Key points of investment:
Anhui Construction Engineering is a large modern construction enterprise group in Anhui Province. The actual controller is the Anhui Provincial State-owned Assets Administration Commission. The company is mainly engaged in infrastructure, housing construction and other construction engineering related businesses. It is a large-scale and powerful comprehensive construction enterprise group in Anhui Province. The company has strong business strength. It has been ranked among ENR's Top 250 Global Contractors for many years in a row, and has a clear competitive advantage in the region.
Optimal layout promotes the strengths of Anhui, and Anhui has broad investment and construction space. In December 2019, the State Council issued the “Outline of the Yangtze River Delta Regional Integration Development Plan”, which included the entire three provinces and one city of Shanghai, Jiangsu, Zhejiang, and Anhui in the Yangtze River Delta plan, and Anhui's development has entered a new stage. Anhui Province invested 500 billion yuan in the “14th Five-Year Plan” transportation construction plan, of which 250 billion yuan was invested in the highway plan, a significant increase of 159 billion yuan over the “13th Five-Year Plan” 91 billion yuan. The investment space is broad, and the planning and construction goals are clear.
Local government debt conversion is progressing in an orderly manner, and local state-owned enterprises have more missions and opportunities. In the context of local government debt conversion, the pace of infrastructure investment in regions with weak finances is slowing down. In the context of steady growth, key provinces will further spur economic growth. Anhui has great potential for growth.
Anhui construction work has both a mission and an opportunity for enterprises in Anhui Province. It is expected to benefit from market expansion and upward concentration catalysts to drive revenue and profit growth. The company's three-year revenue CAGR for 24-26 is expected to be 9.4%, and profit CAGR is 10.2%.
The investment and operation sector is becoming more mature, extending the long-term operation of the company. As of the end of March 2023, the company has 56 PPP projects in operation, and 40 projects have entered operation. In addition, the company has continued to expand franchise projects in the past two years, and has won bids for 6 franchise projects since the beginning of 2022, including 4 expressways and 1 first-class highway project. We believe that after recent years of hard work, the company's investment and operation sector is becoming more mature, and cash flow is expected to improve and prolong the company's operating period.
Emerging businesses account for a high share of profits and are expected to become a new growth pole. In 2023, Anhui Construction Engineering's other businesses accounted for 13.6% of revenue and 33.4% of gross profit. Other businesses include non-traditional engineering businesses such as prefabricated buildings, inspection services, hydroelectric power generation, building materials, and PPP interest income during the operation period. Compared with state-owned construction enterprises of the same type, Anhui Construction Engineering's emerging business accounts for a high level of gross profit, second only to Tunnel Shares (38.1%), and superior to Shanghai Construction Engineering (21.1%), Sichuan Road and Bridge (10.6%), and Pudong Construction (1.9%). We believe that in the context of the traditional construction engineering market gradually entering an era of stock, emerging businesses can be a key factor in the company's sustainable development.
Investment analysis opinion: First coverage, giving a “buy” rating: The company's net profit for 24-26 is expected to be 1.73 billion/ 1.91 billion/ 2.08 billion, respectively, up 11.3%/10.3%/9.2% year-on-year, and corresponding PE is 5X/5X/4X, respectively. As the main construction force in Anhui Province, the company fully benefits from regional development dividends. At the same time, PPP projects have entered the operation period one after another, and cash flow is expected to continue to improve. It is expected to resonate long and short in the context of countercyclical adjustment, and the overall development prospects are superior to the industry average.
Using the price-earnings ratio valuation method, Sichuan Road and Bridge, Shanghai Construction Engineering, Pudong Construction, and Tunnel Co., Ltd. were selected as comparable companies. The valuation center of comparable companies in 2024 was 8.7X, which is far higher than Anhui Construction Engineering. The region where the company is located has good development prospects, and is expected to surpass the average growth rate of the industry in the future. It is conservatively assumed that Anhui Construction Engineering calculates 6.5 times PE in 24 years, with a corresponding market value of about 11.2 billion dollars and a corresponding space of 29%, giving it a “buy” rating.
Risk warning: Economic recovery falls short of expectations; new orders fall short of expectations; PPP cash payments fall short of expectations; corporate and subsidiary lawsuits and arbitration results are uncertain.