Enter the decoration market in mainland China
We recently met with management to update the company. In mid-May, the company announced the acquisition of the domestic decoration business of the controlling shareholder. Although the profit margin of the domestic decoration business is lower than that of the Hong Kong and Macao market, the huge market space may help to promote the company's profit growth.
Company background: Chengda is the leading contractor of comprehensive interior decoration projects in Hong Kong and Macau, engaged in residential property and hotel interior decoration projects, which account for 84% of the company's total revenue over the past 16 years. The company is also engaged in alteration and addition and construction business as well as manufacturing and distribution of interior decoration materials in Hong Kong.
Enter the domestic decoration business: in mid-May, the company announced the acquisition of controlling shareholder Jianghe Creative (601886 CH) decoration business in 12 provinces and cities in China (Beijing Chengda) for HK $520 million in cash. The acquisition has been approved by independent shareholders and equity delivery is nearing completion and is expected to be accounted for in August. The company has a strong long-term customer base, mainly Hong Kong-based real estate developers. Due to long-term cooperation and good track record, the company has a competitive advantage in bidding for mainland real estate projects of Hong Kong real estate developers. After the completion of the acquisition, the company's business is no longer limited to Hong Kong and Macao. As a result, Chengda can directly bid for the domestic real estate projects of Hong Kong real estate developers, enter the domestic decoration business, and expand the source of income. Chengda is located in the domestic high-end decoration engineering market, but the domestic market competition is fierce, and the profit margin of the domestic decoration business is lower than that of the Hong Kong and Macao market, but the huge market space still helps to promote the company's profit growth.
The Macao market is still improving. The company signed a new order of HK $3 billion in the first half of the year, mainly large hotels and casinos in Macau. Construction of new hotels and casinos is still underway in Macao. In addition, the first batch of casinos and hotels built in Macao after the opening of the gaming market began to enter the peak period of renovation, which brought business opportunities for the company.
Meaning of acquisition: although the profit margin of the domestic business is lower than that of the Hong Kong and Macao business and the Beijing Chengda liquidity ratio is lower, the acquisition is valued at a price-to-earnings ratio of only 4.6 times the company's average price-to-earnings ratio over the past 12 months, which is a discount to 18 times the company's average price-to-earnings ratio over the past 12 months. and the acquisition will help the company expand its revenue sources and should increase shareholder value.
Valuation: the company now trades at 24 times the price-to-earnings ratio of the past 12 months. According to Bloomberg's earnings per share forecast, the current share price corresponds to 20 times 2017 and 17 times 2018 forecast earnings. The dividend payout rate for fiscal year 16 was 40%. After the completion of the acquisition, the company's reduced cash and new orders in Macau require more upfront capital investment, and we believe that it is less likely to increase the allocation ratio.
Potential share catalyst: improved profitability, the company announced more newly signed contracts as the stock price catalyst.