Equities Hong Kong/China Initial Coverage Company Report
CNQC International (1240 HK) 29 August 2017 HK & China / Construction More Than Just Foundations We initiate coverage of CNQC International with a Buy rating BUY and target price of HK$3.90. Several small-cap construction Share Target companies have listed in Hong Kong in recent years. However, Upside we believe that the company stands out from this crowd. It not Price Price only has a solid order backlog in its cash-cow Hong Kong, HK$2.67 HK$3.90 46% Macau and Singapore construction business, but is also a major property developer in Singapore and actively (As of 28 August 2017) accumulating land in the city. We expect solid government support and strong demand to provide further tailwinds for the Eva Yip, CFA construction sector in Hong Kong and Singapore. We forecast (852) 2530 8226 a 17% net profit CAGR over FY16-19E [email protected] Stands out from the crowd. CNQC International has consistently been awarded new contracts in Hong Kong due to 52-week price range (HK$) 2.4-3.6 its track record in foundation works, ability to conduct both Div yield % 6.0 foundation works and superstructure projects, and capacity to take on large contracts. We think that its ability to replenish its Latest Key Data order book should result in strong earnings visibility. FF no of shares (m) 392 David Has Joined the Ranks of Goliath. CNQC started its FF (%) 27.45 FF market cap (HK$ m) 1,048 property development business in Singapore only in 1999, but 12M daily turnover (HK$ m) 6.75 has already become the city’s No. 4 developer. We see the 12M volatility (%) 28.15 company’s performance in Singapore as solid over the past RoAE 2017E (%) 20.0 few years, as it has been able to maintain sufficient land bank PBR 2017E (x) 1.2 for developments and launch two to three projects per year. Net debt/equity 2017E (%) 18.0
Strengthening balance sheet. CNQC’s net gearing eased from 400% at the end of FY15 to 157% at the end of FY16 Performance (%) after the company raised HK$577m through three placements 1M YTD 12M of new shares. We think that easing balance sheet pressure Absolute 5.6 (12.5) (11.1) Relative to HSI 2.7 (38.7) (32.7) should help the company cope with a rising working-capital
burden, stemming from additional construction contracts and the expanding scale of its real estate development business. Major Shareholder (%) Valuation. The stock has underperformed Singapore Guotsing Holding Company 65.22 Great Wall Pan Asia 9.93 construction companies by 32 ppts and developers by 36 ppts YTD despite stronger earnings. The shares trade at 6.1X FY17 and 5x FY18 P/E. We initiate coverage with a Buy rating. Our Price Chart target price of HK$3.90 is based on a sum-of-the-parts (SOTP) (HK$) Turnover (HK$ m)
model. CNQC Int'l HSI Investment Summary 4.00 120 FY-end Dec 31 2015 2016 2017E 2018E 2019E 3.50 100 Turnover (HK$ m) 11,053 8,606 10,584 12,037 13,510 3.00 Growth (%) 51.4 (22.1) 23.0 13.7 12.2 80 2.50 Net Profit (HK $ m) 577 585 633 776 950 Growth (%) 108.9 1.4 8.2 22.5 22.4 2.00 60 1.50 EPS (HK cents) 46.1 40.4 43.7 53.5 65.5 40 Growth (%) 98.7 (12.4) 8.2 22.5 22.4 1.00 20 PER (x) 5.8 6.6 6.1 5.0 4.1 0.50 OCF/Share (HK cents) 0.0 1.2 3.3 0.3 (0.2) 0.00 0 PBR (x) 2.2 1.3 1.2 1.0 0.9 DPS (HK cents) 12.0 16.0 17.5 21.4 26.2
Yield (%) 4.5 6.0 6.5 8.0 9.8 10/2012 04/2013 10/2013 04/2014 10/2014 04/2015 10/2015 04/2016 10/2016 04/2017 Sources: Company, CER estimates Sources: Bloomberg, CER estimates
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Investment Thesis
Stands out from the crowd
Several small-cap construction companies have listed in Hong Kong in recent years. However, we believe that CNQC stands out from this crowd. According to our channel checks, many construction companies in Hong Kong have had difficulty securing new contracts over the past couple of years due to government delays in approving funding for major infrastructure projects. Despite this, the company has consistently been awarded new contracts in the city. Management attributes the company’s competitiveness in winning contracts to its 24-year track record in foundation works, ability to conduct both foundation works and superstructure projects, and capacity to take on large contracts. Foundation works and superstructure projects are major components of the construction industry value chain and CNQC is the only company in its peer group that can take on both of these activities, having started taking on superstructure projects in 2015. This helps reduce costs, accelerate project completion, and improve the reliability of project execution for property developers, the company’s clients. We believe that CNQC’s ability to replenish its order book should result in strong earnings visibility. The company had an order backlog in Hong Kong of HK$2.1bn at the end of FY16.
