SHANGHAI IND H: Significantly undervalued, with multi-dimensional drivers for valuation regression

As a blue-chip stock with stable performance growth in infrastructure and consumer sectors, Shanghai Industrial Holdings (00363) has consistently attracted high attention from investors due to its high dividends and low valuation.

According to Zhitong Finance APP, on September 17, Zhitong Finance, in collaboration with Xingyao Capital, launched the "High Consumption Investment Summit Forum and 2025 Zhitong Xingyao Autumn Joint Strategy Meeting" in Hangzhou, the vibrant capital of China's new economy and e-commerce. During the roadshow, Shanghai Industrial Holdings reported on the company's current development status, future growth, and dividend returns, engaging in in-depth communication with on-site investors.

According to the half-year financial report recently released by Shanghai Industrial Holdings, the company achieved revenue of HKD 9.476 billion and a net profit attributable to shareholders of HKD 1.042 billion. By business segment, infrastructure and environmental protection, as well as consumer goods, formed a strong performance foundation, contributing core earnings, with net profits of HKD 933 million and HKD 403 million, respectively. It is noteworthy that the domestic real estate industry remained in a "de-stocking and structural adjustment" transformation phase in the first half of the year, and the company made a total impairment provision of HKD 1.15 billion for certain project inventories and investment properties, which lowered the overall profitability.

However, the company continues to maintain its consistent practice of increasing shareholder returns, announcing an interim dividend of HKD 0.42 per share, with a payout ratio of 43.8% and a dividend yield of 6.4%.

Strong Fundamentals, Diverse Drivers from Core Business and New Tracks

Shanghai Industrial Holdings is a diversified enterprise, continuously solidifying its foundation through investments in infrastructure and consumer sectors, contributing to stable performance growth and cash flow. With substantial funds at hand, the company is also investing in high-potential sectors, such as the health sector, to broaden its growth space.

First, looking at the infrastructure sector, it is divided into three parts: toll roads, water services, and clean energy, contributing core earnings, with net profit contribution reaching as high as 92% in the first half of the year. Toll roads are cash cows for the company, which has three toll roads in the Shanghai section, providing stable profits and cash flow, with profits in previous years at the level of HKD 900-1,000 million, contributing a net profit of HKD 548 million in the first half of this year. The company's management stated that toll roads require heavy capital expenditure with significant upfront investment, but they gain decades of operating rights from the government, generating a continuous and stable cash flow once the projects are completed.

In terms of water services, there are mainly two wastewater treatment businesses, including Shanghai Industrial Environment and Zhonghuan Water, with relatively stable profitability, contributing net profits of HKD 344 million and HKD 120 million, respectively, in the first half of the year. Notably, Shanghai Industrial Environment has seen a significant improvement in profitability, mainly due to the establishment of a capital management center, which greatly reduced financing costs, with financial expenses decreasing by 12.5%. In the clean energy sector, the main focus is on solid waste treatment and waste-to-energy projects through Kangheng Environment, which maintained stable growth in both waste intake and electricity generation in the first half of the year.

It is worth mentioning that this year, the company completed its exit from Yuefeng Environmental Protection, recovering a total of HKD 4 billion in cash through "equity + convertible bonds." This exit was primarily based on benchmark development judgments and the optimal choice for maximizing shareholder interests. The company's management stated that they made a forward-looking investment in the hot waste-to-energy project Yuefeng Environmental Protection in 2017, with total project investments yielding over 50% Secondly, in the large consumption sector, the consumer goods business is the company's second core business with stable cash flow, including Nanyang Tobacco and Yongfa Printing. The consumer goods business is significantly affected by the economic environment, showing considerable performance elasticity. In recent years, consumption has continued to recover, and this business is expected to achieve a compound annual growth rate of 20.23% from 2023 to 2025. It has become a core driver of steady performance growth. In the first half of this year, revenue reached HKD 1.9 billion, accounting for 20.05% of total revenue, with a profit contribution of HKD 403 million, a year-on-year increase of 26%, and a profit margin of 21.2%, representing about 39.8% of the net profit from the business, with Nanyang Tobacco contributing over HKD 300 million in profit.

Nanyang Tobacco mainly focuses on expanding overseas markets, as its participation quota in the domestic market is relatively small. The company has production facilities in Hong Kong and Malaysia, where it has established a factory to expand the local market and reach Southeast Asia and Central America. The management stated that the revenue contribution from overseas markets for Nanyang Tobacco exceeds 60%. Driven by overseas markets, Nanyang Tobacco's performance maintains a double-digit growth level. The company will continue to promote the expansion of Nanyang Tobacco's overseas markets, especially in the duty-free channel, while also pushing Yongfa Printing to transform into high-value-added areas such as cigarette packaging, pharmaceutical packaging, and e-cigarette packaging.

