CHINA STATE CONSTRUCTION ENGINEERING CORP.(601668)：NET OPERATING CASH FLOW IMPROVING; SOLID HIGH-QUALITY GROWTH AHEAD-格隆汇

机构：中金公司
研究员：Yan CHEN/Qing GONG/Maoda YANG

2023 results in line with market expectations
China State Construction Engineering Corp. announced its 2023 results: Revenue rose 10.2% YoY to Rmb2.27trn, and attributable net profit rose 6.5% YoY to Rmb54.26bn. In 4Q23, attributable net profit rose 43% YoY to Rmb10.61bn. The firm’s 2023 results are in line with market expectations.
Housing construction business: In 2023, revenue from the firm’s housing construction business rose 9.4% YoY to Rmb1.38trn, with gross margin falling 0.7ppt YoY to 7.3%.
Infrastructure construction business: In 2023, revenue from the firm’s infrastructure construction business rose 12.8% YoY to Rmb556.6bn, with gross margin falling 0.7ppt YoY to 9.8%.
Real estate business: In 2023, the firm’s real estate business maintained growth despite headwinds, with contracted sales value up 12.4% YoY to Rmb451.4bn, contracted sales area up 7.9% YoY to 18.58mn sqm, and revenue up 9.5% YoY to Rmb308.8bn. The firm acquired 13.1mn sqm of new land in 2023, with a total land purchase value of about Rmb212.7bn.
Overseas business: The firm continued to expand in overseas markets in 2023, with new overseas contracts increasing 12.3% YoY to Rmb186bn and overseas revenue rising 7.2% YoY to Rmb115.8bn.
Financials: Expense control was effective and net operating cash flow improved markedly. In 2023, the firm’s selling, G&A, R&D, and financial expense ratios were 0.34% (+0.02ppt YoY), 1.52% (-0.13ppt YoY), 2.03% (-0.39ppt YoY), and 0.82% (-0.14ppt YoY). The overall expense ratio was reduced by more than 0.6ppt, which increased profit. Net investment income in 2023 decreased Rmb1.64bn YoY to about Rmb4.04bn. Asset impairment loss provision increased Rmb750mn YoY to about Rmb5.71bn, and credit impairment loss provision was largely flat YoY at Rmb8.6bn. Increased provisions affected profit to some extent. Net operating cash flow in 2023 increased Rmb7.2bn YoY to Rmb11.03bn. The firm announced a cash dividend payout ratio of 20.82% for 2023, which was largely flat YoY and relatively high among peers.
Operating targets for 2024: New contracts of more than Rmb4.5trn (+4% YoY) and revenue of more than Rmb2.38trn (+5% YoY).
Trends to watch
Continued growth in new contracts and encouraging growth in new business areas. In 2023, the firm’s new contracts increased 10.8% YoY to Rmb4.32trn. New contracts for the housing construction business increased 8.8% YoY to Rmb2.69trn, of which new contracts for industrial plants increasing 58.9% YoY to Rmb621.8bn. New contracts for the infrastructure construction business increased 15.1% YoY to Rmb1.17trn, of which new contracts for energy engineering increasing 151.4% YoY to Rmb269.7bn. We believe the steady growth in new contracts for housing construction and infrastructure construction businesses and the smooth progress in new business areas will provide solid support for the firm’s future growth.
Financials and valuation
Considering larger-than-expected downward pressure on downstream demand, we cut our 2024 attributable net profit forecast 14.8% to Rmb57.72bn. We introduce our 2025 attributable net profit forecast of Rmb61.28bn. The stock is trading at 3.9x 2024e and 3.6x 2025e P/E. Given the firm’s improving operating quality, we maintain OUTPERFORM and our target price of Rmb7.0, implying 5.0x 2024e and 4.8x 2025e P/E and offering 31% upside.
Risks
Project profit margin lower than expected; demand recovery disappointing.