Incident: Shanghai Construction Engineering released the 2024Q3 financial report. 2024Q1-Q3's overall revenue was 214.013 billion/ -4.05%, and net profit to mother was 1.351 billion/ +4.30%. On a quarterly basis, the company's 2024Q1/Q2/Q3 revenue was 74.737 billion/71.24 billion/68.036 billion yuan, a year-on-year change of +12.89%/-8.86%/-13.52%, and 2024Q3 net profit of 0.525 billions/ -2.75%.

Net profit to mother was steady, and profit margins bucked the trend. 2024Q3 net profit attributable to mother 0.525 billion/ -2.75%, net profit not attributable to mother 0.087 billion/ -45.71%. The company's 24Q3 revenue -13.52% year-on-year, gross margin +1.12pct year over year. We estimate that the gross margin for the main construction industry decreased by 0.123 billion yuan year-on-year, while management expense ratio 2.69% /+0.42pct, R&D expense ratio 4.47% /+0.84pct, financial expense ratio 0.71% /-0.13pct, fair value change, revenue change +0.52 billion yuan (estimated main source of changes in stock holdings), credit impairment losses are less calculated Raised 0.16 billion yuan, non-operating income decreased by 0.438 billion yuan, income tax increased by 0.088 billion yuan, and minority shareholders' equity increased by 0.074 billion yuan. Ultimately, net profit to mother decreased by 0.015 billion yuan year on year, and net profit margin to mother 0.77% /+0.09pct.

The signing of the new contract focused on the Shanghai region, and construction materials industry contracts accelerated sequentially. In the first three quarters of 2024, the company signed a total of 277.8 billion yuan/ -9.18% of new contracts, of which the Shanghai market was 205.3 billion yuan, accounting for 74%, an increase over the same period last year. By business, the three core businesses of the construction, design consulting and building materials industry signed new contracts of 231.4 billion yuan, 14.2 billion yuan, and 22 billion yuan respectively, of which the building materials industry signed new orders of 7.159 billion yuan in 2024Q3, an increase of 7.70% over the same period last year. At the time of 2024H1, the year-on-year growth rate accelerated by 0.44%. Against the backdrop of overall external capital pressure, the company contracted orders from non-core regions and expanded its business around core business, focusing on major regions, key areas, and important customer projects.

Increase investment in R&D and vigorously develop emerging industries. 2024Q3 has a R&D cost ratio of 4.47% /+0.84pcts. The group vigorously develops emerging businesses such as urban renewal, smart operation and maintenance, ecological and environmental protection, water conservancy and water services, and new infrastructure. In the first three quarters, a new contract amount of 70.2 billion yuan (accounting for 25% of the total number of new contracts signed) was signed. The company vigorously promoted the R&D and application of construction robots, and new quality productivity was beginning to show.

Gross profit margins are progressing steadily, and credit and asset impairment losses have narrowed. The gross margin for 2024Q1/Q2/Q3 was 6.17%/9.15%/9.41%, a year-on-year change of -0.12pcts/-0.48pcts/+1.12pct. Among them, the gross margins of construction, design consulting, building materials industry and real estate development businesses in the first three quarters were 6.76%, 26.07%, 12.85%, and 7.50%, respectively, which is a steady improvement over the previous year. 2024Q3 sales expense ratio 0.23% /+0.05pcts, management expense ratio 2.69% /+0.42pcts. 2024Q3 asset impairment losses and credit impairment losses were calculated at 0.079 billion yuan and 255 million yuan respectively, less than 0.34 billion and 160 million dollars, respectively, compared with the previous year, and accounts receivable were well managed.

Contract assets have dropped significantly, and accounts receivable items in the statement are expected to improve. Net cash flow from 2024Q1-Q3's operating activities was -21.494 billion yuan, compared to -5.598 billion yuan in the same period last year; of this, the net cash flow from 2024Q3 operating activities was 1.126 billion yuan, compared with the same period last year. Compared with the same period last year, notes receivable and accounts receivable in the company's statements increased by 6.787 billion yuan, advance payments increased by 1.28 billion yuan, and contract assets decreased by 10.006 billion yuan Billions of yuan. In the future, cash flow is expected to improve further with the implementation of the “debt conversion” policy and the release of the benefits of the policy to stop falling and stabilize the real estate market.

Profit forecasting and valuation: The company is the leading construction business center in Shanghai. Local infrastructure and housing construction in Shanghai may accelerate or be expected to drive the company's business growth, marginally benefiting from regional debt policies. The company's net profit for 2024-2026 is estimated to be 1.625/1.716/1.761 billion, corresponding to the current 13.51/12.79/12.46x PE, giving it a “recommended” rating.

Risk warning: infrastructure demand falls short of expectations, funding falls short of expectations, project progress falls short of expectations