Finally, there is the new growth space in the health sector, primarily through holding shares in Shanghai Pharmaceuticals Group and contributing to performance through profit consolidation. Shanghai Pharmaceuticals Group is a leading pharmaceutical company with stable growth and continuously improving profit margins, bringing considerable profit contributions to the company. In the first half of this year, it contributed HKD 141 million in share of joint venture performance, accounting for 14%.

Shanghai Industrial Holdings is also actively exploring investment opportunities in new sectors. As of June 2025, the company has cash on hand of HKD 28.5 billion, providing ample cash flow. The management indicated that they will focus on investment opportunities in the national high-tech sector, especially in AI and application fields, to maximize shareholder interests through forward-looking layouts while keeping an eye on industry technological advancements to opportunistically increase holdings in quality targets.

It is worth mentioning that while exploring new sectors, the company is also focusing on and recovering from low-performing businesses. For example, in July of this year, it sold assets in Quanzhou for HKD 2.053 billion, which accelerated inventory clearance, optimized resource allocation, and focused on development in the Yangtze River Delta. At the same time, it quickly recouped funds, freeing up more resources for investment in new sectors. In the first half of this year, the real estate business made a provision for impairment of HKD 1.15 billion, and it is expected that there will be no further impairment in the second half of the year, which may not significantly impact profits.

Clearly Undervalued, Multi-Dimensional Drivers for Valuation Recovery

The stability of the fundamentals combined with the continuous exploration of new sectors is built on a strong financial foundation. Shanghai Industrial Holdings continuously improves its balance sheet, ensuring sustained efforts in business sectors while safeguarding maximum shareholder interests, maintaining stable dividends unaffected by operations, and achieving long-term sustainable development.

As of the first half of 2025, the company continues to optimize its net debt ratio, decreasing from 65.12% at the end of 2024 to 60.99%. Interest-bearing debt has steadily decreased to HKD 58.51 billion, a reduction of HKD 1 billion compared to the end of 2024. Coupled with reasonable arrangements of short and long-term debts, financing costs have decreased by 15%. The company has cash on hand of HKD 28.5 billion, of which cash equivalents amount to HKD 24.186 billion, which is 1.42 times the short-term borrowings and 27.6 times the financing costs More importantly, the stable cash flow provided by the company's fundamentals is sufficient to cover net financing outflows and support part of the investments. In 2023-2024, its net operating cash flow is expected to be HKD 4.355 billion and HKD 4.813 billion respectively, totaling a net inflow of HKD 9.168 billion, while the total net financing outflow is HKD 4.723 billion, leaving a surplus of HKD 4.445 billion available for investment activities. The feedback from the business track has formed a virtuous cycle of investment and financing for the company.

With strong financial strength, Shanghai Industrial Holdings is very generous in its dividends. According to Dongfang Choice data, since 2000, the company has distributed dividends 54 times, totaling HKD 21.838 billion, with a dividend payout ratio of 33.15%. Even during the three years of the pandemic (2020-2022), the average dividend payout ratio reached 35.2%. In the first half of 2025, the company plans to pay a dividend of HKD 0.42 per share, increasing the payout ratio from 38% in the same period last year to 43.8%.

The company has a strong fundamental outlook, making it highly attractive to investors. From a valuation perspective, the company is significantly undervalued. Firstly, based on the price-to-book (PB) ratio, its current PB value is only 0.3 times, while the railway and highway sector is at 0.9 times, the environmental protection sector at 0.52 times, and the tobacco consumption sector at 8.8 times. Regardless of which business track is considered, it is clearly undervalued, providing ample room for valuation improvement.

In terms of price-to-earnings (PE) ratio, the company's current PE (TTM) is 5.5 times, while the aforementioned sectors are at 9 times, 10.4 times, and 36.5 times, indicating that the company is also at a significantly undervalued level. Moreover, the company's earnings over the past two years have been mainly dragged down by its real estate business, but as the business gradually divests and focuses, it is expected that losses will continue to narrow. Coupled with the sustained efforts in stable sectors, its profitability will see a substantial increase, and the PE (TTM) will further decline, thereby enhancing valuation attractiveness.

Over the past three years, driven by performance, Shanghai Industrial Holdings' valuation has continuously recovered, with its market value increasing by 98%. However, the return to valuation normalization is still a long marathon. Nevertheless, gold will always shine. With the acceleration of stable sector and new sector layouts, there will be more conceptual halos and value discoverers joining, driving valuation recovery from multiple dimensions