Hebei Construction issued its earnings report on February 28. The company forecasts a 35% year-on-year drop in profits in 2019. The main factors for the decline in profits are 1) the restrictive measures taken by the government in response to the COVID-19 epidemic, and 2) the impact of the macroeconomic downturn. At the corporate level, the progress of projects at hand has generally slowed down. According to the company's disclosure, we expect the company's full-year net profit to be about 728 million yuan. At the same time, Hebei Construction is expected to barely record profits in the second half of 2019.

We expect novel coronavirus to have a serious negative impact on the company's revenue in 2020. In order to combat the COVID-19 epidemic, the central and local governments have ordered various industries to postpone arrangements for returning to work after the Spring Festival. We believe that the epidemic led to the suspension of the company's business activities for at least one and a half months. Even after the gradual resumption of work, the prevention and control measures after the epidemic in various places will have a negative impact on the bidding of the contract and the progress of the project construction. Therefore, it is expected to have a serious negative impact on the company's receivables and profits in 2020.

We believe that the A-share offering plan of Hebei Construction will dilute the interests of existing shareholders to a considerable extent. According to the disclosure, the company will issue 587 million A shares. The planned 3.96 billion yuan will be mainly used to invest in PPP and BOT projects. We believe that the progress of the company's projects is slow, and if the company's A-shares are successfully issued, the PPP and BOT projects invested may be a drag on the company's operating profit and return on equity. Combining the above two points, we believe that the company's A-share offering plan will dilute the interests of existing shareholders to a considerable extent.

For the first time, the coverage company has a "neutral" rating with a target price of HK $3.60 per share, corresponding to 8.7 times 2020 price-to-earnings ratio and 1.0 times 2020 price-to-book ratio. The company is expected to release its 2019 results on March 30. We will update our performance forecast after the company releases its financial results.