Pudong Construction issued an annual announcement for 2022: In 2022, the company completed consolidated revenue of 14.084 billion yuan, an increase of 23.60% over the previous year; realized a total profit of 595 million yuan, an increase of 6.65% over the previous year; and realized net profit attributable to shareholders of listed companies of 568 million yuan, an increase of 6.11% over the previous year.

Key points of investment

Steady growth in performance and abundant cash flow

The company's performance is growing steadily and its cash flow is abundant. In 2022, the company's revenue was 14.084 billion yuan, an increase of 23.60% over the previous year. Net profit attributable to the mother and net profit after deducting non-net profit were 568/430 million yuan respectively, up 6.11%/-0.29% from the previous year. Net cash flow from operating activities reached $2,452 million, an increase of 171.76% over the previous year.

Monetary capital was 5.370 billion yuan, an increase of 84.92% over the previous year, and the ratio of monetary capital to total market value reached 77.83%; current assets totaled 19.815 billion yuan, an increase of 28.2% over the previous year.

The discrepancy between the company's revenue and net profit growth is due to the increase in labor costs due to the pandemic, the Zouping Road TOP Core Link Project, the merger of the Pudong Design Institute, and the increase in sales costs/management expenses and R&D expenses. In 2022, the company's R&D expenses were 496 million yuan, an increase of 28.71% over the previous year. The main reason is that its subsidiaries invested more in green construction technology research, large diameter long-distance curved roof pipe research, rapid construction research on urban overpasses, and research on high-performance steel-concrete composite decking panels.

In terms of business, the company takes construction engineering as its absolute core, while diversifying sales of asphalt concrete and related products, environmental protection business, and design survey and consulting business.

In 2022, the company's main business revenue was 13.722 billion yuan, up 22.11% year on year, and gross margin was 7.18%; other business revenue was 305 million yuan, up 162% year on year, and gross margin was 22.68%. Construction projects account for 97.43% of revenue, which is the absolute core of the company's business, and revenue is growing steadily; as a new business added after the merger of the Pudong Design Institute, the gross margin of the design survey and consulting business is relatively high.

The company's overall profitability has progressed steadily in 22 years, and its ability to repay cash is strong. The company's ROE in 2020/2021/2022 was 7.08%/8.08%/8.11%, respectively, mainly due to the fact that construction projects achieved more work than in the same period last year, the new merger of the Pudong Design Institute and the increase in current financial asset holdings; the payout ratio was 88.06%/91.77%/104.78% respectively, reflecting not only a high percentage of the company's current revenue in cash receipts, but also the gradual recovery of accounts receivable from previous years. Excellent cash flow can support the company to undertake more business and help the company's performance improve steadily. We believe that unsynchronized revenue growth will improve with the improvement of the epidemic and R&D results; abundant cash flow will further enhance the company's performance.

The infrastructure industry is improving in beta, and Pudong's “vanguard” has fully benefited

In 2022, China's infrastructure investment (excluding electricity, heat, gas and water production and supply industries) increased 9.4% year on year. Infrastructure investment in the Pudong New Area increased 0.6% year on year due to pressure from the pandemic, but we think infrastructure investment in Pudong is expected to recover and achieve 10% growth in '23. In '22, the amount of new orders signed by the company was 16.6 billion yuan, an increase of 15.3% over the previous year. The winning bids for major projects in January/February/March '23 reached 15.59/15.66/3,966 billion yuan respectively. With the growth of infrastructure investment in Pudong, the company, as the only listed company whose main business is engineering construction under the SPD Group, is expected to continue to maintain strong order acceptance capabilities. We predict that the company's new orders will reach 211/253/30.8 billion yuan in 2024/2024/2025.

At the same time, the Yangtze River Delta integration strategy has entered the stage of substantial advancement. We believe that this strategy will bring huge growth to the infrastructure industry in Jiangsu, Zhejiang, Shanghai, and Anhui regions. According to statistics, the investment amount of “three provinces and one city” during the 14th Five-Year Plan period reached 16 trillion yuan, providing construction enterprises with rich project resources. The company actively lays out integrated business in the Yangtze River Delta. On September 28, 2022, the company's first EPC project, the rapid remodeling project of the Xiaoshan-Pan'an Highway (Gimpu Bridge to Sanjiangkou Bridge section), was officially opened to traffic. We believe that the infrastructure industry beta boost brought about by the Yangtze River Delta integration in the medium term, as well as the overall industry chain layout and rich project experience, will guarantee the steady development of the company's future operations.

Profit forecasting

After the company issued the 2022 announcement, we have revised the profit forecast based on the annual report data, predicting that the company's revenue for 2023-2025 will be 172.53, 209.82 and 24.290 billion yuan respectively, and the EPS will be 0.69, 0.82, and 0.94 yuan respectively. The current stock price corresponding to PE is 10.3, 8.7, and 7.6 times respectively. Considering that the company is a high-quality local state-owned enterprise, valuations are expected to increase in valuation in the context of China's characteristic valuation system. Therefore, it maintains the “buy” investment rating.

Risk warning

1) Infrastructure investment fell short of expectations; 2) The company's main business revenue fell short of expectations; 3) The company's repayments fell short of expectations.