1H21 performance was slightly higher than our expectations
Urban Construction Design announced 1H21 results: revenue of 4.82 billion yuan, up 11.2% year on year, net profit of 403 million yuan, up 13.2% year on year. Due to the increase in gross margin, the company's performance was slightly higher than our expectations.
1h21 gross margin increased 0.4 ppt to 18.3% year on year; sales expense ratio increased 0.2 ppt to 0.9% year on year, mainly due to the company's increased market development efforts; administrative expenses ratio increased by 0.7 ppt to 8.4% year on year, mainly due to increased R&D investment; asset impairment loss increased 51.8% year on year to 213 million yuan, investment income increased 151% year on year to 124 million yuan; effective tax rate decreased by 5 ppt to 9.6% year on year; net interest rate increased 0.2 ppt to 8.4% year on year.
The net cash outflow from 1H21 operating activities was 814 million yuan, an increase of 321 million yuan over the previous year, mainly due to the acceleration of payment turnover; net cash outflow from investment activities was 435 million yuan, which was basically the same as the previous year.
Development trends
Design revenue is growing rapidly. In the first half of the year, the company's design business signed new orders of 2.75 billion yuan, down 2.7% year on year; revenue was 1.75 billion yuan, up 17.8% year on year. Among them, rail transport/industrial civil construction municipal orders increased 20.3%/9.6% year on year respectively, reflecting the smooth execution of the company's ongoing projects. The gross margin of the 1h21 design business fell 0.3 ppt to 30.4% year on year, which is generally steady. Among them, the gross margin of rail transport/industrial and civil construction municipal construction fell 1.8 ppt/7 ppt year on year, respectively; net profit margin increased by 0.8 ppt to 16.7% year on year. The company's design orders grew rapidly in the early stages (30.6%/9.5% year-on-year increase in 2019/2020, respectively). We believe this is expected to support the company's design business revenue to continue to grow steadily.
Construction orders have rebounded, and revenue has grown steadily. In the first half of the year, the company's engineering revenue was 3.07 billion yuan, up 7.7% year on year; gross margin increased 0.2 ppt to 11.4% year on year, maintaining stability; net profit margin decreased by 1.6 ppt to 4.7% year on year. However, the company signed 10.19 billion yuan of new project orders in the first half of the year, an increase of 744% over the previous year. It exceeded the level of the full year of 2019 and 2020, and reversed the downward trend in project orders since 2018; we estimate that it was mainly due to winning the bid for the Chongqing Suburban Railway Bishan to Tongliang Line PPP project. We believe this will help support the subsequent recognition of the company's engineering revenue.
Profit forecasting and valuation
Considering that the company's engineering orders have rebounded and subsequent project revenue is expected to grow rapidly, we raised our net profit in 2021 and 2022 by 4%/9% to 883/1.0 billion yuan. The company is currently trading at 3.0/2.7 × 2021/2022 EP/E. We maintain our target price of HK$3.24, corresponding to 4.3/3.7 × 2021/2022 EP/E and 40% space. Maintain outperforming industry ratings.
risks
The progress of revenue recognition from the engineering business fell short of expectations, and project repayment fell short of expectations.