Investment highlights

For the first time, Hongxin Construction and Development (09930) was covered to give the industry a rating of outperforming. The target price was HK$3.00. Based on the EV/EBITDA valuation method, the corresponding valuation ratio was 4.8x EV/EBITDA in 24 years. The company is a leader in the domestic equipment operation service industry, ranking first in market share in all fields. The reasons are as follows:

Construction leases are trillion-dollar, and the concentration of high-altitude vehicles is outstanding. The construction leasing operation market is over 900 billion yuan. With the increase in the penetration rate of the leasing model, the scale is expected to maintain 10% CAGR growth until '27, but the market pattern is scattered (CR3 was only 1.5% in 2021, far lower than the US CR 334%). Among them, high-altitude vehicles have become pioneers in the development of the rental market due to their high unit price, short usage cycle, low threshold, and high operating requirements, and the concentration level is high (CR3 reached 58% in '22).

Multiple factors drive the continuous increase in high-altitude vehicles, with prominent scale effects and concentrated acceleration. As practical, efficient, and safe equipment, aerial vehicles are continuously replacing traditional scaffolding. The number of units owned in 22 years reached 490,000 units, and the market size is 13.3 billion yuan. Under the expansion of application scenarios and market promotion, the scale of aerial vehicles is expected to maintain a CAGR of 16% and grow to 31 billion yuan in 27 years. Since 2023, leading companies have had a prominent advantage in scale, and their operating efficiency is far higher than that of the industry, while small enterprises have basically stopped buying new cars or entrusting operations to others due to weakening rental prices, tight capital, and increased pressure to pay debts; while leading companies will continue to expand their scale and gain share faster with their capital and operational advantages.

Hongxin C&D - a leading and steady operator in the high-altitude vehicle sector. Hongxin has strong advantages in the field of high-altitude vehicles: 1) Scale effect: the company managed 180,000 high-altitude vehicles at the end of '23, with 400+ network coverage, leading rental rate; 2) Financial advantage: with the support of majority shareholders, the company has sufficient bank credit, lower financing costs (4.2-4.3%), and has been awarded the credit rating of honest “AAA” entities; 3) Supply chain advantages: the company cooperated with many financial rental companies to accelerate the expansion of equipment operation scale (as of 3Q23, the company had more than 50,000 rental vehicles); 4) Steady operation The company pursues assets and liabilities Long-term matching, and the quality of accounts receivable is controlled through a strict risk control system. Looking forward to the future, with its core advantages in the field of high-altitude vehicles, the company will continue to develop new volume, maintain a leading position, and gradually explore emerging categories and expand overseas markets.

What is our biggest difference from the market? We believe that the market has overlooked the importance of a company's capital advantage (sufficient capital, light asset size) and strong cash flow management ability in the leasing model.

Potential catalysts: Increased stock liquidity, liquidation of medium-sized lessors, and acceleration of overseas development.

Profit forecasting and valuation

We expect the company's 2024-2025 EPS to be 0.41 and 0.48 yuan respectively, and the CAGR will be 26%.

The current stock price is 4.2x/3.7x EV/EBITDA for 2024/2025, respectively. We covered Hongxin Construction and Development for the first time and gave it a rating that outperformed the industry. Using a comparable valuation method, we gave 2024/25e 4.8x/4.2xEV/EBITDA, corresponding to a target price of HK$3.0, implying a 52% upward margin.

risks

Market competition has intensified the reduction in rental prices; the materials business is dragging down profits and the risk of high debt ratios.