▌Rich heritage, complete business, leading engineering design

Huajian Group has a long history and a deep heritage of more than 70 years. It is the first state-owned design consulting enterprise to form a design group and go public in China, and has designed a large number of outstanding works (Oriental Pearl, Shanghai Hotel, etc.). Its business is dual-core engineering design/contracting (accounting for more than 90% in the past five years), while developing both international and domestic markets. The company's performance grew steadily. 22Q4 achieved net profit of 132/75 million yuan after deducting non-return profit, the highest in a single quarter in history; momentum was positive in 2023, and 23Q1 achieved operating profit of 110 million yuan, once again the highest in history in a single quarter. The cash flow was smooth. The 2020/2021/2022 payout ratio was 102.26%/98.84%/94.9% respectively, which is at an excellent level among peers; the company's 2020/2021/2022 ROE was 5.89%/10.50%/9.91% respectively. From a poor level with peers to superior to average, ROE improved significantly. Good cash flow and significantly increased profitability are expected to drive further growth in the company's performance.

▌The fragmentation of the industry is yet to be broken, and the future space prospects for architectural design are promising

The concentration of the architectural design industry is scattered, and the revenue share of leading A-share design companies declined by 7.63 pct in 5 years. The reason for this is that it is difficult to increase per capita output value when combined with high per capita remuneration, making it difficult for listed architectural design companies to generate profits per capita, making it difficult for listed architectural design companies to generate profits per capita, making it difficult to achieve significant scale expansion. In 2018-2022, the per capita output value of the design sector increased by only 4.6%, while the per capita salary in 2022 was about 279,000 yuan. Taking Huajian Group as an example, labor costs accounted for about 50% of operating costs. However, the current policy's focus on informatization and intelligence in the construction industry is superimposed on the “AI+ design” wave, which is expected to bring about revolutionary changes in the architectural design industry, break the shackles of per capita revenue/profit generation, and reshape the competitive pattern of the industry. Further considering the steady expansion of the architectural design market (it is estimated that future space could reach 80 billion yuan), we believe that architectural design companies that can break through the ceiling of output value and take the lead in breaking the market share of the domestic industry are expected to greatly increase the market share of the domestic industry and win the dividends of the construction industry's accelerated overseas expansion.

▌AI+ empowers the industry, and the company welcomes major strategic opportunities

According to authoritative journals, the efficiency of artificial intelligence in some structural design processes is about 10 times that of manpower. “AI+ design” is expected to push building design into the intelligent era, reshape industrial logic and industrial pattern while reducing costs and increasing efficiency. Huajian Group actively embraces “AI+” and has many advantages such as talent, original design and technological innovation capabilities, digital accumulation, massive amounts of high-quality data, and early layout, and is expected to take the lead in achieving substantial breakthroughs in the field of “AI+ design”. In the future, the company is expected to achieve a significant increase in market share by combining economies of scale benefits on the basis of the growth of its main business and increased profit margins.

▌The company has sufficient internal motivation to revalue its value as a local high-quality state-owned enterprise

Currently, the company's PE is only 22.63x, far below the design industry average (48.53x); PB is 1.89x, which is also lower than the design industry average (2.05x). As a high-quality local state-owned enterprise, it has endogenous motivation to improve its valuation in the context of China Special Evaluation. The valuation repair path is: 1) Digital transformation helps value revaluation. 2) Actively expand overseas business and seize opportunities along the Belt and Road. 3) With the expansion of high-margin businesses and the improvement of ROE, increased profitability is expected to further repair its valuation.

▌Profit forecast

The company's revenue for 2023-2025 is estimated to be 94.91, 110.64, and 12.919 billion yuan respectively, and the EPS is 0.61, 0.83, and 1.09 yuan respectively. The current stock price corresponding to PE is 14.7, 10.8, and 8.2 times, respectively, maintaining the “buy” investment rating.

▌Risk Alerts

The progress of “AI+ Design” fell short of expectations, the company's performance fell short of expectations, and overseas revenue fell short of expectations.