Chengda Group (01568 HK)'s revenue for the first half of 2018 increased 23.2% year-on-year to HK$2,704 million. Net profit increased 18.6% year over year to HK$207 million. The performance slightly exceeded expectations, mainly due to higher-than-expected growth in interior decoration projects in Macau, whose revenue increased 33% year-on-year to HK$700 million. Overall gross margin fell 0.2 percentage points year over year to 12.5%. The sales expenses ratio increased 0.1 percentage points year over year to 0.3%, while the management expenses ratio increased 0.2 percentage points year over year to 4.3%. As at 30 June 2018, the total contract amount and remaining project value were HK$7.392 billion and HK$3.850 million respectively.

As for interior decoration projects, we expect the company to continue to benefit from the prosperity of the Hong Kong real estate market, while the Macau market will surpass other markets as the total floor area of newly built buildings continues to rise and existing casinos are renovated. We believe that the reason for the slowdown in revenue growth in Beijing is mainly the tightening of regulations in the real estate market and the slowdown in economic growth. Overall, we expect interior design revenue from 2017 to 2020 to grow at a compound annual growth rate of 9.1%.

Our earnings per share forecast for 2018 to 2020 are HK$0.220, HK$0.259 and HK$0.285 respectively. With the re-acceleration of construction progress in Macau and the support of the booming Hong Kong real estate market, we expect the interior decoration business to continue to recover in 2018. We maintain our target price of HK$4.80, which is equivalent to 21.8/18.5/16.8 times the price-earnings ratio for 2018/2019/2020. Maintain “collected” investment ratings.