Longyuan Construction is a large construction group in East China, and it is expected to bring about fundamental improvements after the Hangzhou Stock Exchange invests in shares. The company's main business is general engineering contracting, full-life cycle services in the infrastructure sector, and green buildings. Currently, the majority shareholders are selling shares and planning increases. The plan was first announced on June 27, 2023, and is currently still in the regulatory inquiry process. According to public information, as of 24Q3, Hangzhou Stock Exchange holds 8.4% of the shares. After the fixed increase is implemented, Hangzhou Trading is expected to hold 29.54% of the shares. It will become the largest shareholder.

Construction is the main business, and PPP projects contribute relatively stable cash flow. In the construction business, the water conservancy business is relatively stable, and civil engineering is expected to pick up after funding is in place; the company has participated in PPP construction projects on a large scale in history. In recent years, as the company withdrew from asset-heavy PPP construction projects, the business model changed to operating existing assets, with higher gross margin and more stable revenue; in the field of green construction, the company has BIPV R&D capabilities and targets industry leaders. According to policy requirements, by 2025, most provinces and cities across the country require more than 30% of prefabricated construction area. At 50%, the market space is broad.

Increment ①: There is a lot of room for new projects after Hangzhou Stock Exchange invests in shares, and the main business is expected to pick up. Due to a shortage of monetary capital, the company's current orders are in a low position. We estimate that as of the end of Q3, the total number of orders in hand was 8.705 billion yuan, lower than the company's revenue level of 9.004 billion yuan in 2023. The fixed increase will raise 1.849 billion yuan in capital, and the company's capital level is expected to recover in the short term. At the same time, Longyuan Construction and Hangzhou Trading's main business are located in East China. If the increase is finally implemented, Longyuan Construction will become the only listing platform with premium general contracting qualifications under Hangzhou's state-owned assets. Hangzhou's 14th Five-Year Plan has a large investment amount, and the company is expected to receive orders and business support through tenders, subcontracting, and asset injection.

Increment ②: In the context of debt conversion, the company's risk asset impairment preparations are expected to be revalued, and financial costs are expected to drop drastically. At the macro level, the Ministry of Finance proposed a one-time increase in large-scale debt limits to replace hidden debts in local government stocks, which is expected to improve local government funding. PPP projects began around 2014, and some policies were gradually abolished due to repayment pressure. The company has been deeply involved in PPP projects in history, and is under pressure to repay. According to the company's current market value, the market believes that there are currently insufficient reserves to accrue risk assets (PPP and receivables), and that an average of more than 8% is still needed, while state-owned equity investment is expected to bring about an improvement in risk asset discounts through strengthening voice and negotiations, leading to an increase in market value. At the same time, it can improve financing costs and drive profit margins to recover.

Profit forecasting and valuation: The current shortage of capital is the company's most critical issue. After Hangzhou Stock Exchange invests in shares in the future, on the one hand, it will directly bring about capital improvements and risk asset revaluation. On the other hand, it is expected that multi-level cooperation will be carried out at the business level. Through order introduction, project subcontracting, asset injection, etc., listed company entities will increase construction business. We believe we should pay close attention to matters related to Hangzhou Stock Exchange's fixed increase. In another dimension, the company's existing PPP operating investment can provide relatively stable cash flow. The green construction business is resilient. Currently, due to poor financial conditions and low market expectations, the company has already obtained an initial stake in Hangzhou Trading, and there is a high level of confidence in continuing operations in the future. It is recommended to focus on the logic of reversing the dilemma in the short term and focus on business growth in the medium to long term. Overall, the company's revenue for 2024-2026 is 9.67 billion yuan/11 billion/ 16.15 billion yuan, giving it a “highly recommended” rating.

Risk warning: There is a risk of uncertainty in the fixed increase of Hangzhou Trading; project introduction falls short of expectations; risk of capital shortage; debt implementation falls short of expectations; infrastructure investment falls short of expectations.