Aoneng Construction: Macao Casino Construction and Substation contractor
Founded in 2000, the company is engaged in (1) steel structure engineering, civil engineering construction and decoration and renovation engineering; (2) high voltage substation construction and system installation engineering; and (3) facility management, transformation and maintenance engineering and services. The main customers include Macau's famous world-class hotels, resorts and gaming enterprises, Macau Electric Power and Macau government agencies. Famous projects include the steel structure of City of Dreams I / II (casino skirt building, Royal Crown Hotel, Rolling Stone Hotel, Grand Hyatt Hotel and Water Dance Theatre) in 2007-2009, Studio City International Holdings subprojects in 2013-2015, Morpheus outer frame steel structure in 2017, Parisian banquet hall and theater skirt roof steel structure in 2016, etc.
The non-gaming transformation in Macau is imperative, and the renewal of the license of gambling enterprises will bring about a wave of construction, which will benefit the civil construction business of Macau. We expect the company to participate in bidding for 11 casino projects in 2018-2021. As non-betting will be one of the important conditions for license renewal of the six major gaming companies, non-gambling projects will follow in 2018-2021, such as Sands Londoners, Studio City International Holdings II, etc., which will become the key to the business growth of the cornerstone of Aoneng. In addition, Aoneng may also participate in the City of Dreams Hotel, Sun City New Century Casino, Treasure Island Casino and Sands Venetian renovation projects from 2018 to 2021, all of which are currently bidding or preparing for bidding. We believe that with its stable cooperative relations with major customers and subcontractors and rich project experience, Australia is expected to seize more market share in the competition.
We expect revenue from this business to reach 570 million patacas, 700 million patacas and 830 million patacas in 18-20 years, an increase of 28 percent, 22 percent and 18 percent respectively over the same period last year.
The increase in the number of overnight tourists plus the post-disaster reconstruction of aging equipment is expected to promote the rapid growth of the substation business and the incremental recovery of the number of tourists visiting Macao in 2017, but the space is still huge. Compared with 15% of people in the United States who have visited Las Vegas each year and 30% of Hong Kong people who have visited Macau each year, the penetration rate of Chinese people who have visited Macao is only 1.8%. We expect that the future infrastructure plus interconnection policy is expected to bring an increase of 35 million tourists, leading to an increase in overnight tourists, which in turn will drive up electricity demand. The renewal of the license of Bo enterprises will bring the demand for the construction of new hotels, which will also drive the business of high-voltage substations. In August 2017, Typhoon "Sky Pigeon" caused heavy casualties and property losses in Macao, disrupted power and communications and restricted reception services in Macao. After the typhoon, the government issued a policy and began to lay out the power business. Aoneng's strong cooperative relationship with Siemens can provide customers with one-stop "design, build, operation and maintenance" solutions, so the company's market share has been stable in the top two. We believe that Aoneng is expected to bid for 10-12 substation projects in 2018-2021 to meet market demand. The company's substation business revenue is expected to reach 330 million patacas, 440 million patacas and 530 million patacas respectively in 18-20 years, an increase of 155%, 34% and 20% respectively over the same period last year.
Valuation: high growth, high dividend, high ROE deserve high valuation, 14.3x PE relatively reasonable company cash stability, as of April 2017 the company cash of about 140 million patacas, no long-term liabilities, asset-liability ratio (46%) lower than peer Hengyu Group (84%) and China Construction International (71%).
From the perspective of ROE, 38 per cent of Aoneng's ROE level is higher than that of its peers, such as China Construction International (20 per cent) and Xinfu Port (28 per cent), demonstrating good profitability and bargaining power. The company's dividend payment rate is also higher than that of its peers, currently stabilizing the annual dividend payment rate of more than 40%, and is expected to continue to increase in the future as the business grows, higher than China Construction International's about 20%.
Compared with 2448.HK, whose business is similar to that of Macau, Hengyu Group provides decoration services such as guest rooms and lobbies for Macau casinos. Hengyu Group's business development scale, projects on hand, operating capacity and profitability are weaker than those of Macau, but it is still valued at 12x in 2018. We believe that Macau can cooperate with major gaming companies in Macau for many years, have accumulated profound cooperative relations and project experience with customers and subcontractors, and are expected to seize more market share in the competition. The valuation of PE in 2018 should be higher than that of 12x PE in Hengyu in 2018. With the landing of projects in hand and the expected success of bidding projects, we expect Macau to have a revenue range of 1 billion-1.18 billion patacas in 2018 and a net profit range of 150 million-180 million patacas, corresponding to the EPS range of 0.13-0.15 patacas. We believe that the 2018 valuation of 14.3x PE is relatively reasonable, and we take the median of 0.14 patacas in the EPS range and forecast a target price of HK $2.00 (the exchange rate between the patacas and the Hong Kong dollar is about 1:1), covering the "buy" rating for the first time.
Risk tips: domestic economic downturn, tightening policy towards Australia, failure of the company's project bidding, etc.