In the first half of the year, revenue was -7.8% year-on-year, and net profit to mother was -12.1% year-on-year. In the first half of 2024, the company achieved operating income of 544.52 billion yuan, -7.8% year-on-year, and realized net profit to mother of 14.28 billion yuan, or -12.1% year-on-year.

The first and second quarters of 2024 achieved operating income of 265.65/278.88 billion yuan, -2.6%/-12.4% year-on-year, and net profit to mother of 7.48/6.8 billion yuan, respectively, or -5.0%/-18.7%.

Affected by the decline in infrastructure demand and the slowdown in projects under construction, the decline in the company's revenue and profit widened in the second quarter.

The amount of new contracts signed has declined, investment business has shrunk sharply, and emerging businesses have bucked the trend. In the first half of 2024, the company achieved a new contract amount of 1078.5 billion yuan, or -15.3%. Among them, the engineering construction business achieved a new contract amount of 780.2 billion yuan, -16.0% year-on-year, and the first two quarters of the engineering construction business achieved a new contract amount of 470.1/310.1 billion yuan, -7.1%/-26.7% YoY, with an average contract amount of 0.401/0.227 billion yuan respectively. By business, the asset operation business declined significantly. In the first half of the year, the amount of new contracts signed was 24.5 billion yuan, compared to -68.6%. Emerging businesses bucked the trend and achieved relatively rapid growth. The amount of new contracts signed in the first half of the year was 166.3 billion yuan, +32.1% over the same period last year. Looking at the subregions, the amount of new domestic contracts was 996.12 billion yuan, -16.2% year-on-year, and the amount of new contracts signed overseas was 82.38 billion yuan, or -2.3% year-on-year.

The business structure was optimized, and gross margin showed signs of stabilizing. The company's overall gross margin for the first half of 2024 was 8.84%, down 1.17 percentage points from the full year of the previous year and 0.01 percentage points lower than the same period last year. The gross margin for the first two quarters was 8.58%/9.07%, respectively, -0.33/+0.28 percentage points over the same period last year. The company's revenue decline widened in the second quarter, while gross margin increased year-on-year, reflecting the optimization of the company's project structure, and the profitability of the project is expected to bottom up in the future.

Expenses were relatively rigid, and the cost rate was relatively stable and increased slightly during the period. The company's expense ratio for the first half of 2024 was 4.81%, down 0.68 percentage points from the full year of the previous year, and up 0.15 percentage points from the same period last year. Management/R&D/sales/financial expenses were 120.8/9.22/2.91/1.89 billion yuan, respectively, -2.0%/-10.4%/-5.2%/+7.7%, respectively. Although there was a general decrease in the pressure rate compared to the same period last year, due to the decline in operating income and the relative rigidity of various expenses, the cost rate was relatively stable during the period, and there was a slight increase over the previous year.

Contract assets and accounts payable increased significantly, putting pressure on both short-term payments and payments. At the end of the first half of 2024, the company's notes receivable and account balance was $164.93 billion, up 9.1% from the beginning of the year, and the balance of contract assets was $286.07 billion, up 22.2% from the beginning of the year. Combined, the two were up $65.64 billion from the beginning of the year; the balance of notes payable and accounts payable was $664.29 billion, up 75.55 billion yuan from the beginning of the year, an increase of 12.8%. The rapid growth in contract assets reflects a clear lag in customer confirmation of the progress of the project. The growth rate of various payables (including long-term payables and other payables) narrowed in the first quarter, but rebounded significantly in the second quarter, reflecting that the company faced great pressure on both payment and receipt sides.

Payment pressure eased in the second quarter, and cash flow is expected to remain under pressure in the second half of the year. In the first half of 2024, the company achieved a cash inflow of 502.61 billion yuan from operating activities, a year-on-year decrease of -115.92 billion yuan, a year-on-year decrease of 571.95 billion yuan, a year-on-year decrease of 76.56 billion yuan, and a net operating cash outflow of 69.33 billion yuan, an increase of 39.37 billion yuan over the previous year. With revenue falling 2.6% in the first quarter, the company's operating cash inflow fell 7.6% year on year and cash outflow increased 2.5% year on year, resulting in a high net operating cash flow outflow; operating cash flow inflow fell 28.4% year on year and outflow fell 26.2% year on year. Cash flow improved in the single quarter, with a net outflow of only 1.27 billion yuan.

Looking at the payout ratio and payout ratio, the revenue to cash ratio for the first quarter was 98.5%/121.6%, respectively, the lowest/highest level in a single quarter since 2020, and the revenue to cash ratio for the second quarter was 78.2%/75.5%, respectively, all the lowest levels in a single second quarter since 2020. The company carried out centralized settlement of upstream accounts payable in the first quarter. Payment pressure eased in the second quarter, but the company's downstream collection did not improve, and the pressure on payments is expected to remain under pressure in the second half of the year.

Investment advice: Lower profit forecasts and maintain the “better than the market” rating. The infrastructure industry has entered a stage of stock development. New infrastructure construction and investment implementation are under great pressure. Local government debt conversion work continues to advance, and the company's engineering business repayment is under pressure in the short term. However, from a long-term perspective, the company, as a leading central construction enterprise, has outstanding brand influence and financing cost advantages. Cash flow is expected to continue to improve in the future as depreciation pressure is gradually released and capital expenditure is continuously reduced. Net profit for 2024-2026 is estimated to be 33.8/32.5/32.1 billion yuan (previous value 38/42/43 billion yuan) and earnings per share of 1.36/1.31/1.30 yuan (previous value 1.53/1.70/1.74 yuan), corresponding to the current stock price PE of 4.20/4.37/4.40X, maintaining the “superior to market” rating.

Risk warning: Risk of further decline in infrastructure prosperity, risk of continuing decline in housing prices, risk of falling short of expectations in engineering business payments, risk of PPP project investment and operation, international business operation risk, etc.