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On Thursday, UBS analyst Robin Xu downgraded Zhejiang Expressway Co Ltd (576:HK) from Neutral to Sell, adjusting the price target to HK$5.50, a slight increase from the previous HK$5.30. The revision follows a rally in the company’s share price, which saw a 14% increase in the month after the company reported a better than expected dividend per share (DPS) for the year 2024 on March 24.
Despite the positive market reaction to the dividend announcement, UBS expressed concerns over the company’s future dividend policy. The firm’s analysis suggests a cautious outlook on traffic growth for Zhejiang Expressway, significant upcoming capital expenditures, and the possibility of a reduced payout ratio. These factors have led UBS to project the DPS for 2025-2027 to be 10-18% lower than the consensus estimates.
The downgrade is further justified by the stock’s current trading at a one-year forward yield of 5.7%, which is one standard deviation below the five-year average yield of 6.7%. UBS’s stance indicates a belief that the potential downside of the DPS is not currently reflected in Zhejiang Expressway’s stock price.
The firm’s analysis points to the expectation that the market has not fully accounted for the risks associated with Zhejiang Expressway’s dividend outlook. As such, UBS has positioned the stock rating to Sell, suggesting that investors may need to recalibrate their expectations regarding the company’s future financial performance.
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