20180118-招银国际-河北建设-01727.HK-Largest_privately-owned_construction_company_in_BTH_33页_2mb

Summary of Hebei Construction (1727 HK)

Core Content

Hebei Construction is a leading privately-owned construction company in the Beijing-Tianjin-Hebei (BTH) region and the second-largest privately-owned construction contracting company in China. Founded in the 1950s, the company provides integrated solutions for construction contracting, particularly in building and infrastructure projects. It was listed on the Hong Kong Exchange (HKEX) on 15 December 2017 with an initial offering price of HK$4.46, raising approximately HK$1,972 million, including the Over-allotment Option.

Main Business Segments

Hebei Construction operates in three main business segments:

1. Construction Contracting Business - This is the core of the company, accounting for 97.7% of total revenue in 2016. It includes:

   • Building Construction (61.2% of 2016 revenue): Projects include residential, public works, industrial, and commercial construction.
   • Infrastructure Construction (31.2% of 2016 revenue): Focuses on municipal and transportation infrastructure, with rapid growth and higher profitability.
   • Specialized and Other Construction Contracting (7.2% of 2016 revenue): Involves electrical and mechanical installation and steel structure construction.

2. Other Businesses - Includes property development, property management, and other services. This segment contributed 0.6% to 4.8% of total revenue from 2014 to 1H17, with increasing gross profit.

3. Discontinued Operations - Previously included water utilities and construction labor services, which the company has decided to discontinue to focus on core construction contracting.

Key Financial Highlights

Investment Thesis

• Buy Recommendation: The company is expected to benefit from national policies promoting coordinated development of the BTH region and the establishment of the Xiong'an New Area.
• Revenue Forecasts: Total revenue is projected to be Rmb43.6bn in 2017, Rmb50.2bn in 2018, and Rmb58.7bn in 2019, representing a CAGR of 26.6% from 2016 to 2019.
• Net Profit Forecasts: Net profit attributable to shareholders is expected to reach Rmb1,054mn in 2017, Rmb1,288mn in 2018, and Rmb1,559mn in 2019.
• Target Price: Based on peer average of 6.5x 2018E PE, the target price is HK$5.58, representing an upside of +28.6% from the current price of HK$4.34.

Strategic Focus

• The company is focusing on infrastructure construction, which is expected to be its strategic growth area due to higher profitability.
• It has a significant market share in the Hebei province and is well-positioned to benefit from the planned Rmb100bn investment in transportation infrastructure and the development of the Xiong'an New Area.
• The PPP model is being used selectively to undertake larger and more profitable projects, allowing the company to generate revenue and investment returns from project operations.

Contracting Models

• Procurement Construction (PC) model: Represents 75.0% to 87.8% of the company's construction contracting projects in terms of contract value awarded and recognized revenue from 2014 to 1H17.
• Engineering, Procurement, and Construction (EPC) model: Also used for some projects, allowing the company to manage the entire construction process.

Shareholding Structure

• Zhongru Investment (68.3%): The controlling shareholder, primarily engaged in investment management.
• Free float (26.2%): The remaining shares available for public trading.

Business Process

Hebei Construction has a well-established business process covering marketing, project execution, and collection of retention fees. The process includes:

• Marketing and securing contracts
• Project planning and execution
• Coordination with subcontractors and suppliers
• Ensuring timely completion and quality of projects

Backlog and New Contract Value

The backlog and new contract value have shown growth from 2014 to 1H17:

• Backlog: Rmb48,612 million in 2016, with an expected increase to Rmb59,589 million by 1H17.
• New Contracts: Rmb48,261 million in 2016, with an expected increase to Rmb39,562 million by 1H17.

Conclusion

Hebei Construction is a key player in the construction sector, with a strong focus on infrastructure projects. The company's strategic shift towards infrastructure, combined with its strong market position in the BTH region and the Xiong'an New Area, positions it well for future growth. The company's financial performance and growth projections support the Buy recommendation, with a target price of HK$5.58.