The company is one of the leading private enterprises in construction in Zhejiang Province. Its predecessor, Ningbo First Construction Engineering Company, was founded in 1951, completed state-owned enterprise restructuring in 2001, went public in 2011, and managed three general contracting business segments including Construction Engineering Group, Jianle Engineering, and Municipal Engineering. The company has qualifications in a number of construction fields and survey and design fields. Its core business is housing construction, municipal administration and construction installation projects, and at the same time, internal and external expansion extends to the entire industry chain, including survey and design and building materials sales. The scale of business undertakings, the scale of revenue, and the scale of net profit to the mother continued to grow, and the share of high-margin municipal engineering business increased. The company's revenue in 2017 was 14.746 billion yuan, an increase of 7.67% over the previous year. Its main business, construction revenue, accounted for a stable share of over 80% in the past five years. The company is deeply involved in the Ningbo market while implementing a “going global” strategy. The revenue contribution rate of Zhejiang Province has steadily increased in recent years, from 12.52% in 2014 to 23.82% in 2017. At the same time, the company acquired South Africa's Anlan Securities to expand financial services and overseas markets. In the field of EPC and PPP, the amount of projects the company undertook has increased dramatically. In 2017, it undertook 964 million yuan of EPC projects, and so far it has undertaken a total investment of 4.815 billion yuan in major PPP projects.
The company's net interest rate level has basically fluctuated slightly around 1.5% in recent years, and the ROE level has remained stable. The ROE level for the first three quarters of 2018 was 5.79%. The level of cash flow is stable. Net operating cash flow has continued to improve since the 2015 period, reaching 485 million yuan in 2017. The company's balance ratio is stable, fluctuating slightly around 80%. The liabilities are mainly rigid liabilities. In 2017, as PPP projects entered the construction stage, the company's long-term loans gradually increased. The company's share of monetary capital remained above 15%. The capital on hand was relatively sufficient, the level of inventory management improved, and the inventory share fell to 29.73% at the end of Q3 2018. Compared with the other three comparable competitors in Jiangsu and Zhejiang, Longyuan Construction, Hongrun Construction, and Tengda Construction, the company has more comprehensive qualifications and a wider range of business undertakings. The scale of revenue and profit and the year-on-year growth rate are at midstream level.
The scale of business undertakings ranked second, and the year-on-year growth rate was more steady than the performance of the other three companies.
Construction Engineering Group, a wholly-owned subsidiary of the company, acquired 8.86% of Zhongjingyun's shares and increased its capital by 300 million yuan in December 2018. After the acquisition and capital increase was completed, the company and its wholly-owned subsidiaries directly and indirectly held a total of 32.07% of Zhongjingyun's shares. China Economic Cloud is a next-generation big data infrastructure service provider initiated by the National Information Center. Its main business is IDC services and its value-added services, such as cabinet leasing and cloud computing. As of October 31, 2018, it achieved sales revenue of 113 million yuan. Among them, the Yizhuang Data Center, the first green cloud data center deployed by China Economic Cloud nationwide, has advantages in various fields such as geographical location and PUE, and sales revenue is expected to grow further. With the upgrading of the communications industry and the increase in demand for data storage and cloud computing, combined with various information industry infrastructure construction incentive policies issued by China's government departments, the domestic IDC market has huge potential. The company's acquisition of China Economic Cloud lays out the IDC market, and “new infrastructure construction” may become a new growth point for the company's performance.
Investment advice: The company's revenue growth rate from 2018 to 2020 is expected to be 7.8%, 8.0%, and 8.1% respectively, and the net profit growth rates are 12.5%, 31.1%, and 21.9% respectively. The corresponding EPS is 0.25 yuan, 0.32 yuan, and 0.39 yuan respectively. We are optimistic about the steady progress of the company's construction business, adding new performance growth points to achieve transformation and upgrading in the IDC business. At the same time, referring to the current valuation levels of comparable construction and IDC listed companies, the investment rating given to increased holdings was covered for the first time. We forecast that the company's six-month target price is 3.84 yuan, which is equivalent to 12.0 times the expected price-earnings ratio valuation in 2019.
Risk warning: the risk of large macroeconomic fluctuations, the risk of a decline in the growth rate of domestic infrastructure investment, the risk that the execution of projects under construction does not meet expectations, the risk of project repayment, the risk of China Economic Cloud IDC data center business promotion and forecasting performance falling short of expectations, etc.