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Research Report: Stock code:
  29-07-2016 (嚙踝蕭)    China State Const. Int`l (3311.HK) - Expects Business Growth in the Mid- to Long-run with Sufficient Contracts
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China State Const. Int`l(3311)
29-07-16
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Recommendation on   29-07-16 
Recommendation Buy
Price on Recommendation Date $ 10.480
Suggested purchase price N/A
Target Price $ 14.800
Written by: Research Department
Tel:
(+ 86 21 51699400-107)

Email:
research@phillip.com.cn

China State Const. Int`l (3311.HK) - Expects Business Growth in the Mid- to Long-run with Sufficient Contracts

Net Profit Rocketed by 20.1% that Meets Expectations

In 2015, China State Construction International realized revenue of HKD37.913 billion, representing a Y-o-Y increase of 10.1% that fell below market expectations. It was mainly because the revenue of some projects carried out in the form of a joint venture was not recognized as revenue. Looking into the revenue of construction operations in different regions during the year, construction operations in Hong Kong saw the revenue of HKD16.184 billion, up by 6% Y-o-Y. That in Macao witnessed the revenue of HKD5.314 billion, surged by 136% Y-o-Y. Yet, construction operations in China, having the revenue of HKD14.631 billion, underwent a fall by 6% Y-o-Y as most major infrastructure investment projects were completed and plenty of new projects were just commenced. Profit attributable to shareholders registered HKD4.153 billion, with a Y-o-Y increase of 20.1% that was basically in line with the Company's guidance.

In terms of profitability, on account of the lump-sum provision for the Hong Kong lead-tainted water scandal occurred in 2015, the gross profit margin of the HK cash construction business was 5.9%, representing a decline of by 0.7%, leading to the overall gross margin falling to 13.3%, down 0.51%. The net profit margin increased from 9.8% to 10.8%, chiefly attributable to the sharp increase on profit and loss of non-recurring items and the reduction of tax rate. The EPS was HKD103.16 cents, up by 16.2% Y-o-Y. The annual dividend per share was HKD33.00 cents, representing a Y-o-Y increase of 26.9% with the dividend payout ratio as high as 32%.

Operating Cash Flow Improved for the First Time

The company recorded the net operating cash flow of HKD300 million for the first time in the past five years. The net leverage ratio of 2015 increased from 36.8% in 2014 to 45.9% as there were multiple PPP projects for investment during the year. As a result of that, the capital expenditure went over budget and reached HKD1.37 billion and the total equity fell due to the depreciation of RMB.

In May 2016, the company acquired China Overseas Building for investment by means of allotment. It dramatically increased the HKD assets and therefore reduced the exchange rate risk of depreciation of RMB. Meanwhile, with the increased share capital, the net leverage ratio would be further increased to 37%, providing financial support for the Company to grasp investment opportunities of infrastructure projects in the market of China.

New Projects in1H 2016 Outperformed Quota

In 2016, the company aims to achieve the newly added contract amount of HKD78 billion, equivalent to an 11.4% growth of the actual contract amount of the previous year. In the first six months of 2016, the company accomplished a newly added contract amount of HKD42.99 billion, representing a Y-o-Y increase of 16.7%, contributing to 55.1% of the target of the year. Specifically speaking, the markets in Hong Kong, Macao, Mainland China and Far East Global, respectively, contributed 27.9%, 13.4%, 53.5% and 4.3%. Considering the satisfactory performance of new projects, the management may raise the target for this year recently.

As of 30 June 2016, the company has been holding a total contract amount of HKD238.96 billion, including the outstanding contract amount of HKD145.53 billion, equivalent to 3.8 times the revenue in 2015. The sufficient contracts are sure to drive business growth of the company.

Valuation and Rating

Since the acquisition of investment property in May, the stock price of the company slumped dramatically and stood at around HKD10.00. We believe that the present stock price is a typical reflection of the influence of allotment on EPS dilution. Based on the steady performance of core businesses and the sufficient contracts, we are positive about the solid business growth of the company in the future. Thus, we give the company an estimation of 13.0x EPS in 2016 with the target price of HKD 14.8. Rating is "Buy". (Closing price as at 27 July 2016)

Catalyst

Acquisition of overseas businesses;

Higher target of new contract amount;

Risk warnings

Slowdown of investments in mainland China;

Risk of capital recovery from the PPP projects;

Financials

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