Figure 1: CNQC is not just a HK based foundation constructor
CNQC International Holdings Limited
Singapore Hong Kong and Macau South East Asia
Property Commercial and residential Construction Foundation Superstructure Development construction projects
Sources: The company and CER
Figure 2: Construction companies that have listed in Hong Kong in the past two years Listing date Stock code Company Name Revenue mix 99% of revenue from foundation services in Hong Kong and Macau and 2% from leasing 18 Mar 2016 1557 HK KH Group machinery 8 Jun 2016 1420 HK Chuan Holdings 51% of revenue from earthworks and 49% from general construction works in Singapore 28 Sep 2016 1591 HK Shun Wo 100% of revenue from foundation services in Hong Kong 17 Oct 2016 2113 HK Cherish Holdings 100% of revenue from site formation services in Hong Kong 11 Nov 2016 1633 HK Sheung Yue 100% of revenue from foundation services in Hong Kong 8 Dec 2016 1581 HK Progressive Path 45% of revenue from construction works and 55% from construction machinery rentals 100% of revenue from building construction and repair, maintenance, alteration, and 20 Feb 2017 1627 HK Able Engineering addition (RMAA) works in Hong Kong 30 Mar 2017 1647 HK SHIS 93% of revenue from integrated building services and 7% from building construction works 68% of revenue from building construction services, 25% from alteration, addition, and 7 Apr 2017 1667 HK Milestone Builder fitting-out works, and the remainder from the repair and restoration of historic buildings Sources: The companies and CER Note: Revenue mix as the latest reported financials
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David Has Joined the Ranks of Goliath
CNQC started its property development business in Singapore only in 1999, but has already become the No. 4 developer in the city in terms of number of residential units completed per year. We believe that its rapid growth in Singapore has been supported by focusing on developing and selling executive condominiums, a type of public-private residential property. Executive condos have amenities and features similar to those of private-sector apartments, but have lower prices because their land costs are subsidised by the government The purchase and sale of these properties are, however, subject to regulations such as income thresholds and reselling restrictions for buyers.
Executive condos mainly target first-home buyers looking to upgrade their living environment. We see the company’s performance in Singapore as solid over the past few years, as it has been able to maintain sufficient land bank for developments and launch two to three projects per year. We believe that a steady pace of property launches is appropriate in this market, as Singapore imposes levies on property developers that do not build and sell all the new units of a development within five years from a site’s contract purchase date. Sustained high land prices at recent government land tenders have made it increasingly difficult for the company to replenish its land bank, but the company has partly offset this pressure by diversifying into redevelopment projects.
Figure 3: Property project pipeline Estimated year of Project name construction completion Bellewoods executive condominium project 1H 2017 Bellewaters executive condominium project 1H 2017 Visionaire executive condominium project 2H 2018 iNz Residence executive condominium project 2H 2019 Le Quest mixed commercial and private condominium project 2H 2021 Shunfu Ville private condominium project 2022
Sources: The company and CER
Strengthening balance sheet, new methods of participating in projects
CNQC’s net gearing was 400% at the end of FY15. The company raised HK$577m through three placements of new shares in FY16, which reduced net gearing to 157% at the end of FY16. Although these share placements diluted earnings, we think that easing balance sheet pressure should help the company cope with a rising working-capital burden, stemming from additional construction contracts and the expanding scale of its real estate development business, especially in terms of acquiring land for development. The company has not announced any plans for further fundraising. We believe that the easing balance sheet pressure has reduced the need for the company to issue further new shares.
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Figure 4: Gearing and net gearing have declined
(%) Gearing Net gearing
1,200
1,000
800
600
400
200
0 2014 2015 2016
Sources: The company and CER
Figure 5: Fundraising record Announcement Date Details
Issued 99m shares at HK$2.55 each to raise HK$252.45m in order to 23 December 2016 expand its property development and construction businesses and for general working capital.
Issued 22m shares at HK$2.53 each to raise HK$55.66m, in order to repay 8 September 2016 loans for property development business in Singapore and for general working capital.
