1H24 results are in line with our expectations

The company announced 1H24 results: revenue of HK$61.755 billion, up 12% year on year, and net profit to mother of HK$5.465 billion, up 12.7% year on year. The results are in line with our expectations.

1H24 signed new contracts +29% to HK$125.1 billion, of which new technology-driven and construction contracts were +21%/+88% to HK$60/41.4 billion, respectively, and -6.5% to HK$22.7 billion compared to the same period last year for new investment-driven contracts. By region, Mainland China/Hong Kong/Macau signed new contracts +17%/+54%/+6.6% year-on-year to HK$56.9/57.6/4.5 billion, respectively. The high growth in technology-driven contracts and contracts in Hong Kong is mainly due to 1H winning the bid for the Hong Kong New Territories West Landfill Expansion Project.

1H24's gross margin was -0.2ppt to 15.5% year on year, mainly due to the increase in Hong Kong and Macau's revenue share and the increase in labor costs in Hong Kong and Macau; sales and management expenses ratio -0.1ppt to 2.1% year over year, financial expenses ratio -0.2ppt to 2.6% year over year; net interest rate remained basically 8.8%.

The net operating cash outflow of 1H24 was HK$0.17 billion, up from the net inflow of HK0.1 billion in the same period of the previous year; the net inflow of investment cash was HK$1.09 billion, a decrease of HK$0.8 billion year over year. The net borrowing ratio decreased by 1.9ppt to 67.5% compared to the end of the previous year.

1H24 increased its capital expenses, with an investment cash outflow of HK$1.587 billion (1H23 flowing into HK$1.097 billion), mainly due to the company's factory construction in Jiangmen and Shenzhen, and may continue to invest in Shanghai/Beijing in the future. The 1H24 net debt ratio increased by 3.9ppt to 69.8% from the end of '23. The company increased its interim dividend payout ratio of 1.85ppt to 30.4% to HK33 cents per share. If a 30% dividend payout rate is maintained throughout the year, the dividend rate is as high as ~ 6%.

Development trends

The mainland's investment business is steady and enterprising, and mic technology is driving momentum. We believe that the company focused on high-quality regions in the mainland market. In the first half of the year, all new investment-driven projects were concentrated in eastern coastal provinces such as the Yangtze River Delta, and the contract turnover period was further shortened (1H24 investment contracts were kept within 5 years). The company's 1H24 MiC products received the Shanghai Xuhui renovation project and have now successfully entered the four major first-tier cities. In the future, it will continue to promote the production capacity layout in Shanghai and Beijing to form a MiC production capacity centered on first-tier cities and radiating high-energy regions. 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 high-quality new impetus for the company's medium- to long-term corporate growth.

Profit forecasting and valuation

We keep our profit forecast unchanged. Currently trading at 5.4x/4.7x 2024e/2025e P/E. We maintain our outperforming industry rating. Considering the company's stability and high dividend rate, we raised our target price by 23% to HK$13.5, corresponding to 6.5x/5.7x 2024e/2025e P/E and 19% upward space.

risks

The payback of the investment business fell short of expectations, the progress of the Hong Kong project fell short of expectations, and the development of the mic business fell short of expectations.