20160914-招商证券_香港_-中国能源建设-03996.HK-An_underrated_universal_energy_construction_enterprise_11页_1mb_1mb

China Energy Engineering (3996 HK) Summary

Core Content

China Energy Engineering (CEEC) is an energy construction company with a strong position in thermal power, ultra-high voltage (UHV) transmission, and nuclear island installation. It offers comprehensive services in design, construction, and equipment, making it a key player in the energy infrastructure sector. CEEC is positioned to benefit from both China's domestic energy infrastructure development and the expansion of its overseas projects, particularly through the "Belt & Road" initiative.

Main Points

Market Position

• CEEC holds an absolute leading position in thermal power, UHV transmission, and nuclear island installation.
• It has diversified business segments, with 72% of revenue coming from the infrastructure segment, where non-power is the largest contributor.
• The gross margin contribution from the infrastructure segment is 41% of total gross profit.

Domestic Growth

• In 2016, the company's new contract value is expected to rise 9% YoY to RMB350.2bn.
• The outstanding contract coverage ratio is estimated to be 4.3x in 2016, the highest among infrastructure companies with tens-of-billions of market caps.
• The company is expected to grow at 8% annually between 2015 and 2018.

Overseas Growth

• Overseas revenue CAGR is projected to be 27% for 2015–2018.
• 2018E overseas revenue is expected to account for 23% of total revenue.
• Overseas energy infrastructure investment CAGR is forecasted to be 5.6% for 2015–2020.
• Per capita electricity consumption in developing regions is significantly lower than in developed regions, creating potential for rapid growth.

Valuation and Performance

• CEEC is currently trading at a 2016E PE of 6.43x, which is well below the HK peers average (7.54x) and lower than those of European, US, Australian, and Japanese/Korean contractors.
• Despite its low valuation, 2016E ROE (11.8%) and dividend yield (3.7%) are above industry averages.
• The target price is set at HK$1.42, implying an 18% upside from the current price, based on the industry average PE.
• The buy recommendation is based on its strong net profit growth, return on assets, and dividends compared to HK peers.

Key Information

Financial Highlights (2014–2018E)

Metric	2014	2015	2016E	2017E	2018E
Revenue (RMB mn)	183,824	205,693	221,075	243,458	261,275
Revenue Growth (%)	19.6%	11.9%	7.5%	10.1%	7.3%
Net Profit (RMB mn)	2,153	4,236	4,760	5,298	5,918
Net Profit Growth (%)	60.2%	96.7%	12.4%	11.3%	11.7%
EPS (RMB)	0.10	0.19	0.16	0.18	0.20
DPS (RMB)	0.03	0.00	0.04	0.04	0.05
P/E (x)	10.1	5.3	6.4	5.7	5.1
P/B (x)	0.5	0.4	0.5	0.4	0.4
ROE (%)	11.4%	12.3%	11.8%	12.4%	12.8%

Shareholding Structure

• China Energy Engineering Group Co., Ltd. holds 70% of shares.
• CEZN Limited holds 5%.
• China International Capital Corporation Hong Kong Securities Limited holds 4%.
• Total number of shares: 30,020 million.

Key Risks

1. China's economic slowdown could lead to a sudden drop in energy demand.
2. Unexpected changes in macroeconomic policy might reduce infrastructure investment.
3. Major engineering issues could result in unexpected losses.

Peer Comparison and Valuation

Company	2016E P/E	2017E P/E	2016E ROE	2016E PEG	2016-18E Net Profit CAGR
CEEC	6.43	5.78	11.8%	0.56	11.5%
Average of HK peers	7.54	6.81	10.4%	0.88	9.2%
CRECG	8.63	8.06	9.4%	1.14	7.6%
CRC	7.80	6.92	10.9%	1.11	7.0%
CCCC	7.30	6.49	9.4%	0.69	10.6%

• CEEC is undervalued compared to other HK-listed infrastructure companies.
• The low valuation is attributed to low market awareness, low trading volume, and complicated shareholding structure.
• The dividend yield and outstanding contract coverage are better than the industry average.

Investment Theme

CEEC is a universal energy construction leader, with a strong presence in design and construction of landmark projects across multiple sectors. While thermal power construction may decline due to China's economic slowdown, the company is not reliant on this segment. Its diversified business model and strong project pipeline support long-term growth.

Conclusion

CEEC is a high-quality infrastructure company with a strong position in energy construction and potential for overseas expansion. Despite its low valuation, its net profit growth, ROE, and dividend yield are superior to HK peers. The target price of HK$1.42 is based on industry average PE, suggesting a long-term upside. The company is recommended for a BUY due to its strong fundamentals, growth potential, and undervaluation.