Main points of investment:
Hongrun Construction is a listed private enterprise with rail transit business as its main business. it has participated in the rail transit construction in Shanghai since 1995, and then infiltrated into the rail transit business in Hangzhou. At present, it has become the leader of rail transit in East China. Participated in almost all the rail transit line construction in Shanghai and Hangzhou. On the other hand, the company is also actively expanding its business throughout the country. At present, the rail transit projects undertaken by the company have covered a total of 18 cities across the country. As the core business of the company, the proportion of revenue of rail transit has increased year by year, with CAGR reaching 25.2% from 2017 to 2020. In 2020, new rail delivery orders increased by 141% compared with the same period last year, and the rail transit business is expected to continue to grow in the future.
The leading shield construction technology helps the company enter the field of intercity railway construction. The company is the first private enterprise with shield construction technology in the country, with shield manufacturing, repair and maintenance base, with a total of 287 km of shield tunneling. The Hangzhou-Shaotai Railway PPP Project, which the company participated in in 2017, is the first batch of railway demonstration projects invested by social capital in China, and it is the first railway construction project controlled by private capital in China to create new business growth points.
The heat of rail transit investment is heating up. In 2020, the number and total length of rail transit operating lines in China increased by 17.1% and 18.5% respectively compared with the same period last year. After the NDRC resumed the examination and approval of urban rail projects in 2018, nearly 2 trillion projects have been approved, of which, according to local plans, the investment in urban rail transit in Zhejiang Province will reach 234.7 billion yuan during the 14th five-year Plan period, and Shanghai will start the construction of seven rail transit lines with a total investment of 187.5 billion yuan.
The construction of urban agglomeration enables the development of inter-city railway. At the end of 2020, the National Development and Reform Commission pointed out at a special meeting that the intercity and urban railways of the three major urban agglomerations such as the Yangtze River Delta will be included in the 14th five-year Plan as major projects, and it is planned to start the construction of about 10,000 kilometers of intercity railways and urban (suburban) railways in the next five years. Among them, about 4000 kilometers of intercity railways will be built in the Yangtze River Delta in the next three years, accounting for 2/3 of the total new mileage of the three major urban agglomerations.
First coverage, "overweight" rating: the company's 21-23 net profit is expected to be 353 million / 375 million / 405 million, with a growth rate of-14.8%, 6.3% and 8.1%, respectively, corresponding to 13X/12X/11X for PE. Using the price-to-earnings ratio valuation method, Pudong Construction, Ningbo Construction Engineering and Tengda Construction, which are similar to the company's main business and scale, are selected as comparable companies. The PE valuation of Hongrun Construction in the past 21 years is slightly lower than the comparable average of 14.2 times. Considering that the subdivision areas such as rail transit and intercity railway, where the company's main business is located, have a good bearing, it is expected to obtain a tilt of investment, promote the rapid growth of the industry, and the Hongrun traditional rail transit construction experience is strong. In recent years, the momentum of development is rapid. The newly signed rail delivery orders in 2020 increased by 141% compared with the same period last year, ensuring future performance growth. At the same time, the company is also the first private enterprise to participate in intercity railway construction. It is expected to fully benefit from the warming of intercity railway investment, which is expected to exceed the average growth rate of the industry in the future. Suppose it is calculated according to 14.2 times PE in 21 years, the corresponding market value is 5 billion yuan, the current market value is 4.5 billion yuan, and the corresponding space is about 12%.
Risk hint: the development of rail transit investment is not as expected; the growth of new orders signed by the company is not as expected.