Investment highlights

For the first time, it covered China Nuclear Construction (601611) and gave it an outperforming industry rating. The target price was 10.50 yuan. Based on the SOTP segmented valuation method, it corresponds to 24/25e 15/13x P/E, implying 19% upward space. The company is a core domestic nuclear power engineering, industrial and civil engineering construction enterprise. The reasons are as follows:

Domestic attitudes towards nuclear power policies have turned positive, and nuclear power projects have entered a peak approval period. The 2021 government work report proposed “active and orderly development of nuclear power on the premise of ensuring safety”. This is the first time in many years that China has used an “active” expression to clearly mention nuclear power. The “14th Five-Year Plan” released in 2022 once again mentions the active, safe and orderly development of nuclear power, requiring the installed operating capacity of nuclear power to reach 0.07 billion kilowatts by 2025. China's approved units reached double digits for 3 consecutive years in 2022 to 2024. We calculate that the construction cycle for a single nuclear power unit is 5 years and the peak revenue period for construction companies starts 2 to 3 years. We determine that the company may begin the peak revenue confirmation period for nuclear power projects in 2024.

It is the main force in nuclear power engineering construction, and has accumulated far-reaching professional capabilities. According to the company's announcement, since the 1980s, it has constructed nuclear island projects for all active nuclear power units in China, and has taken a leading position in the industry. For example, it has successively completed the construction of nuclear islands and conventional islands for units such as the Zhejiang Qinshan Nuclear Power Plant and the Guangdong Daya Bay Nuclear Power Plant. Nuclear island construction requires high technical requirements, and owners usually choose more experienced contractors to reduce risk. We believe the company's leading position is expected to continue. In November 2024, the company signed a special cooperation agreement with EDF to jointly promote cooperation in various fields such as global nuclear power construction in the future.

Optimize the order structure, or actively reduce the share of housing construction and enhance the competitiveness of energy projects. According to the company's disclosure, housing construction projects affected by the external environment have been under pressure since 2022. The company is actively responding to traditional business order pressure and increasing the scale of new energy revenue, which is reflected in the project growth rate and structural ratio. For example, the revenue of 1H24's industrial and civil engineering sector was -5.7% to 35.7 billion yuan, but the amount of new energy contracts signed increased dramatically; 1H23's industrial and civil engineering sector revenue was -3.2% to 43 billion yuan, of which the amount of new energy contracts signed was +46% to 6.8 billion yuan.

What is our biggest difference from the market? The market is concerned that the decline in the company's traditional business will bring pressure on the profit side. We believe that ① the company's nuclear power business is growing at a rapid rate of new orders; ② the profitability of nuclear power projects is stronger than traditional business, or may increase the company's overall profit margin; ③ the company is actively developing new energy projects in the field of industrial and civil engineering, which is expected to support orders.

Potential catalysts: domestic/overseas nuclear power orders exceeding expectations, traditional business revenue, profit margin improvements, etc.

Profit forecasting and valuation

We expect the company's 2024-2025 EPS to be 0.70 yuan, 0.80 yuan, and CAGR of 8%, respectively.

The current stock price corresponds to 24e/25e 13/11x P/E. We covered China's nuclear construction for the first time and gave it a rating that outperformed the industry. The target price was 10.5 yuan, corresponding to 24/25e 15/13x P/E, implying 19% upward space.

risks

Approval of nuclear power projects fell short of expectations, and project profit margins fluctuated; traditional engineering projects were hampered by housing construction and other businesses; PPP projects affected accounts receivable, causing credit impairment to affect the company's profits.