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Author: kimeng   |   Latest post: Wed, 18 Jul 2018, 11:42 AM

 

China State Construction Int (3311 HK): Growth to Continue in 2018

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  • 15% growth in new contracts target
  • Backlog ~4x of rev in FY16
  • Good earnings visibility

Targets HK$115b of New Contracts for 2018 Vs. HK$100b in 2017

China State Construction International (CSCI) recently provided an update on the amount of contracts secured in Dec and hence for the full year 2017. In Dec 2017, the group won the Hongyong Garden Relocation Housing Project in Chengdu, worth about HK$0.94b. The construction period is about 30 months for this project which includes 0.29m sqm of relocation housing. This brings total contracts secured in 2017 to HK$103.14b, slightly exceeding the group’s earlier target of HK$100b.

Recall that CSCI also met its 2016 target of HK$83b by securing HK$83.8b contracts eventually. Looking ahead, management has a 2018 new contracts target of HK$115b, and most of this growth is expected to come from China. For Hong Kong, there may be two to three major projects that could be put up for tender this year, though we are assuming flattish growth for this segment to be more conservative.

On a more positive note, the general sentiment is that government efficiency and the award of projects is speeding up after the change of Chief Executive to Ms. Carrie Lam.

Backlog of HK$188b

As at end 2017, the on-hand contract value of CSCI amounted to about HK$309.07b, among which the backlog was approx. HK$188.01b (82% relates to infrastructure investments in the PRC, 15% relates to cash construction and related work in mostly Hong Kong and Macau, and 3% for Far East Global). This backlog translates to about four times of the group’s revenue in FY16.

Up FV to HK$14.00

Recall that since May last year, policies to regulate the PPP segment were rolled out and looking ahead, management does not expect further significant tightening policies. Indeed, CSCI expects the award of new PPP projects for the whole sector to pick up from the middle of this year. With more clarity on the outlook, we increase our peg from 10.5x FY18F earnings to 11.0x, such that our fair value estimate rises from HK$13.35 to HK$14.00. Meanwhile, management reiterated that there will be no equity financing from now till end 2018, sticking to its earlier guidance.

Yoma Strategic Holdings: New Rules But Supply Concerns Remain

In Dec 2017, the Ministry of Construction in Myanmar issued rules for the Condominium Law that will open up the local property market to foreign buyers, allowing them to buy up to 40% of completed units on any floor of a condominium block under the new rules. Foreigners will also be permitted to develop property, subject to approvals and project requirements. While these rules are intended to foster greater vibrancy in the local property market, concerns still remain.

According to Colliers International, future condominium supply in Yangon should remain substantial with more than 10,000 units currently in the pipeline. The estimated completed stock is also expected to double in the next two to three years. 9M17 witnessed a slight improvement in demand following extensive pricing promotions for many projects, with discounts reported to be in the 30%-40% range, but questions arise regarding the sustainability of this approach.

We maintain our HOLD rating and our fair value estimate of S$0.55.

Source: OCBC Research - 12 Jan 2018

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