Toll roads have become an important part of transportation infrastructure in many countries around the world. In China, the toll road industry has experienced rapid growth since the 1990s, providing a profitable investment opportunity for many companies. This article will analyze how toll road investment companies operate and earn profits in the Chinese market, with a focus on industry chain, business models, financial performance, valuation, pricing mechanisms and competitive landscape of toll road industry. By looking into the economics behind toll road investments, investors can gain key insights to assess the risks and returns of putting money into toll road companies.
Toll road industry chain consists of construction, operation and maintenance links
The toll road industry chain includes three major links: highway construction, highway operation and highway maintenance. Highway construction involves building the roads, bridges, toll plazas, service areas and roadside facilities. Highway operation refers to collecting usage fees from drivers and managing the daily operations. Highway maintenance involves repairing damages, resurfacing roads and ensuring safety. A complete industry chain allows toll road companies to internally control the whole lifecycle of a toll road asset. Key players in the industry chain are construction companies, operators of toll roads, maintainers, as well as suppliers of materials, equipment and services.
BOT and TOT are common business models adopted by toll road companies
Toll road companies often use BOT (build-operate-transfer) or TOT (transfer of operating rights) as business models when taking over highway projects. Under the BOT model, the private investor builds and operates the toll road for a concession period like 30 years, after which the asset is transferred back to the government. This model needs large upfront investments but the long concession period helps recoup the costs. The TOT model means the government transfers the operating rights of an existing toll road to the private investor for a fee. The investor operates and earns fees for an agreed period before transferring the asset back. Compared to BOT projects, TOT requires less upfront investments from companies.
Industry financials show fast revenue growth but dependence on government subsidies
The toll road industry in China has maintained rapid revenue growth in recent years, typically outpacing GDP expansion. This reflects the country’s booming traffic volumes and continued investments in highway projects. However, industry profitability is heavily reliant on government subsidies. For example, subsidy income accounted for about 57% of net profits for Shenzhen Expressway in 2020. Investors need to assess the sustainability of financial aid policies when evaluating toll road companies. In addition, competition from high-speed rails and airlines has led to slower traffic growth on some toll roads. Overall, the industry has promising prospects but also faces uncertainties that require careful analysis.
Common valuation methods include P/E, PEG, EV/EBITDA and discounted cash flow
When valuing toll road companies, common valuation metrics used by investors include P/E, PEG, EV/EBITDA multiples and discounted cash flow models. The P/E ratio assesses valuation relative to profitability. PEG ratio takes into account growth potential. EV/EBITDA evaluates enterprise value against cash flow. Discounted cash flow models project future cash flows and discount them back to the present. Each metric has pros and cons and investors often use a combination of methods. Key variables that drive toll road company valuations are traffic volume trends, growth prospects, concession lengths, fee rates, operating leverage and capital expenditure needs. Financial modeling is crucial to forecast the impacts of these factors.
Toll road investment companies in China operate through integrated industry chains, using BOT/TOT models and relying on government support. Valuations depend on traffic volume growth, fee rates, financial subsidies and CAPEX needs. By analyzing industry economics, investors can better evaluate opportunities and risks.