Local private construction enterprises may take off after completing business adjustments

The company is a local private construction enterprise with municipal engineering and real estate development as its main business. We expect that at present, the company's real estate development has shrunk. Subsequent efforts may be made to develop the main engineering business. Equity incentives demonstrate the company's confidence in the development of the engineering business. The company's balance sheet is of high quality. Many early investments all had good performance, or there are possibilities to expand other businesses. We are optimistic about the company's long-term development after completing business adjustments. We expect the company's net profit to be 32/37/43 million in 23-25. Referring to comparable companies, the company will be given 1 times PB in 23 years, with a target price of 3.97 yuan for the first time, and a “buy” rating.

Highlight 1: The business adjustment may have basically ended: the main engineering business is steady, the real estate business has shrunk since 2014, and the company has no new reserve plots of land. Currently, the real estate business mainly focuses on digesting inventory.

According to the estimate of the amount of pre-sold real estate of 23.33 million yuan at the end of '22, the company's real estate business revenue in '23 is estimated to be 10 million yuan (-97% year-on-year). Although the company's strategy shifted to the real estate development business after 2018, the main engineering business remained stable both in terms of scale and profit margin level. We think that in the context of the sharp contraction of the real estate business in 2023, the company may use engineering as its main driving force.

Highlight 2: Orders resume growth: One of the equity incentive conditions is that the amount of newly signed contracts is based on 22 years, with a growth rate of 40%/60%/80% for 23/24/25

2023Q1, the company signed 1.84 billion new orders, +32% year on year, showing rapid growth in a single quarter. The company announced equity incentives. The assessment target is based on 2022, meeting one of the following conditions: 1) the growth rate of operating income in 2023/2024/2025 is not less than 10%/20%/35%, 2) the growth rate of the new winning bid amount in 2023/2024/2025 is not less than 40%/60%/80%. Judging from the equity incentive target, whether the target growth rate of the order assessment is engineering business (new orders are engineering business, the year-on-year growth rate in 2023 is not less than 40%, it can be seen that the company has strong confidence in the signing of new engineering business orders) or the target growth rate of revenue assessment (the year-on-year growth rate in 2023 is not less than 10%, but considering that the real estate business may be on a sharp downward trend, the growth rate of the engineering business may reach 30% in 2023), the company may have strong confidence in future engineering business development.

Highlight 3: High balance sheet quality: no interest-bearing liabilities, multiple investments have good performance, or there are possibilities to expand other businesses

At the end of 2022, the company's balance ratio was only 46.6%, monetary assets+transactional financial assets reached 3.883 billion, and there were no interest-bearing liabilities. The company began to invest in trusts in 2017, using Jinglin Assets as investment advisors. The company invested 5,500 million dollars in the first half of the period (2 years each) and recovered 635/871 million yuan; the third phase invested 900 million, with a loss of 376 million in '22. If the 23-year trust plan achieves positive returns, the company's performance may show greater flexibility, and the third phase will end at the end of 2023 and the beginning of 2024. If no subsequent investment is made, the company will have more cash. The company holds 5% of the shares of Bank of Taizhou. In 2018-2022, the net revenue and profit of the Bank of Taizhou were all relatively stable (revenue level 10 billion, net profit level 4 billion), providing the company with a good amount of investment income and cash flow. Since listing, the company's business has expanded into real estate development and highway operation; financial investment has participated in the Bank of Taizhou and investment trust plans, with the exception of the third phase of the trust plan (which is still in existence), and has historically achieved good returns. Also, we think the company may expand other business possibilities.

Risk warning: Construction investment in housing, transportation, etc. falls short of expectations, trust investment is risky, the market value in circulation of the company is small, and the stock price may fluctuate greatly