China Construction's only Hong Kong and Macau engineering platform continues to develop investment business in mainland China. China Construction International is the only Hong Kong and Macau construction business platform under China Construction Group. Since 2008, it has entered the mainland market to develop investment projects such as BT and PPP. The mainland's revenue/performance share has continued to increase, reaching 58%/81% in 2023. The company's revenue/performance CAGR in 2013-2023 reached 15%/13% respectively (up 11.5%/15.1% in 2023). In recent years, it has maintained steady growth under the influence of macroeconomic disturbances and declining real estate, and has strong operational resilience, and comprehensive gross profit margin, net interest rate and other indicators are significantly superior to other leading construction central state-owned enterprises, with excellent profitability.

The investment business model is optimized, and the profit quality continues to improve. Affected by the undertaking of long-term PPP projects, the company's total asset turnover rate has declined markedly since 2016, resulting in ROE falling from a high of 22% to 12%. Since 2019, in order to speed up turnover, improve cash flow, actively innovate project models, and develop GTR short-term projects such as targeted repurchases of guaranteed housing with local governments, the mainland investment business structure was significantly optimized in 2019-2021. There were no PPP projects in 2021. The proportion of GTR projects increased to 76%, driving a marked acceleration in overall order conversion. The cash flow in 2023 has already accelerated markedly After two consecutive years of correction, the mainland's cash flow was balanced for the first time, and ROE increased sharply to 15.3%.

MiC products lead prefabricated development, and technology empowers accelerated growth. China Construction Hailong, a subsidiary of the company, lays out the entire prefabricated industry chain, with the largest market share of prefabricated parts in Hong Kong and Macau, and has strong business strength; in 2019, the company pioneered MiC modular products, which can complete 90% of the construction process to the factory, shorten the construction period by 80% and reduce total labor consumption by 20%, covering multiple application scenarios such as modular homes, schools, hotel apartments, etc., and is an integrated application of prefabricated technology iteration to 4.0. The 2020 public health incident spawned rapid construction demand in Hong Kong, and the MiC penetration rate increased at an accelerated pace. Currently, the Hong Kong government requires that public buildings above 300 square meters must use MiC. The mainland plans to increase the prefabricated penetration rate to 30% by 2025, and there is broad scope for MiC development. In addition to MiC rapid construction technology, the company also has six core technologies, such as complex curtain wall construction and complex environmental tunnel construction. In 2023, technology-driven orders increased 45% year-on-year, accounting for 40% (planned to increase to 50% in 25 years). Compared with traditional construction businesses, the profit margin of technology projects is superior, and the turnover is significantly faster than investment projects, which is expected to drive the continuous improvement of the company's business model.

The mainland's guaranteed housing policy continues to gain strength, and subsequent construction is expected to accelerate. China's guaranteed housing system includes three categories: public rental housing, allotted housing, and affordable rental housing. “Document No. 22” was issued in 2021, which proposes to accelerate the construction of guaranteed housing. The “14th Five-Year Plan” Ministry of Housing and Construction plans to build 9 million new guaranteed housing units, which is expected to drive an investment of nearly 3 trillion dollars.

The 2023 guaranteed housing policy continues to gain strength. In August, the National Standing Committee reviewed and approved “Document No. 14”, which calls for speeding up the construction of allocation-type guaranteed housing. Since the beginning of this year, several key cities have introduced allocation-type guaranteed housing construction plans, and investment in various types of guaranteed housing is expected to reach 639.5 billion dollars in 2024. Guaranteed housing is of great significance for the transformation and stable investment of the real estate industry, and subsequent construction is expected to accelerate significantly. The company accounts for nearly 80% of the targeted repurchase business of guaranteed housing in the mainland. The characteristics of MiC products are in line with the demand for batch and standardized construction of guaranteed housing. In the future, it will benefit from the acceleration of guaranteed housing construction, and the mainland business is expected to grow rapidly.

The policy vigorously promotes the integration of Guangdong, Hong Kong and Macao, and regional leaders enjoy the dividends of integration in the Bay Area. In recent years, the integration of Guangdong, Hong Kong and Macao has continued to accelerate, driving demand for connectivity infrastructure to rise. In 2023, about 675.8 billion dollars of major projects in Guangdong Province were invested in the Greater Bay Area. In April 2021, Hong Kong proposed a development strategy for the northern metropolitan area, and released the “Action Plan” in October 2023. It plans to vigorously develop the northern metropolitan area within the next 10-20 years. It is expected to contribute HK$3 trillion in investment. It is expected that more than 500,000 new residential units will be added, and demand for housing construction will continue to be strong. The company is a leading engineering leader in Guangdong, Hong Kong and Macau. The market share in Hong Kong is about 15%, and Macau's market share exceeds 50% for three consecutive years. The leading position is prominent. In the future, as the integration of the Bay Area accelerates and engineering demand rises, the company's regional orders are expected to continue to increase.

Investment advice: We forecast that the company's net profit for 2024-2026 will be HK$106/120/13.4 billion, up 15%/13%/12% year over year, and corresponding EPS of HK$2.10/2.38/2.66, respectively. The current stock price PE is 4.6/4.0/3.6 times, respectively, giving a “buy” rating for the first time.

Risk warning: Risk of a sharp downturn in housing construction investment, risk that project execution progress falls short of expectations, risk that MiC application falls short of expectations, etc.