Lower-than-expected performance in 2018
Urban construction design announced its 2018 results: revenue rose 3.1% year-on-year to 7.2 billion yuan, and net profit increased 13.5% to 563 million yuan, or 0.42 yuan per share. In the second half of 2018, revenue fell 4.4 per cent year-on-year to 3.8 billion yuan, while net profit rose 8.8 per cent to 300 million yuan. Due to the lower-than-expected performance of the construction business, the performance was lower than we and the market expected.
Gross profit margin rose 0.6 percentage points to 19.8% in 2018, mainly due to increased contribution from the high-interest rate design business; net profit rose 0.7 percentage points to 7.8%. The net operating cash outflow of the company in 2018 was 711 million yuan, significantly lower than the inflow of 234 million yuan in 2017, mainly due to changes in working capital; the net investment cash inflow was 230 million yuan, a significant improvement from the net outflow of 860 million yuan in 2017, mainly due to loan repayment by associated companies.
Trend of development
Fluctuations in the industry led to a slowdown in income. The company's revenue fell 4.4% in the second half of 2018 compared with the same period last year, of which revenue from design and construction increased by 7.6% and 13.5% respectively, and revenue growth declined both year-on-year and month-on-month, mainly due to: 1) the company's business was still affected by the suspension of urban rail examination and approval, and the release of new projects brought about by the newly approved urban rail construction plan lagged behind; 2) due to the decline of the industry as a whole, the company took the initiative to reduce the size of PPP business.
New orders and revenues are expected to improve in 2019. In 2018, the company's design and construction business newly signed orders fell by 63.6% and 33.8% to 3.5 billion yuan and 10.2 billion yuan respectively, while the year-end orders reached 35.7 billion yuan, five times the 2018 revenue, and the orders-on-hand are still sufficient. With the acceleration of domestic urban rail projects, we expect the growth rate of newly signed orders to improve in 2019, and design revenue is expected to remain strong.
Profit forecast
Based on the strategic adjustment of the company's PPP business, we cut our net profit forecasts for 2019 and 2020 by 14.8% and 17.1% to 650 million yuan and 750 million yuan, respectively.
Valuation and suggestion
The current share price corresponds to 6 times 2019 p / e. We maintain the recommended and target price of HK $4.95 (10.5 times 2019 price-to-earnings ratio), which is 53% upside from the current share price.
Risk
In-hand order delivery and new orders are lower than we expected.