1H24 results in line with our expectation

China State Construction International (CSCI) announced its 1H24 results: Revenue rose 12% YoY to HK$61.76bn and net profit attributable to shareholders grew 12.7% YoY to HK$5.47bn, in line with our expectations.

In 1H24, newly signed contracts rose 29% YoY to HK$125.1bn, with newly signed technology-driven and construction-related contracts up 21% and 88% YoY to HK$60bn and HK$41.4bn, and new investment-driven contracts down 6.5% YoY to Rmb22.7bn. By region, new contracts on the Chinese mainland, Hong Kong SAR and Macao SAR rose 17%, 54% and 6.6% YoY to HK$56.9bn, HK$57.6bn and HK$4.5bn. The high growth of technology-driven contracts and contracts in Hong Kong was mainly as the firm successfully won the bid for the West New Territories Landfill Extension in 1H24.

In 1H24, GM fell 0.2ppt YoY to 15.5%, mainly due to rising revenue contribution from Hong Kong SAR and Macao SAR, and rising labor costs in Hong Kong SAR and Macao SAR. Selling and G&A expense ratio fell 0.1ppt YoY to 2.1%, and financial expense ratio fell 0.2ppt to 2.6%. Net margin remained largely unchanged at 8.8%.

In 1H24, net operating cash inflow was HK$2mn (vs. a net inflow of HK$168mn in 1H23), with the Chinese mainland registering a net outflow of HK$222mn (vs. a net outflow of HK$684mn in 1H23), and net inflow down about HK$630mn YoY in Hong Kong SAR and Macao SAR due to the construction commencement of major projects in Hong Kong SAR.

CSCI increased capex in 1H24, with cash outflow from investment activities at HK$1.59bn (vs. an inflow of HK$1.10bn in 1H23), as CSCI built factories in Jiangmen and Shenzhen, and it may continue to invest in Shanghai and Beijing. In 1H24, net gearing ratio rose 3.9ppt from end-2023 to 69.8%. The firm raises its interim dividend payout ratio by 1.85ppt to 30.4%, implying a cash dividend of HK$33 cents per share. If the dividend payout ratio is maintained at 30% for 2024, the dividend yield may be as high as about 6%.

Trends to watch

Chinese mainland investment business solid; MiC business gaining momentum. In our view, the firm focuses on high-quality regions in the Chinese mainland, and its newly signed investment-driven projects in 1H24 were all concentrated in eastern coastal provinces such as the Yangtze River Delta. The contract turnover period was further shortened (new investment-driven contracts for 1H24 stayed below five years). The firm won the Xuhui urban renewal project in Shanghai in 1H24 for Modular Integrated Construction (MiC) products. Having entered four tier-1 cities, the firm plans to expand its production capacity in Shanghai and Beijing to form a MiC production capacity centering on tier-1 cities and covering high-tier regions.

Looking ahead, we believe technologies such as MiC will continue to empower project acquisition and help improve quality and efficiency, providing high-quality new drivers for the sustained growth in the medium and long term.

Financials and valuation

We keep our earnings forecasts unchanged. The stock is trading at 5.4x 2024e and 4.7x 2025e P/E. We maintain an OUTPERFORM rating. Given the solid fundamentals and high dividend payout ratio, we raise our target price by 23% to HK$13.5, implying 6.5x 2024e and 5.7x 2025e P/E and offering 19% upside.

Risks

Disappointing payment collection from investment business; slower-than- expected progress in projects in Hong Kong SAR; slower-than-expected development of MIC business.