• In line results
• Improving margins
• New orders on track

3Q17 Results Within Expectations

China State Construction International (CSCI) reported a 11% rise in group revenue to HK$33.7b in 9M17. CSCI also reported its share of revenue from JVs (not consolidated) in 9M17, which at HK$4.5b was a 140% increase compared to a year ago, contributed by acceleration in projects in Guizhou and Anhui. As such, operating profit and the share of profits for JVs were approx. HK$5.0b compared to HK$3.7b in 9M16, comprising 70% of our full year forecast and within our expectations. As per the group’s usual practice for 1Q and 3Q results, only the revenue and operating profit figures were disclosed.

GPM Remains on Upward Trend; Keeps New Order Guidance

Management also updated that the group’s gross profit margin remains on an upward trend, aided by an increase in gross profit margins in China in 3Q17 due to economies of scale. Social housing remained a key driver of new order flows, as this segment was not affected by regulations announced in May/Jun that affected the overall flow of PPP projects. Hence management is comfortable with the current run rate of projects and keeps its full year guidance of HK$100b new order flows.

As of 9M17, the group has secured a total of HK$81b in new orders, accounting for 81% of the full year guidance; on-hand contract value amounted to approx. HK$319.4b, among which the backlog was about HK$189.65b. We understand that the gross profit margin for PPP projects is similar to the social housing projects in China (less than 1% margin difference).

Satisfied With China/HK/Macau Projects

Though the group is well-positioned to secure projects related to China’s One-Belt-One-Road (OBOR) initiative, CSCI is contented with the pipeline of opportunities that are coming up in China, Hong Kong and Macau. As the group sees significant growth in its core markets, it is not planning to tender or bid for many OBOR-related projects.

Maintain BUY with HK$13.35 fair value estimate on CSCI.

Source: OCBC Research - 19 Oct 2017