The 2023 results are largely in line with our expectations

The company announced 2023 results: revenue +11.5% YoY to HK$113.7 billion; net profit to mother of HK$9.2 billion, up 15.2% year over year; of these, 2H23 revenue +22% YoY to HK$58.6 billion, and net profit +15% YoY to HK$4.3 billion, which is basically in line with our expectations and the market.

Mainland revenue increased significantly, supporting the company's profit: in 2023, the company's mainland revenue was +36.1% year over year to HK$66.185 billion (accounting for 58% of revenue); as the company increased its high turnover business in the domestic region, gross margin declined slightly (-3.2ppt to 19.4% year over year), accounting for 79% of gross profit. The Hong Kong and Macau regions showed a steady upward trend, and gross margin recovered steadily: in '23, the company's revenue in Hong Kong and Macau was -13% to HK$41.6 billion (excluding the impact of epidemic prevention projects, +10% YoY), gross margin was +1.2ppt to 6% year over year, and gross profit ratio reached 15%. Increased profit margin: The company's comprehensive gross margin in '23 was +0.7ppt to 14.4% year on year, sales and management expenses ratio was -0.1ppt to 2.3% year on year; net margin increased 0.3 ppt to 8.1% year on year. Early ROE compliance: 23-year ROE was +1.2ppt to 15.1% year-on-year, reaching the ROE target level of 15% ahead of schedule in 25 years. The amount of new contracts signed has remained high, and the driving force in the technology and investment sectors is strong. The amount of new contracts signed by the company in 2023 was HK$188 billion (+17% YoY), of which the amount of new contracts signed in China was +4.5% to HK$96.1 billion, and the Hong Kong and Macau regions were +37% to HK$80.5 billion. By contract category, technology-driven category, investment category, construction category, and operation category accounted for 40%/34%/25%/1% respectively. Among them, technology and investment orders were +45%/21%, respectively, which was the main driving force for the growth of company orders. Cash flow continues to improve. The company strengthened risk management and refined project operation management, and achieved an increase in the Group's overall net operating cash flow inflow. Net operating cash flow increased 150% year over year to HK$300 million year on year in '23, and operating cash flow was corrected for the first time since the launch of the mainland business. At the same time, the investment cash flow was also +700 million to HK$1.2 billion compared to the same period last year.

Development trends

Mainland, Hong Kong and Macau projects strive for excellence, and MIC is gradually being promoted. We believe that the company has a leading market position in Hong Kong and Macau and will continue to benefit from large-scale plans such as moderate and diversified economic development in the northern metropolitan area and Macau. At the same time, the company focuses on high-quality regions in the mainland market. The proportion of new contracts signed in regions such as the Yangtze River Delta and Greater Bay Area in 23 years has reached 90%, and the investment map has been further optimized. The company's MiC products have successfully entered cities such as Beijing, Guangzhou, and Jiaxing to construct difficult projects such as the renovation of the old buildings of the Beijing Birch Factory, and set a number one in the industry. Looking forward to the future, we believe that technologies such as MiC are expected to continue to enable project acquisition, improve quality and efficiency, and provide long-term momentum for the company's medium- to long-term corporate growth.

Profit forecasting and valuation

We kept our 24-year profit forecast unchanged, introducing net profit of HK$12 billion for the year 25. The current stock price corresponds to 2024/25e 4.2/3.7x P/E. We maintain our outperforming industry rating. Considering the valuation switch to '24, we raised our target price by 5% to HK$11, corresponding to 5.3x/4.6x 2024e/25e P/E, implying 25% upside.

risks

Cash flow fell short of expectations, and order fulfillment fell short of expectations.