20171018-中国银河国际证券-中国建筑国际-03311.HK-Q3_2017_results_in_line,_but_stock_rerating_remains_wait_and_see_4页_828kb

China State Construction International (CSCI) [3311.HK] Summary

Core Content Overview

China State Construction International (CSCI) released its Q3 2017 results, which were in line with market expectations. The company's performance was driven primarily by its China business, with significant growth in revenue and operating profit from joint venture (JV) companies. Despite this, the management remains cautious about the company's ability to convert Public-Private Partnership (PPP) projects into sustained earnings growth without affecting cash flow performance.

Key Financial Highlights

• Revenue: Total revenue for 9M17 grew by 11.4% YoY to HK$33.7bn, which is 63% of the estimated 2017 revenue.
• Operating Profit: Operating profit, including JV contributions, increased by 34.5% YoY to HK$5,025m, aligning with 68% of the 2017 operating profit forecast.
• JV Performance: Unconsolidated JV revenue rose 140.4% YoY, highlighting the effectiveness of the company's PPP project execution in China.
• HK/Macau Business: The HK/Macau segment saw a slowdown in earnings growth, with operating profit falling over 60% YoY in Q3 17 due to conservative revenue booking for ending projects.
• Current Valuation: The current valuation of 8.9x 2018E PER suggests limited downside risk, but investors are still waiting for more evidence of consistent earnings growth from PPP projects.

Investment Highlights

• Hold Rating: The analysts maintain a Hold rating on CSCI, citing the lack of clear catalysts for a re-rating.
• Target Price: The target price is set at HK$12.70, based on a 10x PER multiple, which is below the historical average of 12.2x.
• Market Cap: As of October 17, 2017, the market cap was US$7,450m, with 5,049m shares outstanding.
• Dividend Yield: The dividend yield was 3.1% for 2017E and 3.1% for 2018E.

Financial Ratios and Performance

• Sales Growth: Sales growth for 9M17 was 11.4% YoY, while EBIT and EBITDA growth were 27.7% and 18.5% respectively.
• Profit Margins: Net profit margin remained stable at 10.1% for 9M17 and 10.7% for 2018E.
• ROAA and ROAE: Return on average assets (ROAA) was 6.2% for 2017E, and return on average equity (ROAE) was 19.2%.
• Liquidity Ratios: The quick ratio decreased to 0.6x, and the current ratio improved to 1.2x for 2018E.
• Interest Coverage: The interest-coverage ratio was 7.9x for 9M17 and 7.5x for 2018E.

Key Assumptions and Backlog

• New Contracts: New contract revenue for 2017E was HK$102,913m, with a backlog of HK$202,015m, resulting in a 3.9x backlog-to-sales ratio.
• Backlog Growth: The backlog-to-sales ratio is expected to rise to 4.4x by 2018E.

Market and Shareholder Information

• Share Price Performance: The share price closed at HK$11.52 on October 17, 2017, with a 10.2% increase from the target price.
• Major Shareholding: China Overseas Holding owns 62.3% of the shares, indicating a significant stake in the company.
• Auditor: The company is audited by PwC.
• Free Float: The free float is 35.1%, reflecting the proportion of shares available for trading.

Analyst Notes

• Kelly Zou and Wong Chi Man, CFA are the analysts involved in the report.
• The report acknowledges the removal of the share price overhang from the rights issue and the on-track earnings growth, but cautions that more clarity is needed on the government's stance toward future infrastructure development, as reflected in the 19th Party Congress.

Disclaimer and Interests

• The report is issued by Galaxy International Securities, a subsidiary of China Galaxy International Financial Holdings Limited.
• The company may have financial interests in the subject company, potentially equal to or exceeding 1% of its market capitalization.
• The analysts may have financial interests in the company and may provide investment banking services or seek mandates from it.

Equity Rating Explanation

• Hold: Indicates no clear catalyst for a re-rating, and the rating is not upgraded unless further evidence is provided to support a BUY or SELL rating.

Copyright

• The material is copyrighted and cannot be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.