Highway sector performance has shown resilience in recent years despite cyclical industry headwinds, with the sector's inherent stability and defensive characteristics remaining well-preserved. The stability of earnings is robust, and companies with larger profit scales tend to exhibit relatively higher earnings stability. The effectiveness of the two metrics—dividend yield and payout ratio—has significantly increased, reinforcing the sector's defensive investment thesis. It is anticipated that road enterprises characterized by "high payout ratios and low uncertainty" will maintain their relative strength.
Fundamentals and Valuation: Valuation Remains at Elevated Levels, Earnings Slightly Pressured During Capital Expenditure Phase
The expressway sector remains within a capital expenditure cycle, driven by the industry's toll concession periods. Since 2023, factors including a slowdown in truck revenue growth and traffic diversions due to road reconstruction and expansion projects have led to a slight year-on-year decline in the sector's adjusted net profit, with forecasts indicating decreases of 3.0% and 4.0% for 2024 and 2025, respectively.
Although the overall earnings growth of the highway industry has been affected by its cycle in recent years, the sector's own earnings stability and defensive function have been well-maintained. The stability of sector earnings is strong, and companies with larger profit scales demonstrate relatively higher earnings stability.
From a valuation perspective, the highway sector's valuation peaked in the first half of 2025 before experiencing a subsequent correction, yet it remains higher than 2023 levels. The market continues to recognize the sector's characteristics as a beneficiary in a low-interest-rate environment. However, with current government bond yields relatively stable, this factor alone is not a driver for increased holdings. With valuations elevated to current levels, investors are placing greater emphasis on the dividend yield of individual stocks and the stability of future earnings.
Dividend Yield and Payout Ratio Metrics Gain Prominence, Reinforcing Defensive Logic
An analysis of sector trends suggests that the core logic for allocating to highway stocks has shifted back towards absolute returns and defensiveness since the third quarter of last year. The performance evolution of individual stocks in the first half of this year provides strong confirmation of this conclusion.
1. Since the beginning of the year, individual stock price gains have shown a clear positive correlation with payout ratios. It has been observed that the year-to-date stock price increases of listed highway companies exhibit a significant positive correlation with their dividend payout ratios. For instance, the top three performers this year—Yuexiu Transport Infrastructure Limited, Shandong Hi-Speed Company Limited, and Anhui Expressway Co., Ltd.—have maintained stable payout ratios of approximately 70%, 60%, and 60%, respectively, for multiple consecutive years. The market's preference for high payout ratios is essentially a pursuit of high certainty. Currently, the highway sector is in a reconstruction and expansion cycle, where significant capital expenditures have increased earnings uncertainty for some companies. A company's ability to maintain stable dividend amounts and payout ratios has become an effective measure of its cash flow adequacy. As the market provides long-term positive feedback on stock prices for high-dividend companies, the willingness of road enterprises to pay dividends has continued to strengthen in recent years, with dividend stability and sustainability being relatively leading within the A-share market. Among A-share targets, four highway companies have maintained payout ratios above 60% for three consecutive years, and eight have maintained ratios above 50%. Furthermore, four companies have significantly increased their payout ratios for 2025 compared to 2024, indicating a clear industry trend of rising payout ratios.
2. Since Q3 last year, the dividend yields of key listed companies have shown a trend of gradual convergence. Another notable change in the sector this year is the trend towards convergence in the dividend yields of major listed companies. Prior to Q3 2025, there was a long-standing disparity in dividend yield levels among key sector companies; for example, Jiangsu Expressway Co., Ltd. consistently had a dividend yield about one percentage point lower than Shandong Hi-Speed Company Limited. However, after Q3 2025, this gap narrowed rapidly, with the dividend yields of several leading high-dividend stocks converging towards the 4%-4.5% range, significantly reducing the yield differential. This phenomenon may be attributed to the increasing proportion of institutional investors within the highway sector's investor base. When institutional investors allocate to the sector based on absolute return or defensive logic, they tend to have stricter requirements for the dividend yields of relevant stocks. Regardless of the precise cause, it is certain that the importance of the dividend yield metric has risen since Q3 last year. Over the long term, the spread between the dividend yield levels of listed companies and government bond yields remains a key indicator to monitor. In a low-interest-rate environment, stocks offering stable and high dividends remain suitable for investors seeking absolute returns.
Investment Recommendations: Road Enterprises with "High Payout Ratios and Low Uncertainty" Expected to Remain Strong
Regarding individual stock allocation, companies that meet the criteria of "high dividend payout ratio and low uncertainty" are expected to receive increased market attention in the coming period. Anhui Expressway Co., Ltd. is a key recommendation. Other relevant targets include high-payout-ratio stocks such as Yuexiu Transport Infrastructure Limited, Shandong Hi-Speed Company Limited, and China Merchants Expressway Network & Technology Holdings Co., Ltd., as well as Jiangsu Expressway Co., Ltd., which is noted for its strong stability in dividend amounts.
Risk factors include changes in industry policies, a slowdown in macroeconomic growth, road reconstruction and expansion expenditures exceeding expectations, and road network traffic diversion exceeding expectations.
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