20130924-新鸿基金融集团-China_State_Construction_Research_Idea-Constructing_Excellence_18页_1mb

Summary of China State Construction (3311.HK) Infrastructure Sector Analysis

Core Content

China State Construction International (CSCI) is a leading infrastructure investment platform under China State Construction Engineering Corporation (CSCEC), the third-largest construction contractor in China. The company is positioned to benefit from sustained urbanization and government-driven infrastructure and affordable housing development in both Hong Kong and mainland China. CSCI has shown strong earnings growth and is currently trading above its three-year average forward P/E, with a Buy rating and a target price of HK$16.20.

Main Points

Earnings Outlook

• Net Profit CAGR: Forecasted at 28% for 2013-2015, driven by a strong order backlog of HK$79bn, equivalent to four years of FY12 revenues.
• EPS Growth: Expected to rise from HK¢70.3 in FY13 to HK¢115.3 in FY15.
• Valuation: Currently trading at 13.5X FY14E P/E, with a target price based on 17.5X FY14E EPS of HK$0.928.
• Catalysts: Better-than-expected new contract value and more supportive government policies for affordable housing.

Business Segments and Margins

• Infrastructure Investment: Expected to become the core earnings driver, contributing 60% of revenue by FY16.
• Gross Margins: Projected to range between 12.0% and 12.5% over the next few years, up from 8% in FY08-FY09.
• Order Backlog: 43% of current backlog is for infrastructure projects, up from 20% in 2011.

Risk Mitigation

• Funding Sources: CSCI is well-positioned to maintain positive free cash flow by FY14, with a relatively low D/E ratio and strong government policy support.
• JV Strategy: The company forms joint ventures (JVs) with its parent and sister companies, limiting financial exposure and allocating risks and profits proportionally.
• Financing Mix: Increased use of long-term loans and offshore financing, with 25% of borrowing now fixed-rate and an average borrowing cost of 4% in 1H13.

Scenario Analysis

• Base Case: 28% EPS growth with a target price of HK$16.20 (29% upside), based on 17.5X FY14E P/E.
• Bull Case: 30% EPS growth with a target price of HK$20.20 (61% upside), assuming continued high infrastructure spending and favorable policy.
• Bear Case: 20% EPS growth with a target price of HK$10.60 (16% downside), due to reduced infrastructure spending and slower new contract growth.

Key Data Highlights

Peer Comparison

Risks

• Skilled Labor Shortage
• Default Risk or Contract Cancellations by Customers
• Inability to Finance Working Capital or Higher Funding Costs

Investment Case

• Strong Order Backlog: Provides clear earnings visibility and supports growth.
• Affordable Housing: CSCI is well-placed to benefit from China's affordable housing and shantytown development plans, with government support and favorable policy.
• Infrastructure Shift: Moving toward capital-intensive infrastructure projects with higher margins, supported by parent company and government policy.
• Government Spending: Hong Kong and China are expected to maintain high infrastructure spending, with HK$70bn p.a. in Hong Kong and 6 million affordable housing units p.a. in China.

Conclusion

CSCI is well-positioned to benefit from China's urbanization and infrastructure development trends, supported by its strong order backlog, government policy, and financial structure. The company's shift toward higher-margin infrastructure projects and its strategic use of financing tools make it a compelling investment opportunity.