20180806-中国银河国际证券-中国联塑-02128.HK-A_Laggard_Infrastructure_Play__Maintain_BUY_4页_789kb

China Lesso (2128.HK) Summary

Core Content

China Lesso (2128.HK) is an infrastructure-focused company that has experienced a share price drop of 16% since early June. However, this decline is largely attributed to currency translation effects due to RMB depreciation, with the actual correction being approximately 10%. Despite the broader concerns about slowing infrastructure and property investment growth, the company is positioned to benefit from enhanced government support for infrastructure projects, particularly in areas such as sewage systems, telecommunications, and environmental protection. This support is expected to drive recurring EPS growth of 12% in 2018E and 13% in 2019E.

Main Points

• Share Price Performance:

  • Share price has dropped 16% since early June, but excluding currency translation, it has corrected by about 10%.
  • Current share price is HK$4.63 (as of Aug 3, 2018).
  • Target price is HK$7.60, implying a 64% upside from the current price.

• Valuation Metrics:

  • Trading at 5.5x 2018E PER and 0.82x 2018E PBR, both at the low end of the historical range.
  • The company's valuation is considered attractive given these metrics.

• Regional Exposure:

  • Approximately 57% of revenue comes from southern China, especially Guangdong.
  • Fixed asset investment in Guangdong grew by 10.1% YoY in 1H18, significantly higher than the national average of 6%.
  • Property investment in Guangdong rose by 20.2% YoY, also outperforming the national average.

• Investment Potential:

  • The company is a major producer of plastic pipes in China, which positions it to benefit from increased investment in sewage systems and other infrastructure projects.
  • The recent rebound in cement and steel stocks may draw more attention to mid-cap infrastructure plays like China Lesso.

• Financial Performance:

  • Recurring EPS growth is projected at 12% for 2018E and 13% for 2019E.
  • Revenue is expected to grow by 13% in 2018E and 17% in 2019E.
  • EBITDA growth is forecasted at 9% for 2018E and 15% for 2019E.

Key Financials

Valuation Metrics

Operational Metrics

Investment Highlights

• Share Price Correction: The 10% correction (excluding currency translation) reflects concerns about slowing growth in infrastructure and property investment, but the company's exposure to southern China, where growth remains robust, offers downside protection.
• Recurring EPS Growth: The company is expected to achieve 12% and 13% recurring EPS growth for 2018E and 2019E respectively.
• Valuation: The current valuation is considered attractive, with PER and PBR metrics at the lower end of the historical range.
• Infrastructure Policy: Recent policy statements suggest increased support for infrastructure investment, which should benefit the company, especially in underdeveloped areas.
• Upcoming Results: The company will announce its 1H18 results in late August, which could help alleviate investor concerns.

Analysts

• Wong Chi Man - Head of Research, contact: (852)36986317, email: cmwong@chinastock.com.hk
• Mark Lau - Research Analyst, contact: (852)36986393, email: marklau@chinastock.com.hk

Disclaimer

• The report is not directed at any person or entity in jurisdictions where it would be illegal to distribute.
• The information is based on reliable sources but not guaranteed.
• The report is for informational purposes only and does not constitute an offer or solicitation to buy or sell securities.
• The views expressed are those of the analyst and may not reflect the views of China Galaxy International.

Disclosure of Interests

• China Galaxy International may have financial interests in the subject company, with interests potentially equal to or exceeding 1% of the company's market capitalization.
• The company may have provided significant investment services or received compensation from the subject company in the preceding 12 months.

Analyst Certification

• The analyst certifies that all views expressed accurately reflect his or her personal views.
• No part of the analyst's compensation is related to the specific views expressed in this report.
• The analyst has not traded in the securities covered in the report within 30 days prior to the report's release and will not trade within three business days after the release.