20181203-中国银河国际证券-中国建筑国际-03311.HK-Cash_flow_improvement_remains_uncertain__too_early_to_upgrade_5页_699kb

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

Core Content

China State Construction International (CSCI) is a Hong Kong-listed construction company with a focus on infrastructure projects in the PRC (People's Republic of China), Hong Kong, and Macau. The report outlines the current financial performance, outlook, and valuation analysis of the company, with a particular emphasis on its cash flow challenges and the potential for future growth.

Main Points

• Earnings Forecast Update: The company has revised its earnings forecast for 2018-2019E, with a reduction of $6-10%$ due to ongoing cash flow issues.
• Target Price Adjustment: The target price (TP) was cut from HK$8.20 to HK$7.20, reflecting a lower EV/EBITDA multiple from 7.5x to 6.5x.
• Current Valuation: The stock trades at 5.7x 2019E EBITDA, which is two standard deviations below its historical average.
• Rating: The rating remains HOLD, as further share price re-rating depends on the company's ability to improve cash flow and reaccelerate growth in the PRC market.

Key Financials (2015-2019E)

Business Overview

PRC Market PPP Investment Business

• The PPP investment business in the PRC market is expected to slow down due to the company's focus on resolving cash flow issues.
• Q3 2018 operating data showed a deceleration in revenue and new contract wins compared to earlier periods.
• The company's revenue growth in 9M18 was 13.4% YoY, down from 18.0% in 1H18.
• The share of revenue from joint ventures in the PPP business fell by 60.2% YoY in 9M18.
• Operating profit and joint venture profits grew by 15.7% YoY in 9M18, but the company slowed down the pace of project undertaking.

HK and Macau Business

• The HK and Macau cash construction business (representing 50% of total revenue) is expected to provide support for earnings growth in 2019E.
• New contract wins for HK business accelerated to 44.6% in 10M18, up from 19.0% YoY in 2017.
• New contract wins for Macau business grew by 50.3% YoY in 10M18, reversing a decline of 23.3% YoY in 2017.
• The high-base effect of the MGM project has faded, and with continued local government investment in infrastructure, Macau business growth is expected to recover from 2019 onwards.

Cash Flow and Financial Strategy

• Cash flow improvement remains uncertain and is in a wait-and-see mode.
• Operating cash flow deteriorated further in 1H18 due to the deleveraging environment.
• The company is using financial innovations to control leverage and pursue sustainable earnings growth.
• A US$500m senior guaranteed perpetual share issuance was announced, which should provide funding support for the PPP investment business.
• Further measures like setting up investment funds and asset securitization are still uncertain.
• The company faces a dilemma between accelerating earnings growth and resolving cash flow issues.

Key Assumptions and Earnings Estimates

Valuation and Performance

• The current share price is HK$6.82 (as of Nov 30, 2018).
• The target price is HK$7.20, representing a 5.6% upside to the current price.
• The EV/EBITDA multiple is 6.5x, down from 7.5x.
• The company's 12-month forward EV/EBITDA band is shown in Figure 7.

Analysts

• Kelly Zou – Analyst, contact: (852)3698-6319, email: kellyzou@chinastock.com.hk
• Wong Chi Man, CFA – Head of Research, contact: (852)3698-6317, email: cmwong@chinastock.com.hk

Disclaimer

• This report is not directed at, or intended for distribution to, any person or entity in jurisdictions where it would be illegal or subject to registration requirements.
• The report is issued by Galaxy International Securities, a subsidiary of China Galaxy International Financial Holdings Limited, based on reliable information sources.
• No representation or warranty is made regarding the accuracy or completeness of the report.
• The report is for informational purposes only and does not constitute an offer or solicitation to buy or sell securities.

Disclosure of Interests

• China Galaxy International may have financial interests in the subject companies, potentially equal to or more than 1% of their market capitalization.
• One or more directors, officers, or employees of China Galaxy International may be associated with the companies mentioned.
• The company may have participated in financing transactions or provided services to the subject companies.
• The company may have received compensation or is seeking mandates from the subject companies.

Analyst Certification

• The analyst certifies that the views expressed in the report accurately reflect their personal views.
• No part of the analyst's compensation is directly or indirectly related to the specific views expressed in the report.
• The analyst has not traded in the securities covered in the report within 30 days prior to the report's issue and will not do so within three business days after the issue date.
• The analyst does not serve as an officer of any of the Hong Kong-listed companies covered in the report and has no financial interest in them.

Equity Rating Explanation

• BUY: Share price is expected to increase by >20% within 12 months.
• SELL: Share price is expected to decrease by >20% within 12 months.
• HOLD: No clear catalyst, and the rating is downgraded from BUY pending clearer signals for re-rating.

Copyright

• No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.