpinned by 2011E-2013E average CROCI of 16.3%. Risks: (1)Unfavorable policies relating to coal demand and freight rate; (2) Coal railsupply chain disruptions; (3) Capex and costs surprising on the upside.