At times we can get quite optimistic in projecting a high yield dividend stock. Toll roads generate a lot of cash flows but there are much downside as well.
Maintenance of roads and upgrading of toll technology
When road is being used too much, authorities will need to relay or fix roads. To improve collection of tolls, investment in technology in the future may be necessary.
These will increase capital expenditure
Changes in government policy
The china government have been trying to reduce toll charges to ease consumer inflation burden. This is also to reduce toll gate congestion and cut car emissions.
Cabinet has approved a proposal for all cars and motor bikes to travel toll-free during four main national holidays, namely the Spring Festival (Chinese New Year), Tomb Sweeping Festival, Labour Day and National Day.
The measure applies to both local toll roads and expressways.
Measures like this reduces toll roads takings. However, reducing tolls may mean more vehicles taking certain expressways which may increase the takings.
Ultimately this may be balanced by increase in vehicle growth which would work back in their favor.
Economic problems
A bad economy erodes road usage as well. Though my guess is that even when the economy is bad, people still need to look for jobs, move goods to build businesses.
China and the other BRICs are slowing down, and we will be able to see first hand how badly economic growth slowdown can hit toll roads.
Public planning changes
Toll takings can be severely affected if other roads or transportation becomes a cheaper alternative. People would go for a faster means, cheaper means.
The toll road company would need to move toll gates appropriately to improve takings.
Check out my coverage on China Merchant Pacific to understand more on toll roads [here]
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
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Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Fee-only Wealth Advisory firm Providend. All opinions on Investment Moats are his own and does not represent the views of Providend.
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