The company announced major transactions and signed an agreement on October 11, 2023 to sell CNOOC Supervision Co., Ltd. for HK$950 million, with expected sales revenue of HK$550 million. The calculated valuation is 14.90 times that of PE in 2022. After this transaction, the company gradually divested its non-core main business and focused on curtain wall engineering. Overall, the company's performance growth is in line with the “14th Five-Year Plan” business target (achieving a net profit of 1 billion yuan, a compound 5-year net profit growth rate of 39%). It continues to build high certainty in performance, and is expected to continue to grow rapidly along with the emerging market+BIPV layout. Considering that the company's performance is still in a period of rapid growth and has high certainty, the comprehensive PE valuation of comparable enterprises and the company's historical PB valuation gave a target market value of HK$7.5 billion, corresponding to a target price of HK$3.3 billion, and maintained the “buy” rating.

The company sold its supervisory consulting business, with estimated revenue of HK$5.3 billion. The company announced on March 14, 2018 that it acquired CNOOC Supervision Co., Ltd., a subsidiary of China Construction International, for 70 million yuan. Together with the company's engineering consulting and communications engineering consulting services in China, the company considered that CNOOC had more than 30 years of experience in providing engineering consulting and supervision services, so the company expected to improve its dual-core business strategy. After 2021, the company's “14th Five-Year Plan” strategy will gradually focus on the curtain wall business and downplay non-core business. On October 11, 2023, it announced that it will sell CNOOC Supervision for HK$950 million (unaudited net assets of approximately HK$448 million in 2022), with expected sales revenue of HK$5.3 billion.

The valuation multiplier for the selling company is higher than that of the original company as a whole. The company sold CNOOC at a price of HK$950 million. If the transaction were successfully completed, the company's net capital would be HK$948 million, CNOOC's profit before tax in 2022 was HK$46.26 million, profit after tax was HK$63.76 million, profit before tax in 2021 was HK$80.28 million, and profit after tax was HK$60.15 million. The valuation of PE in 2022 is 14.90x, 15.79x higher than the company's current PE (ttm).

After divesting non-main businesses, the company's balance ratio and net borrowing ratio will improve significantly. The net proceeds from the sale of China Construction Industry will be HK$948 million. The company plans to use 40% of the net proceeds for the general working capital of the Hong Kong and Macau façade construction business, and 60% to repay some of its existing debts to reduce financial expenses.

Prior to the transaction, the company's balance ratio (as of 2023H1) was 78.7%, and the net loan ratio was 30.8% (including bank balance and cash of HK$645 million, and total bank loans of HK$1,375 million). This capital repayment of approximately HK$569 million and the investment of HK$379 million into operations will significantly improve the company's balance ratio and net loan ratio.

Continuing to build certainty about performance is expected to grow rapidly in the future. According to the 2023 Interim Report, 2023H1's curtain wall project revenue reached HK$3.65 billion, up 25.8% year on year, gross margin reached 15.2%, up 1.8 pcts year on year, and segment profit reached HK$5.1 billion, up 60.1% year on year. Furthermore, the company's new contracts remained stable in 2023H1. The total amount of contracts reached HK$6.62 billion, an increase of 10.2% over the previous year. Under the guidance of the “14th Five-Year Plan” strategy of “Expanding Hong Kong and Macao, Expanding the Mainland, and Optimizing Overseas” strategies, the company continued to build a high degree of certainty in performance (at the beginning of the “14th Five-Year Plan”, the company proposed a target of reaching HK$1 billion in net profit by 2025). Following the emerging market+BIPV layout, the company's performance is expected to continue to grow rapidly.

Risk factors: Risk of rising costs such as raw materials and labor, risk of rising capital costs, risk of exchange rate fluctuations, market expansion in mainland, Hong Kong and Macao falling short of expectations, implementation of overseas projects falling short of expectations, and risk of uncertainty in this transaction.

Profit forecast, valuation and rating: If the sale of CNOOC's supervisory transaction is successfully completed, it will increase the company's short-term net profit in the short term. In the long run, the company is positioned in the middle and high-end curtain wall market, and at the beginning of the “14th Five-Year Plan”, proposed a goal of achieving a net profit of HK$1 billion by 2025, with a compound growth rate of 39% in net profit for 5 years. Up to now, the performance targets for 2021 and 2022 have been fulfilled. In terms of business quality, payment terms for the company's Hong Kong and Macau business are relatively good, and future performance growth is highly certain. We adjusted the company's net profit forecast for 2023-2025 to HK$8.15/7.92/1,042 million (original forecast was HK$568/7.78/1,031 million). Comparable companies of the company were Jianghe Group and Yaxia Co., Ltd. (loss of previous performance was not used as a reference for valuation), and Jianghe Group's 2024 (Wind unanimous expectation) valuation was 10 times PE. Considering that China Construction Industry focuses on the high-end curtain wall market, the performance growth is highly certain and the growth rate is fast. We gave the company a PE valuation of 10 times in 2023, corresponding to a market value of 82 100 million Hong Kong dollars. Furthermore, since the company proposed the “14th Five-Year Plan” in 2021 to reduce the scale of its overseas market business, the average PB has been 1.80 times. Considering that the company's overseas business is expected to continue to shrink in the future, compounded by the scale of the mainland, Hong Kong and Macao business, and continue to improve, we believe it is possible to give the company a valuation level exceeding the center of history, that is 2.5 times PB, equivalent to 71% of the valuation score since 2020, corresponding to HK$6.7 billion. Based on comprehensive PE and PB valuations, we believe that the reasonable market value of the company is around HK$7.5 billion, with a target price of HK$3.3 billion, maintaining a “buy” rating.