The amount of newly signed projects is under short-term pressure, and the performance of Q3 is higher than the previous month.

The company is one of the traditional leading enterprises in the field of architectural design in China, and ranks first in the mainland in the list of Top 2021 World Architectural Design companies (WA100) of BuildingDesign, an authoritative British architectural magazine. In 2022, the gross profit margin of Q1-Q3 was 22.49%, 27.97% and 21.91%, respectively, and the net profit was 6.04%, 4.88% and 5.39%, respectively. In the first half of 2022, the company's revenue from engineering design, engineering contracting and engineering technical management services was respectively

The gross profit margin of the project contracting business has declined significantly, which is mainly affected by the epidemic situation in Shanghai.

In 2022, the company's newly signed contracts totaled 11.935 billion yuan, down 5.44 percent from the same period last year. Of this total, engineering design business was 6.197 billion yuan, down 3.77% from the same period last year; engineering and technical management services were 975 million yuan, down 4.12% from the same period last year; and project contracting business was 4.573 billion yuan, down 8.47% from the same period last year. The newly signed amount of large contracts is 7.166 billion yuan, accounting for 60.04%, of which the design consulting business is 4.076 billion yuan, accounting for 56.88%, and the project contracting business is 3.09 billion yuan, accounting for 43.12%. The order area is distributed in Shanghai, Haikou, Xi'an, Hunan and other places, and Shanghai accounts for a relatively high proportion of orders. The amount of newly signed contracts in all business directions of the company decreased slightly compared with the same period last year, mainly due to the delay of construction projects and the contraction of overall real estate demand caused by the epidemic.

In the second half of 2022, the newly signed contract amount was 7.239 billion yuan, an increase of 54.15% over the previous year, and an increase of 14.74% over the same period last year. In the third quarter of 2022, the company achieved revenue of 2.086 billion yuan, an increase of 60.93% from the previous quarter. The company's business rebounded rapidly after the end of the epidemic.

In the short term, to "fill the growth gap", the inflection point of long-term concentration can be expected.

In the short term, with the help of loose control of the epidemic, recovery of real estate fundamentals and steady growth of infrastructure, the company is expected to "fill" the "growth gap" in 2022.

In the long run, China's engineering consulting industry is still in the trend of increasing concentration: in 2021, the market size of China's engineering design consulting industry reached 1.14 trillion yuan, an increase of 6.4% over the same period last year, and the market share of the company as a leading enterprise is only 0.40%.

We believe that the per capita production efficiency is the main factor restricting the improvement of the market share of engineering consulting enterprises. According to the classification of Shenwan engineering consulting industry, the average per capita income of the engineering consulting industry in 2021 is 721000 yuan, the per capita salary is 238000 yuan, and the per capita profit is 79000 yuan. The diseconomy of scale of personnel leads to the low willingness of the design leading enterprises to take the initiative to increase the market share. We think that in the future, with the improvement of the company's management efficiency and the change of production technology, the company's market share will increase or enter the inflection point.

Equity incentive shows confidence, and the price revaluation of central state-owned enterprises promotes the enthusiasm of the company.

The company issued an announcement of the restricted stock incentive plan on January 29, 2022, which grants 102 incentives to directors, senior managers and other key management and technical personnel. According to the company's equity incentive method, if the company achieves the performance evaluation target in the next three years, the company's net profit will grow at a compound annual growth rate of 16.16% from 2023 to 2025.

In December 2022, the Shanghai Stock Exchange formulated a new round of "Central Enterprise Integrated Service three-year Action Plan", pointing out that it will continue to focus on services to promote the valuation of central enterprises back to a reasonable level. At present, the valuation of state-owned listed companies is generally on the low side, and the PE/PB quantile of the company is respectively at 30.61% and 9.08% since the backdoor listing of the company, which is at an all-time low. In the context of the restructuring of the valuation of central state-owned enterprises, the enthusiasm of the company is expected to be improved.

Actively lay out the field of building information, create the second growth curve company formally established the subsidiary Huajian Digital Chuang in May 2017, in order to open up the second curve layout building information field, is the company's "14th five-year Plan" during the key information transformation enterprises.

Huajian Digital Innovation's main business mainly includes digital consulting, BIM consulting, CIM consulting and smart building areas. Its core product ArcOS is a leading intelligent operating system in the construction field through the spatio-temporal correlation of multi-source and heterogeneous data and taking the building data stored by the company as its core driving force. At the same time, the company is also actively developing big data, artificial intelligence, virtual reality technology, and strategic cooperation with Microsoft Corp, Huawei and other technology companies.

From 2018 to 2021, the operating income of Huajian increased from 14.38 million yuan to 78.33 million yuan, and the CAGR reached 52.8% in four years. We believe that in the future, with the acceleration of digital transformation in the construction industry, the company will continue to benefit from the accumulation of technology and data resources in the past few years, which is expected to become the second growth curve of the company's future development.

Undervalued, high margin of safety.

1) from the perspective of PE, the average PE of A-share engineering design enterprises is 26.53x, and the PE of the company in 2023 is only 17.0x, which is significantly lower than the valuation of comparable companies; 2) from the perspective of PB, the average PB of current A-share engineering design enterprises is 2.04x, and the PB of the company in 2023 is only 1.4x, which is significantly lower than the valuation of comparable companies; 3) from the perspective of asset valuation:

The company's operating activities have a long-term net cash flow. From 2018 to 2021, the net cash flow of the company's operating activities was 4.21 billion yuan, respectively. In 2022, the Q3 book cash can be regarded as free cash flow. In addition, the company holds a property value of about 1.9 billion yuan, book cash + property is 4.89 billion yuan. 4) from the perspective of financial security, as of 2022, the asset-liability ratio of Q3 company after deducting contract liabilities is 56.32%. In 2021, revenue in Shanghai accounts for 57.87%, and the risk of true impairment loss of its accounts receivable is small.

Profit forecast

From 2022 to 2024, the income of the forecast company is 86.69,95.38,10.215 billion yuan respectively, and the EPS is 0.32,0.40,0.45 yuan respectively. The current stock price corresponding to PE is 17.0,13.6,12.3 times, giving the "buy" investment rating.

Risk hint

(1) the risk of payback of accounts receivable; (2) the investment in infrastructure is not as expected; (3) the new business development is not as expected.