A leading nuclear power construction enterprise in China, a company with the world's leading nuclear power construction capabilities, is a leading nuclear power engineering construction enterprise in China, representing the highest level of nuclear power engineering construction in China. The company was founded in 2010 and is mainly engaged in the construction business of military engineering, nuclear power engineering, and industrial and civil engineering. It is the only enterprise in the world that has been engaged in uninterrupted nuclear power construction for 39 consecutive years. The company has the only international training center for nuclear power construction authorized by the International Atomic Energy Agency, assumes the responsibility of the engineering rescue team of the National Nuclear Emergency Rescue Team, and has the world's leading nuclear power construction capabilities. At present, the company has formed a business layout based on military engineering and nuclear power engineering construction, and is deeply involved in the construction engineering value chain vertically.

The company's performance is growing rapidly, and R&D and financial expenses are growing at the same time. Overall, thanks to the boom in the company's civil construction business, the company's revenue and profit have all re-entered a period of rapid expansion since 2017 and maintained rapid growth. Looking at the breakdown of the company's period expenses, R&D and financial expenses have risen rapidly. Among them, the sharp increase in R&D expenses is mainly due to the company's strong investment in scientific research since 2021 and a significant increase in R&D personnel; financial expenses and net interest expenses jumped sharply in 2022. We determine that there are two reasons: ① the scale of interest-bearing debt increased; ② the company's PPP projects have moved massively from the construction period to the operation period, leading to a high increase in the company's interest calculation from capitalization to cost.

China's nuclear power boom, and the threshold for nuclear island construction is high

The global share of nuclear power is stabilizing, and China's nuclear power contribution is increasing. In the 60-80s of the last century, global nuclear power development was in full swing; after 1987, with the basic improvement of energy structures in developed countries, global nuclear power entered a stage of incremental slowdown; since 2010, the scale of installed nuclear power in China has also entered a period of rapid expansion. According to International Atomic Energy Agency data, as of 2023, China's newly built nuclear power accounts for 40.84% of the installed capacity, making it an important participant in global nuclear power construction and operation.

Nuclear island construction is dominated by China's nuclear construction, while conventional island construction is leading China's energy construction. The scope of nuclear power engineering business mainly includes nuclear power plant nuclear islands, conventional islands, BOP projects and other related projects. Among them, nuclear island construction has high technical and qualification requirements. Currently, out of 11 first-class licenses for domestic nuclear engineering professional contracting, China Nuclear Construction and its subsidiaries hold a total of 9. By the end of 2023, there were 55 nuclear power units in operation in mainland China, and the participation rate in China's domestic nuclear construction and power unit construction had reached 100%. In the conventional island and BOP engineering construction market, the difficulty and specificity of the project is not as difficult and special as nuclear island construction, and the market competition is fierce. In terms of conventional island construction, China Energy Construction undertakes the survey and design of more than 90% of conventional island projects that have already been put into operation in the country, and the construction of more than 66% of conventional island projects.

The nuclear power industry is booming, and the company is expected to accelerate growth

High-margin nuclear power projects have returned to a growth channel, gradually increasing the marginal profit of China's nuclear construction revenue. Since approval for the restart of China's nuclear power units in 2019, China's nuclear power construction investment has increased, and China's nuclear construction business has improved; nuclear power construction has high barriers, and profitability is better than traditional engineering business. Looking ahead to the future development of nuclear power, considering that about 8-10 units will be approved every year in the future, the nuclear construction industry will maintain its prosperity for a long time, and the company is expected to benefit from the increase in capital expenditure in the nuclear power industry in the long term.

2023 may be the first year of the company's current nuclear construction business expansion range. According to experience, after approval of a nuclear power unit, it usually takes several months to a year until FCD (first tank of concrete is poured on a nuclear island), while from FCD to the end of the construction cycle, the unit is put into commercial operation for about 5 years. As a result, construction revenue for the 10 approved units in 2022 will roughly be reflected in 2023-2028. Considering the long-term prosperity of nuclear power in the future, we believe that China Nuclear Construction's nuclear construction business revenue will begin to expand in 2023. At the same time, the high-quality nuclear construction business with high gross profit and low impairment will strongly drive the company's high performance.

Risk warning

1. The number of approved nuclear power units falls short of expectations; 2. Nuclear power going overseas falls short of expectations; 3. Safety risks of nuclear power projects; 4. Risk of credit impairment; 5. Risk that profit forecasting assumptions are not true or fall short of expectations.