We maintained our “buy” rating and lowered our target price to HK$2.35. We expect Hongxin C&D (the “Company”)'s net profit for 2024-2026 to be RMB 0.81 billion, RMB 0.886 billion, and RMB 1.009 billion, respectively. We expect earnings per share for 2024-2026 to be RMB0.202, RMB0.251, and RMB0.221, respectively. Our price target is based on a 2024 price-earnings ratio of 11.5 times.

In the first half of 2024, the company actively expanded its overseas business. Overseas revenue increased 62% year over year to about RMB 73 million, and the operating scale increased more than tenfold, indicating that many new businesses have not fully contributed to revenue. The company's capital expenditure surged 364.7% year on year to RMB 4.37 billion, mainly to expand the procurement scale of aerial work platforms to consolidate market share and expand the product line, including special aerial work equipment, material handling equipment, small lifting equipment and mining equipment. Management said that the long-term strategy will focus on the international market, using 30% of total capital expenditure for overseas expansion, and prioritizing market learning and market share over immediate profits. This indicates that the company will shift to ensuring a stable position in the global market while dealing with high investment risks in the context of market uncertainty and regulatory challenges.

Demand for construction equipment in the domestic market is expected to recover further with the implementation of stimulus policies. Recent macroeconomic and real estate policy adjustments indicate that the government has taken positive measures to stabilize the economy and stimulate the market. The reserve ratio was lowered by 50 basis points, releasing liquidity of RMB 1 trillion, and is likely to be lowered further. Policy interest rates, including the 7-day reverse repurchase rate, have been lowered, while the Medium-Term Loan Facility Interest Rate (MLF) and Loan Market Price Rate (LPR) are also expected to be lowered. At the industry level, measures include lowering interest rates on stock housing loans to be consistent with interest rates on newly issued loans, lowering the minimum down payment ratio for two-home loans from 25% to 15%, and increasing the central bank's financial support ratio for affordable housing reloans from 60% to 100%.

In addition, the policy period to support commercial real estate loans and market-based land acquisition from housing companies has also been extended, and it is possible to obtain refinancing support from the central bank. All of these are aimed at promoting the health and affordability of the real estate market.

Risk: Increased industry competition; insufficient recovery in industry demand.