20200406-软库中华金融服务-河北建设-01727.HK-Rapid_deterioration_in_cash_flow,_downgrade_to__Sell__9页_730kb

Hebei Construction (01727.HK) Summary

Core Content

Hebei Construction (01727.HK) has been downgraded to "Sell" by SBI China Capital due to a combination of deteriorating financial performance, weak cash flow management, and macroeconomic headwinds. The target price has been revised to HKD 3.10, reflecting the analyst's pessimistic outlook on the company's future prospects.

Key Financial Metrics

• Current Price: HKD 4.58
• Target Price: HKD 3.10
• Market Cap. (HKD, bn): 8.1
• 12M Price Range: 4.18 – 7.62
• PE (2020/2021/2022): 7.6x / 9.1x / 10.9x

Main Points

1. Performance Decline in 2019

• The Group reported a 14.2% YoY decline in revenue and a 36.2% YoY drop in net profit.
• Gross margin fell by 0.8 p.p. to 4.7%.
• These results were in line with revised forecasts, and the analyst expects the downtrend to continue.

2. Impact of Environmental Controls and Coronavirus

• The building construction segment saw a 3.6% YoY decline due to environmental restrictions during the 70th anniversary of the PRC.
• The resumption of work was smooth, but the recovery time remains uncertain.
• The risk of a second Coronavirus outbreak is a major concern, which could further impede project progress and reduce demand for construction services.

3. Slow Progress in Infrastructure Construction

• Government project growth remained weak in 2019 2H, with a 41.7% YoY slump in the infrastructure construction segment.
• Although fiscal stimulus may be introduced in 2020, the effectiveness is doubted due to:
  • Incomplete resumption of material and labor supply
  • Increased transaction costs from stricter health and safety protocols

4. Cash Flow Concerns

• Cash flow is expected to deteriorate further due to the business nature and slow project progress.
• The Group's cash management policy is not sustainable in the current macroeconomic environment.
• This may force the company to increase its gearing ratio to maintain working capital.

5. Dividend Policy Adjustment

• The dividend payout ratio is expected to decline due to the deterioration in cash flow.
• The current dividend yield is 3.1%, which is lower than peers such as MCC (5.9%), China Communications Construction (4.9%), BBMG (7.0%), and China State Construction (5.5%).
• A lower dividend yield reduces the company's attractiveness compared to its peers, which have stronger financing capabilities.

6. Valuation and Peer Comparison

Ticker	Market Cap (mn)	PE (X)	Fw PE (X)	PB (X)	PS (X)	Revenue (mn)	GM (%)	ROE (%)
01618.HK (MCC)	54,845.4	8.6	3.6	0.4	0.1	384,170.4	11.6	8.1
01800.HK	128,426.1	6.7	3.5	0.4	0.1	629,389.1	12.8	9.0
02009.HK (BBMG)	34,255.1	8.0	4.3	0.4	0.2	104,176.6	26.6	8.5
03311.HK	29,487.1	5.5	4.6	0.7	0.5	61,669.7	15.0	13.4
01727.HK	8,049.5	9.9	10.2	1.3	0.2	46,406.7	4.9	13.1

• The valuation premium of Hebei Construction is considered unjustified due to the deteriorating cash flow and lower dividend yield compared to peers.

Risk Factors

• Faster-than-expected decline in property demand
• Longer-than-normal receivable turnover days from government projects
• Second outbreak of Coronavirus (COVID-19) in China
• Slower-than-expected resumption of work and material supply in China

Financial Highlights

• Revenue Growth (YoY): -14.2% (2019), -8.2% (2020), -5.1% (2021), -4.3% (2022)
• Net Profit Growth (YoY): -33.3% (2019), -25.5% (2020), -15.8% (2021), -17.1% (2022)
• EPS: 0.428 (2019), 0.365 (2020), 0.308 (2021), 0.255 (2022)
• Gross Margin: 4.7% (2019), 4.8% (2020), 4.8% (2021), 4.7% (2022)
• Operating Margin: 3.5% (2019), 3.1% (2020), 3.2% (2021), 3.3% (2022)
• Net Profit Margin: 1.8% (2019), 1.7% (2020), 1.5% (2021), 1.3% (2022)
• Return on Equity (ROE): 12.2% (2019), 9.8% (2020), 7.8% (2021), 6.2% (2022)
• Return on Asset (ROA): 1.2% (2019), 1.0% (2020), 0.9% (2021), 0.7% (2022)

Summary of Financial Statements

• Cash Flow: Expected to deteriorate further, with a negative CFO in 2020.
• Capital Expenditure (CAPEX): Expected to decrease in 2020 and 2021.
• Free Cash Flow to Equity (FCFE): Expected to decline significantly in 2020.
• Free Cash Flow to Firm (FCFF): Expected to be negative in 2020.

Conclusion

The analyst believes that Hebei Construction is likely to face stronger headwinds in its operations due to declining cash flow, slower project progress, and lower dividend yield compared to its peers. The valuation premium is considered unjustified, leading to the downgrade to "Sell" and a revised target price of HKD 3.10. Investors are advised to be cautious due to the potential for further decline in the company's financial performance.