Incident: China Construction released its 2024 three-quarter report. From January to September '24, the company's realized revenue/net profit attributable to mother/net profit without return to mother were 1626.5/39.7/37 billion yuan respectively, down 2.7%/9.1%/9.8% year-on-year. The 24Q3 company achieved revenue/ net profit attributable to mothers/ net profit after deducting non-net profit of 481.9/10.3/10.1 billion yuan, respectively, a year-on-year decrease of 13.6%/30.2%/31.1%.

Comment:

The number of new contracts signed grew steadily, and industrial plants, energy, water resources and water services continued to increase: from January to September '24, the company signed a total of 3247.9 billion yuan, an increase of 4.7%. Among them, the housing construction/infrastructure/survey and design business was 2001.1/976.3/10 billion yuan, +0.9%/-2.6% compared to the same period last year. New domestic/overseas contracts were signed at 2,829/158.4 billion yuan, an increase of 5.4%/88.3% over the same period. In the housing construction business, new contracts for industrial plants were signed at 520.8 billion yuan, an increase of 26.4% over the previous year. The amount of new contracts signed in the infrastructure sector for energy engineering/water and environmental protection increased by 107.5%/50.4% year-on-year.

Performance is under pressure, and the land storage location advantage is clearly yet to be repaired: from January to September '24, the company calculated asset impairment loss/credit impairment losses of 3.59/5.11 billion yuan, an increase of 140.9%/10.1%. The two impairment values were 2.57 billion yuan higher than the same period last year, making the net profit drop higher than revenue. The company's housing construction/infrastructure/housing development business achieved revenue of 1044/384.5/176 billion yuan, -3.3%/+1.7% year-on-year; gross margin was 7.0%/9.1%/17.4%, a year-on-year decrease of 0.2/0.1/0.8 pct. From January to September '24, the company achieved overseas revenue of 84.5 billion yuan, an increase of 8.9% over the same period.

The overall real estate business is still under pressure and is awaiting repair as policies continue to strengthen. From January to September '24, the company's real estate contract sales/sales area decreased by 21.9%/28.9%, adding 4.72 million square meters of land reserves. It is mainly located in first-tier and second-tier cities. At the end of the period, it had a land reserve of 82.04 million square meters. The superior land storage area structure gave the company's real estate business high restoration flexibility.

Expense control was good, and operating cash flow improved month-on-month: from January to September '24, the company's gross sales margin/net margin was 8.8%/3.2%, a decrease of 0.1/0.2pct. Sales/ Management/ Financial/ R&D expenses rate was 0.3%/1.4%/0.9%/1.5%, +0.04/+0.04/-0.15pct year-on-year. The company accelerated efforts such as project payment recovery, inventory removal, and asset revitalization, and increased revenue collection incentives. Operating cash flow improved month-on-month. From January to September '24, the company's net operating cash flow was -77.01 billion yuan, a decrease of 31.76 billion yuan month-on-month, and an increase of 60.66 billion yuan over the same period last year.

The investment balance ratio increased month-on-month, and shareholders' holdings once again showed confidence in development: from January to September 2024, the company completed an investment amount of 212.1 billion yuan, achieving an investment payback of 258.1 billion yuan, and an increase of 11.3 pcts to 121.7% month-on-month.

The company responded positively to the policy call. Following the increase period from October 25, 2023 to April 16, 2024, the company once again announced its plan to increase its holdings by 0.6 billion yuan to -1.2 billion yuan within 6 months from October 15, 2024, demonstrating the company's confidence in future development.

Profit forecasting, valuation and ratings: Affected by factors such as increased impairment accrual, the company's performance declined. We lowered the 24-26 net profit forecast to 50.07/51.01/52.29 billion yuan (down 13%/16%/17%, respectively). The company has signed new contracts and is growing steadily, and the land storage location is superior. With the introduction of a series of policies, business performance is expected to gradually recover and maintain a “buy” rating.

Risk warning: the risk of falling demand for housing construction, the risk of excessive land acquisition prices in the real estate business