Asia/PacificInvestmentResearchMORGANSTANLEYDEANWITTERThismemorandumisbasedoninformationavailabletothepublic.Norepresentationismadethatitisaccurateorcomplete.Thismemorandumisnotanoffertobuyorsellorasolicitationofanoffertobuyorsellthesecuritiesmentioned.Pleaserefertothenotesattheendofthisreport.November11,1999China:InfrastructureJing-FengYou–HongKong2848-6511WhoBenefitsfromChina’sChangingHighwayPolicy?SummaryandInvestmentConclusionAmendmentstoChina’sHighwayLawhavewithdrawnthelegalbasisforvariousfeeschargedbyprovincialandlocalgovernmentsandreplacedthemwithcentralizednationaltaxeswhich,potentially,includeafueltaxandavehicletax.ThetollroadsinwhichHongKong-listedcompaniesareinvolvedhavelargelybeenshieldedfromthechangeinlawwithgrandfatherclause-likeexemptionsforexistingprojects,inouropinion.ButotherhighwayregulationsexpectedfromtheStateCouncilcouldpinchinsomeareas.WethinkthebiggestbeneficiariesofthenewamendmentsandtheexpectedStateCouncilregulationswouldbeZhejiangExpressway(Outperform,HK1.13),ShenzhenExpressway(Outperform,HK$1.11)andJiangsuExpressway(Outperform,HK$1.21).Wethinkthatstockineachofthethreecompaniesissubstantiallyundervalued,tradingatsingle-digitP/Esonourestimatesfor2000anddiscountsofabout36-38%toourconservativelyestimatedNAVs.WethinkthenewpoliciescouldputlimitedpressureonsomeprojectsinvolvingNewWorldInfrastructure(Neutral,HK$8.4),CheungKongInfrastructure(Neutral,HK$14.35)andRoadKing(NotRated,HK$5.10).ThefullimpactofthenewlegislationwillprobablynotbeclearuntiltheStateCouncil,withinthenextfewmonths,spellsouthowtheamendedlawwillbeimplemented.Thenewfueltaxistoreplacefeesthatarecurrentlyleviedonaper-vehiclebasis.Thiscouldstimulatecarbuyingmodestlyandincreasetheuseofexpressways,whichwethinkaremorefuel-efficientthanstandardroads.However,thenewtaxpolicycouldraisecounterpartyrisksfortollroadsoperatingunderprofitguaranteearrangementsifaguaranteeismet,atleastpartially,byfundsraisedfromvehiclefeesthatlocalgovernmentschargetooffsetpossibletollrevenueshortfalls.AnOverallPositiveisLikelyforHongKong-ListedCompaniesWebelievetheamendedHighwayLawandthepolicychangesstillpendingshouldprovidethetollroadsectorwithabetter-definedlegalframework.Thisshouldbeabigpositivebecauseregulatoryriskcouldbebettermanaged.WedonotexpectanyHongKongcompaniestobenegativelyaffectedtoasubstantialdegree.Thenewregulationsarenotlikelytodepartmuchfromtherulesalreadygoverningwhataretobecomeclassifiedas“speciallicensetollroads.”AndexistingtollroadsaretobeshieldedfromtheHighwayLawamendmentsandthependingregulationsbyanexemption.TheAmendmentsChina’spresident,JiangZemin,hasenactedasetofamendmentstotheHighwayLawthathadbeenapprovedearlierbytheStandingCommitteeofChina’sNational2MORGANSTANLEYDEANWITTERThismemorandumisbasedoninformationavailabletothepublic.Norepresentationismadethatitisaccurateorcomplete.Thismemorandumisnotanoffertobuyorsellorasolicitationofanoffertobuyorsellthesecuritiesmentioned.Pleaserefertothenotesattheendofthisreport.People’sCongress.ThenewpolicyinvolvestollroadsandcameintoeffectonOctober31,1999.Theamendmentsbanvariousfeesthathadbeenimposedbyprovincialandlocalgovernmentsandreplacethemwithcentralizedtaxes—itisintendedthatthesebeafueltaxandavehicletax.TheamendmentsgivetheStateCouncilbroadauthoritytocomeupwithataxschemeandtaxrates.Theamendmentsinvolvethreechanges(Table1):•Clause21:feesdescribed...
