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Sam Woo Construction (3822 HK) Summary

Core Content

Sam Woo Construction (3822 HK) is a leading Hong Kong-based contractor specializing in foundation works and ancillary services. The company is well-positioned to benefit from the anticipated growth in the construction industry, driven by government initiatives and increased infrastructure and housing spending.

Main Points

• Government Initiatives: The Hong Kong government has launched the "Ten Major Infrastructure Project" and aims to supply 480,000 housing units over the next 10 years under the Long-Term Housing Strategy (LTHS). These initiatives are expected to drive a CAGR of 23.7% in construction spending from 2014 to 2018.

• Industry Growth: Public sector construction is expected to grow at a faster CAGR (30.6%) than the private sector (13%). The overall construction industry is projected to reach a gross value of HK$295.7b by 2018, with pilling and foundation works growing at a CAGR of 27.4%.

• Company Position: Sam Woo has a strong track record, having completed 20 major projects in the past four years, including high-profile projects such as the Shatin to Central rail link and hotel developments in Macau. It currently has five projects on hand, with two expected to be completed in FY15-16.

• Operational Advantages: Sam Woo owns a broad range of machinery and equipment valued at over HK$500m, which provides flexibility in tender bids and helps maintain higher gross profit margins (GPM) and net profit margins (NPM) compared to industry peers. The company also has its own maintenance team, reducing downtime and project delays.

• Financial Performance: Sam Woo's revenue and net profit grew at a CAGR of over 100% from 2012 to 2015, with GPM and NPM in 2014/15 at 35.97% and 25.79%, respectively, significantly higher than the industry average. Its ROA and ROE were also better than the industry, at 27.16% and 58.72% respectively.

• Valuation: Sam Woo is undervalued compared to its peers, with a historical PE of 7.5x versus an industry average of 14.8x. Its dividend yield is also higher, at 3.8% compared to the industry's 3.3%.

Key Financials (Year to 31 Mar)

Risks

• Contract Securing: The company's ability to win new contracts is crucial for its growth.
• Government Investment: A slowdown in government spending on infrastructure could negatively impact the company.
• Land Sales: The government's success in achieving its land sales target is vital for private housing development.
• Housing Supply: Failure to meet the LTHS housing supply target could affect the company's business prospects.

Investment Highlights

• Machinery and Equipment: Sam Woo owns a broad range of machinery and equipment, which enhances project execution and provides flexibility in tender bids.
• Maintenance Team: The in-house maintenance team helps reduce project delays and extend the lifespan of equipment.
• Equipment Purchases: Management expects to spend around HK$100m annually on equipment, with potential increases based on project opportunities and currency fluctuations.
• Financial Strategy: Sam Woo is able to secure financing with a maturity of 4–5 years, which aligns with project timelines and minimizes cash flow pressure.

Valuation Comparison

Appendix Highlights

• Management Experience: The management team has extensive experience in the construction industry, with some members having over 20 years of experience.
• Project Track Record: Sam Woo has executed several large projects, including the Shatin to Central rail link and hotel developments in Macau, demonstrating its capability in both public and private sectors.
• Cost Assumptions: Based on the government's housing supply targets and construction cost estimates, the gross value of construction works is expected to grow significantly, supporting the company's future revenue potential.

Conclusion

Sam Woo Construction is well-positioned to benefit from the anticipated growth in Hong Kong's construction industry due to its strong track record, in-house machinery and equipment, and experienced management team. The company's financial performance and valuation suggest it is undervalued compared to peers, offering potential for growth. However, it faces risks related to contract securing, government spending, and land sales. Overall, Sam Woo appears to be a solid investment opportunity within the construction sector.