Issued 110m shares at HK$2.45 each to raise HK$269.5m, in order to 19 June 2016 develop the construction business in Singapore by acquiring a construction group and for general working capital.
Issued 215m shares at HK$2.40 each to raise HK$516m, with about HK$98m used to repay part of the short-term bank loans due in early 2016, 18 December 2015 about HK$370m used for development costs for five property projects in Singapore due during January-March 2016, and about HK$32m used for general working capital.
Sources: The company and CER
In addition, the company has formed a limited partnership investment fund with Great Wall International Investment and Guotsing Asset Management to invest in the Singapore Shunfu real estate project, which involves total development costs of about HK$8.3bn. The company has agreed to contribute US$90m of the total funds of US$280m and take on the construction work involved. We believe that participating in investment funds with third parties allows the company to take on a wider range of projects than otherwise possible, tying up a smaller amount of its funds. We believe that this business model could help the company expand its business without increasing its gearing.
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Further growth opportunities from overseas expansion
In 2016, the company won a construction contract in Indonesia worth IDR955m. We see further growth opportunities from overseas expansion, supported by its strong parent and track record.
Chinese companies are gaining ground in the overseas construction industry, which we attribute to their low costs and ability to accept flexible payment terms and construct projects quickly. Although the company is much smaller than state-owned constructors, at HK$3.8b market cap versus, CSCI’s HK$50.6b, we think that its extensive construction and property development experience in Hong Kong and Singapore plus its parent’s extensive connections could facilitate expansion into new countries and development into a regional construction company. According to the ENR rankings, published in August 2017, Guotsing Group’s major operating subsidiary Qingjian Group Corporation ranked No. 64 among the Top 250 International Constructors in terms of 2016 revenue. Among Chinese companies, it ranked No. 12, despite not being an SOE. To minimize risk, the company enters into joint ventures with local partners for projects in new markets, which we see as an appropriate strategy.
Figure 6: Qingjian Group Corporation is among the top Chinese contractors in the ENR rankings despite not being an SOE Global business ranking No. Co. Name 2017 2016 1 3 3 China Communications Construction Group (Limited) 2 10 11 Power Construction Corporation of China 3 11 14 China State Construction Engineering Corporation Limited 4 21 20 China Railway Group Limited 5 23 55 China Railway Construction Corporation Limited 6 27 ** China Energy Engineering Corporation Limited 7 31 23 China National Machinery Industry Corporation 8 48 49 China Metallurgical Group Corporation 9 50 67 China National Chemical Engineering Co., Ltd. 10 53 75 SINOPEC Engineering (Group) Co., Ltd. 11 56 58 CITIC Construction Co., Ltd. 12 64 77 Qingjian Group Corporation
Sources: ENR and CER
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Industry Overview
Singapore residential property market
Singapore residential property prices peaked in 2013. Non-land property prices fell by 3.5% YoY in 2014 and 3.6% YoY in 2015, albeit the decline narrowed to 2.6% YoY in 2016. The drop in property prices has come amid government policies to reduce immigration and ease the demand/supply imbalance in the residential property market. We think that property sales should be robust over the medium term as the government has now eased some of its curbs on the sector and demand is likely to return now that prices are at more affordable levels than before. We see signs of improvement in the residential housing market, as the average price of non-land properties fell by 2.8% YoY in 2Q17, unchanged from 1Q17, while the vacancy rate for non-land properties slid for a fifth straight quarter.
Figure 7: Singapore residential properties price and YoY change
URA Private Residential Price Index (Non-landed) YoY chg (%) 155 40 35 150 30 145 25
140 20 15 135 10 130 5 0 125 -5 120 -10 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q
Sources: Singapore Urban Redevelopment Authority and CER
Figure 8: Number of units transacted in Singapore have picked up since 3Q2016 with falling vacancy rate
(units) (%) 3,500 11.00 3,000 10.00 2,500 9.00
2,000 8.00
1,500 7.00
1,000 6.00 500 5.00 0 4.00 2014 1Q 2014 3Q 2014 4Q 2015 1Q 2015 2Q 2015 3Q 2015 4Q 2016 1Q 2016 2Q 2016 3Q 2016 4Q 2017 1Q 2017 2Q 2014 2Q 2007 1Q 2007 3Q 2008 1Q 2008 3Q 2009 1Q 2009 3Q 2010 1Q 2010 3Q 2011 1Q 2011 3Q 2012 1Q 2012 3Q 2013 1Q 2013 3Q 2014 1Q 2014 3Q 2015 1Q 2015 3Q 2016 1Q 2016 3Q 2017 1Q Sources: Singapore Urban Redevelopment Authority and CER
Hong Kong and Singapore construction market
The Hong Kong and Singapore governments are boosting housing supply to tackle shortfalls of housing problems and increasing infrastructure spending to meet their future economic and social needs. We expect these industry tailwinds
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HK & CHINA / CONSTRUCTION to drive demand for construction and benefit CNQC International, which has exposure to both cities.
