CHINA STATE CON(03311) 华泰证券·2024-07-08 04:07Investment Rating and Target Price - The report initiates coverage on China State Construction International (3311 HK) with a "Buy" rating and a target price of HKD 14.49, based on a 7x PE multiple for 2024, reflecting the company's steady growth and technological advancements [2][7] Core Investment Thesis - The company is a leading construction contractor in Hong Kong and Macau, with a strong presence in mainland China as a comprehensive urban investment operator [2] - It is well-positioned to benefit from large-scale projects in Hong Kong, increased non-gaming investments in Macau, and the demand for affordable housing and tech-driven projects in mainland China [2] - The company has achieved a 15% CAGR in net profit from 2019 to 2023, with improving ROE and cash flow [2] - The dividend payout ratio has been maintained at around 30% since 2008, with an expected dividend yield of 5.8% for 2024 [2] Hong Kong Market Opportunities - Hong Kong's government is actively investing in large-scale projects such as the Northern Metropolis and Lantau Tomorrow Vision, with annual infrastructure spending expected to average HKD 90 billion over the next five years, an 18% increase from the previous five-year average [3] - The company holds an 11% market share in Hong Kong, with new contract orders growing by 58% in 2023 [3] - The government plans to increase hospital beds by 4,600 from 2023 to 2027, a 70% increase compared to the previous five years, providing significant opportunities in healthcare construction [46] Macau Market Opportunities - Macau's economy is recovering, with public and private construction projects expected to grow, particularly in non-gaming investments, which are set to increase by 20% from the previously committed HKD 108.7 billion over ten years [3] - The company holds a 22% market share in Macau, with revenue and gross profit contributions of 9% and 6%, respectively, in 2023 [3] Mainland China Market Strategy - Mainland China accounts for 58% of the company's revenue and 79% of its gross profit, with a focus on affordable housing and tech-driven projects aligned with national policies such as the "Three Major Projects" and green building initiatives [4] - The company has improved its cash flow through short-cycle, fast-turnaround projects, with operating cash flow turning positive in 2022 for the first time since 2017, reaching HKD 5.0 billion in 2023 [4] - The company has established 8 prefabricated construction production bases with 78 intelligent production lines, achieving an annual capacity of 2.05 million square meters [4] Technological Advancements - The company is leveraging its technological capabilities, particularly in Modular Integrated Construction (MiC) and Building Integrated Photovoltaics (BIPV), to enhance its business model and profitability [5] - MiC projects accounted for 39.7% of new contracts in 2023, with a target to reach 50% by 2025 [5] - The company has completed 331 prefabricated projects, covering a total area of 28.34 million square meters, and has developed MiC products for various building types, including residential, commercial, and healthcare facilities [36][37] Financial Performance and Projections - The company's revenue is projected to grow from HKD 125.6 billion in 2024 to HKD 158.0 billion in 2026, with net profit expected to increase from HKD 10.4 billion to HKD 13.4 billion over the same period [6] - ROE is forecasted to improve from 13.8% in 2024 to 14.4% in 2026, driven by higher net margins and asset turnover [28] - The company's cash flow has significantly improved, with operating cash flow turning positive in 2022 and reaching HKD 5.0 billion in 2023 [30] Competitive Advantages - The company holds five highest-level "C" licenses in Hong Kong, allowing it to bid on unlimited-value public projects, and has a strong track record in healthcare, public housing, and infrastructure projects [52] - Its MiC technology has been widely adopted in Hong Kong, with the company contributing to the development of MiC standards and applications, including the construction of the world's first fully MiC-built negative pressure isolation hospital [53]