One of the most influential architectural design institutes in China is based in Shanghai, radiating the Yangtze River Delta and expanding across the country. Huajian Group has more than 8000 employees, and has more than ten molecular companies and professional institutions, such as East China General Hospital, Urban General Hospital, Shanghai Hospital, Modern Construction Consulting, Water Conservancy Institute, Environmental Institute, Wilson, etc., which has advantages in large-scale public building design and industrial building design. Following the growth path of the design company, the company continues to expand outside the province while tamping up its business in the city. at present, it has 35 domestic branches and 9 overseas branches.
The reform of state-owned enterprises is expected to stimulate vitality, optimize management and improve profitability. Employee stock ownership is an important means for design companies to implement incentives and improve efficiency, and the company has made continuous progress. Huajian, a subsidiary company, became a mixed reform pilot in November 2018. It is proposed to sell 20% of the shares to external strategic investors at the same time to implement employee shareholdings (about 7% equity). In March 2019, the company completed the restricted stock incentive program, awarding 1292 shares to 339 incentive targets, including directors, senior managers, management and technical backbones, and other employees who have made significant contributions to the development of the company. it accounts for about 3% of the total share capital at the time of the announcement, and the current shareholding cost is about 4.73 yuan per share. We believe that the company's profitability is at a low level in the industry, and the incentive will focus more on management and optimization costs, and we expect the expense rate (including R & D) to be reduced by nearly 3 percentage points.
Benefit from the acceleration of the Yangtze River Delta, long-term excellent design + M & A capacity can achieve regional expansion. The integration of the Yangtze River Delta has been promoted to a national strategy, and investment and construction has entered an accelerated stage. Compared with Japan, according to the peak of the total stock, the space for fixed assets investment in the Yangtze River Delta region is about 20 trillion. According to the per capita capital stock, the space for fixed assets investment in the Yangtze River Delta region is about 93 trillion. Huajian Group is expected to fully benefit and usher in the stage of rapid order growth. In the long run, Huajian Group has outstanding design strength, continued to increase the expansion of non-local markets since its listing, and carried out a number of excellent M & An investments. The actual performance of the target enterprises Wuhan Zhenghua and Wuxi Municipal people's Court have exceeded 1.6 times the promised number.
For the first time, the company is given an overweight rating: the company's net profit for 19-21 is expected to be 304 million / 363 million / 436 million, with a growth rate of 15%, 20% and 20%, respectively, corresponding to 17X/15X/12X for PE. Using the FCFF valuation method, assuming that the three stages of the company are all three years, the conservative assumption of ROIC and EBIT Margin indicators is 3 percentage points lower than that of the peer company, and the estimated equity value of the company is 6.51 billion yuan. Using the relative valuation method, the historical valuation center of the company is 24.8X vertically; horizontally, Sujiaoko, Zhongshi Group, General Institute of Design and Zhongheng Design are comparable companies, with an industry average of 13x in 19 years. We believe that as the top design institute in China, the company's professional ability is second to none, and the management efficiency and profitability of state-owned enterprises are expected to be greatly improved after the reform. Entering the stage of rapid development, the company should be given a higher valuation than the industry average, with the lowest market value calculated according to the absolute valuation method of 65.1 billion, corresponding to the 19-year PE of about 21.4 times, and the highest according to the historical center of 24.8 times PE, so the reasonable market capitalization range is 65.1-7.54 billion yuan. The current market capitalization is 5.29 billion yuan, corresponding to 23.1% Murray 42.5%.
Risk hints: the construction process of the integration of the Yangtze River Delta is lower than expected; the growth of the company's newly signed orders is lower than expected; the gross profit margin of the company's engineering contracting business is lower than expected; the optimization of the company's management expense rate is lower than expected.
