• Confident of new contracts
• But PPP requires higher working capital
• Exploring more funding options

Balancing New Contract Wins and Net Gearing Levels

As at end Apr 2018, China State Construction International (CSCI) has secured new contracts worth HK$42.1b, accounting for 36.6% of its 2018 target of HK$115b. Backlog was HK$213.55b as at Apr 2018 and HK$173.16b as at Apr 2017. We are confident of the group’s ability to secure contracts, given its good track record and assuming the government continues to award projects to the industry.

We would, however, continue to monitor CSCI’s cash flows and net gearing levels (~40%) considering that Public Private Partnerships (PPP) have longer cash conversion cycles and higher working capital requirements, as mentioned in our earlier reports. Should the group seek to pursue growth at the expense of cash flows, net gearing is likely to increase without the injection of fresh equity. Regarding this, management earlier reaffirmed its commitment to not do any equity fundraising by the end of this year.

Possible Funding Options

Management has mentioned that it has set up a mainland fund with CCB in Shenzhen which is expected to lower funding requirements of CSCI in projects. This is in addition to a possible beltand-road fund in Hong Kong which would be another source of funding. Finally, the group is exploring securitization options for some mature assets to recycle capital.

Currently Trading at ~7x FY18/19F Earnings

Should working capital requirements of the group’s projects be higher than expected, we would expect a lower growth rate for CSCI assuming the above-mentioned funding options take more time to be implemented.

Pending more clarity, we lower our valuation from 11x FY18 earnings to 9.5x, while rolling over to blended FY18/19 earnings. This leads to a lower fair value estimate of HK$12.63 for CSCI.

Currently, our relatively more conservative FY18/19F PATMI estimates of HK$6.4b and HK$7b are 5% and 25% lower than consensus estimates, respectively. This translates to an average of 13% earnings growth for FY18-19F, compared to an average of 17% in the last three years.

Based on a full year dividend of HK$0.35/share, the stock currently has a dividend yield of ~3.6%.

Source: OCBC Research - 22 May 2018