Hebei Construction (01727.HK) is expected to report a profit decline of 35% year-on-year for the whole of 2019, mainly due to the following factors: the government's requirements for major activities and changes in work arrangements made by the macro economy.

It is expected that the contracted projects of housing construction will be contracted, and the growth of housing projects will continue to increase.

About 56.0% of the collective housing construction comes from the Beijing-Tianjin-Hebei region, and housing construction in these areas is increasing in the second half of 2019. According to the figures of the State Statistics Bureau, the cumulative growth of real estate construction in Beijing and Tianjin in 2019 is-3.5% and 10.9% respectively, the lowest level for the whole year, and the cumulative growth of real estate construction in China is about 8.5%. It is flat for the whole year.

The slow growth in 2019 is mainly due to I) since last year was the 70th anniversary of the founding of the people's Republic of China, the 70th anniversary ceremony was generally held in the mainland, so local governments' control over air pollution and other environmental protection requirements was more stringent, resulting in lower construction time from September to early October in the collection (especially in the Beijing-Tianjin-Hebei region) than last year, and ii) the winter weather was at the end of the year. According to the data of the China Image Bureau, there have been about six snowfalls in the Beijing area since the beginning of winter this year, with an average precipitation of 2.4 times more than in the same period of the year, while the rainfall in the northern region is the most since 1961, causing resistance to land traffic transportation / project construction. Therefore, for the collection of tourism concentrated in the Beijing-Tianjin-Hebei region, the two factors all cause great difficulties to the collection, which makes us believe that the progress of the collection project is equally affected.

At the same time, we have no plans for housing construction projects in other areas. Based on the spread of the latest coronavirus and the prevalence of rural migrant workers across the country, coupled with the large number of infected people in the south and the "city closure" policy, under the approval of the government of I) workers, ii) epidemic prevention equipment and iii), we do not think that collective projects can benefit workers, especially in areas outside the Beijing-Tianjin-Hebei region where the epidemic is serious. Therefore, as we are sad about the spread of the epidemic and the speed of employment, we think that the income and profit statement for 2020 will remain weak.

The number of infrastructure and other construction projects undertaken in the first half of 2019 has decreased, while the progress of the project has been improved. as a result, the progress of the handheld contract has been further improved, and the progress of infrastructure and other construction projects is mainly due to the improvement of government contracts. According to the statistics of the State Statistics Bureau, the number of bonds issued by local governments increased and expanded in the second quarter, while the growth rate of fixed assets for road transport, investment and public facilities management also slowed down in the second quarter, and the latter was at the level of rapid growth in the whole quarter.

However, the relevant words did not see any improvement in the second half of 2019. The annual cumulative expenditure of local governments on general and financial services decreased by 20.1% and increased by 33.0% respectively, the lowest level for the whole year. In the face of insufficient funds, the annual cumulative growth of fixed investment in the railway transport industry in the same period was recorded, while the cumulative growth in fixed investment in the management of public facilities was only flat. This leads us to believe that the infrastructure and other construction projects and projects achieved by the collection company in the second half of 2019 are still in constant progress. At the same time, the accompanying new coronavirus spread rapidly in the first quarter of 2020. In order to control the epidemic, the strategy of "city closure" was used to cut off the costs between cities and even between small areas, which made us believe that the probability of extending the duration of public projects is very high.

The development of Xiongan New area may be blocked.

According to the Hebei Xiongan New area Control Plan of June 2019 and the Hebei Xiongan New area start area Control Plan of June 2019, the first section of the Xiongan New area is divided into the start area and the start area, and the plan clearly defines the actual goals for different areas from 2020 to 2022. Among them, the Hebei Xiongan New area Control Plan states that the major municipal infrastructure facilities and public service facilities need to be basically completed by 2022, forming a basic traffic network framework; the Hebei Xiongan New area Control Plan specifies that the basic road will be completed by 2020, and the municipal and transportation key projects are scheduled to be completed by 2022. It includes the Xiongan Gaohe Station, which is expected to be put into operation by the end of 2020, and the ZT2 bid section of the main project of the Beijing-Hebei-Jinshi Expressway Section from Beijing Xinjichang to Dezhou Expressway, which is expected to be put into operation by the end of 2020. Construction is scheduled to start at the end of 2019 and be completed by 2021.

However, affected by the impact of the epidemic, Xiongan stopped planning projects for the construction of Xiongan New area, land transfer activities, and public resources trading projects in some public resources trading centers (such as Xiongan New District Public Resources Trading Center, etc.). In addition, in the Xiongan New area Safety Supervision Bureau, it is proposed that the "seven necessities" (including I) must strengthen the prevention and control of the epidemic, organize the investigation of the epidemic, strengthen the monitoring of the staff and workers, and ii). It is necessary to formulate a scientific plan for the production and employment of workers. To ensure the safe and orderly implementation of production work, iii) it is necessary to call a safety production conference, iv) it is necessary to recruit new recruits, special workers, transferred workers and workers on leave to carry out systematic sex education, v) it is necessary to carry out a comprehensive inspection of health problems and implement technical measures for prevention and control. To ensure that measures are not implemented, non-production is not ruled out, vi) must implement the approval system for special operations such as limited space and fire, and vii) it is necessary to formulate emergency plans). At present, we are conservative in the development of Xiongan new areas for the purpose of internal demonstration in China, and the return time for other projects is even longer.

There are some problems in fund management.

Of course, in a depressed environment, we believe that collectors and suppliers will be able to extend the payment period, but we think that due to the lack of staff, ii) insufficient supply of raw materials, and the strengthening of iii) epidemic prevention measures / procedures, the process after collection will not be profitable, which will lengthen the project cycle and slow down the return of funds. The failure to take advantage of the payables management fund cycle in the first half of 2019 will continue and further improve. In particular, we have been particularly concerned about the lack of flexibility of collection fund management methods during the downward period of the industry, and the current collection model can only be used to recharge funds through I) increasing the cost ratio and ii) prolonging the payment cycle.

Improvement of uncertainty in the listing of A shares

In July 2019, the proposal issued no more than 25% of the total share capital after the development of A shares, equivalent to no more than 590 million shares. According to the arrangement, the fair intends to collect 3.96 billion yuan of people's funds, which will be used to invest in PPP projects, BOT projects and other fund-raising projects. Due to the consolidation and uncertainty of the performance and profit performance of the 2019 / 2020 collection in our forecast, the economy and the local market are likely to prolong the approval process of new shares, resulting in an increase in the uncertainty of the A-share listing plan.

The valuation premium is no longer reasonable, the target is reduced to HK $4.32 per share, and the target is reduced to HK $4.32 per share. In view of our poor performance in the second half of 2019 and the first half of 2020, the development of temporary projects and the progress of newly acquired projects are expected to be slow, at the same time, the uncertain increase in the listing plan of A shares makes it impossible to recharge the capital. As a result, the cash flow that we believe to be centralized is becoming more and more difficult. As a result, we cut our revenue and profit forecasts for the last three years by 26.3%-31.7% and 53.6%-58.5%, respectively.

As of February 28, 2020, the stock market has continued to run 31.4 percent points to 58.2 percent points since 2019, and recorded the third largest increase since December 2019 (the international medical journal The Lancet reported the first case of new coronavirus in December 2019). Due to the decline in collective profit, the liquidity of cash flow and the uncertainty of A-share listing, I believe that the valuation premium to the same industry will be less, so we lower the market level to "hold" and cut the target to HK $4.32 per share.