Summary. Hebei Construction announced a proposal to issue A shares on April 30. On May 17, 2019, the company announced that it had entered into an equity exchange and transfer agreement with related parties. The company will sell its real estate business and acquire the landscape engineering business. We believe that the transaction will have an impact on profit margins in the short term, but in the long run it will help ease the business volatility caused by the real estate market and prepare for the A-share offering.

It is planned to start planning the A-share offering plan. On April 30, Hebei Construction announced a proposal for the issuance of A shares. Hebei Construction has an H-share structure, with H-shares accounting for 26.2% of the total share capital. The A-share offering plan is still in its infancy. Although the divestiture of the real estate business will increase the chances of issuing A shares, there is still uncertainty and it will take a long time. We are cautiously optimistic about its A-share offering plan.

Equity exchange and transfer. On May 17, 2019, Hebei Construction announced that it had signed an equity exchange and transfer agreement with related parties. Upon completion of the equity exchange and transfer agreement, the Company will sell its real estate business and acquire the landscape engineering business (Hebei Construction Group Landscape Engineering Co., Ltd.). The company believes that the deal will help strengthen its core construction business and seize the opportunities in Beijing, Tianjin and Hebei. We believe that the divestiture of the real estate business may have a negative impact on profit margins in the short term due to the wide margin gap between the real estate development business and the construction business (the difference between the gross margin of about 25% and 5%). However, the real estate business is not the main business of the company, the scale is small and the income fluctuates greatly. in the long run, the divestiture of the real estate business can alleviate the overall business fluctuation brought by the real estate market. Revenue from the real estate business fell 34% from 2017 to 2018 and recorded a negative profit in 2018. More importantly, the sale of the real estate business is conducive to the A-share offering plan.

About Hebei Construction Group Garden Engineering Co., Ltd. Hebei Construction Group Landscape Engineering Co., Ltd. specializes in greening seedling research and planting, landscape engineering planning, design and construction, ecological environment management and restoration, and urban landscaping maintenance and operation. According to the announcement, Hebei Construction Group Landscape Engineering recorded a net profit of 55 million yuan and 36 million yuan (RMB, the same below) respectively in fiscal year 18, 2017, and held a contract of 2.943 billion yuan as of December 31, 2018. The decrease in profits was mainly attributable to the increase in administrative and financial expenses, a decrease in investment income and an increase in asset impairment losses. We expect that the garden project of Hebei Construction Group can improve the operating leverage by merging with Hebei Construction. The purchase price of the company is 241 million yuan, corresponding to the price-to-earnings ratio of 2018.

Macro-level support from infrastructure investment and real estate construction and security expenditure. The Chinese government has once again increased infrastructure investment to support economic development, encouraging local governments and financial institutions to use special bonds and other forms of financing to develop major projects, such as the development of Jingjin-Hebei district, especially the construction of Xiongan New area. In the first five months of this year, the Hebei provincial government has issued about 22 billion special bonds. Although large state-owned construction enterprises are more likely to obtain large-scale infrastructure projects, we believe that as the largest private construction company in Beijing, Tianjin and Hebei, Hebei Construction will have a great chance to obtain the construction of related supporting projects in Hebei region. In addition, the company's housing construction business accounted for 63 per cent of revenue in fiscal 2018. According to the real estate development investment data in May 2019, we expect that 2019 of the construction expenditure and the area under construction will gradually accelerate, which will be beneficial to the company's housing construction business.

Raise the target price and keep buying. Hebei Construction has solid profits and healthy operating cash flow, so the company declares a dividend of 0.3 yuan per share for fiscal year 2018, corresponding to a dividend yield of 47.5%. We expect the future dividend ratio to be maintained at 30%. We expect the company's revenue growth to be maintained at 10-15% in the future, while the profit margins of each construction sub-business have rebounded steadily, and the share of infrastructure projects has gradually increased, both of which drive the company's profit growth faster than revenue growth. We raised our target price to HK $7.30, which is equivalent to 6.9 times the 2020 forecast price-to-earnings ratio. Maintain the buy rating.