The Hong Kong construction industry has grown substantially in recent years. The total gross output value of construction works in Hong Kong recorded a CAGR of 11% from HK$124.4bn in 2012 to HK$187.8bn in 2016. According to forecasts by Ipsos, construction works in Hong Kong should record a 6% CAGR over 2016-2021, reaching HK$247.7bn in 2021.
Figure 9: Gross output value of construction works in Hong Kong
(HK$bn) 2012-2021E 300 CAGR: 6%
250 2012-2016 CAGR: 11% 200
150
100
50
0 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Sources: Ipsos report, CER
One driver for steady construction demand in Hong Kong is the government’s policies to increase housing supply. The government has pledged to increase the supply of residential units in order to meet demand for housing amid escalating housing prices but tepid wage increases. Its 2017 Policy Address included a target to increase the city’s housing supply over the next decade from 2017-18 by 460,000 units, with 200,000 contributed by public rental units and 80,000 by subsidised sale flats.
Figure 10: Public Housing Construction Programme of the Housing Authority
(units) Public Rental Housing Subsidised Sale Flats
25,000
20,000
15,000
10,000
5,000
0 2017E 2018E 2019E 2020E 2021E
Sources: Hong Kong Housing Authority and CER
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Another driver is the Hong Kong government’s commitment to infrastructure spending. Hong Kong’s Ten Major Infrastructure Projects initiatives since 2007 have fuelled a 16% CAGR in public expenditure on infrastructure to HK$92.6bn in 2016. We expect spending to remain at similar levels over the next few years as the Hong Kong government has other works in the pipeline, such as railway projects, new town developments, hospital developments, and other large-scale infrastructure projects.
Figure 11: Public expenditure on infrastructure in Hong Kong
(HK$bn)
120
100
80
60
40
20
0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E
Sources: Census and Statistic Department, Hong Kong Budget 2017-2018 and CER
Figure 12: Hong Kong Planned Infrastructure Projects Project Name Estimated costs Targeted completion Date HK-Shenzhen Airport Railway Link N/A N/A Hong Kong-Shenzhen Joint Development of the Lok Ma Chau Loop N/A N/A West Kowloon Cultural District HK$21.6bn 2015 (first phase) 2013, 2016, 2021 (in three Kai Tak Development HK$130bn phases) New Development Areas N/A 2019 (first phase) Expansion of railway network for seven new rail lines Northern Link (and Kwu Tung Station), the Tuen Mun South Extension, the East HK$110bn Through to 2031 Kowloon Line, the Tung Chung West Extension (and Tung Chung East Station), Hung Shui Kiu Station, the South Island Line (West) and the North Island Line. Airport third runway HK$141.5bn 2024 10-year Hospital Development Plan HK$200bn 2026 Sources: Hong Kong Budget 2017-2018, Hong Kong Trade Development Council, and CER
In Singapore, the total value of construction projects awarded fell by 4.1% per year on average over 2012-2016, reaching S$26.1bn in 2016. This was due to weak demand for private-sector construction, owing to a slowdown in property construction, more than offsetting growth in the public sector. In Singapore’s 2015 Budget, the then Minister for Finance said that the city needed to reinvest in its infrastructure in order to meet its future economic and social needs. Demand for property construction has recovered somewhat in 2017, led by redevelopment projects such as Funan DigitalLife Mall at North Bridge, Golden Show Carpark at Market Street, and CPF Building at Robinson Road. Euromonitor forecasts construction demand in Singapore reverting to positive growth with a 1.4% CAGR over 2017-2021, as public infrastructure spending remains strong and private investment recovers.
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Figure 13: Total value of contracts awarded in Singapore by sector
(S$ bn) Public sector Private sector 30
25
20
15
10
5
0 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Sources: Euromonitor Report and CER
Figure 14: Singapore’s government is committed to investing in infrastructure Year Budget comments
Construction to be supported by a large expansion in public infrastructure and housing projects, even as private residential demand has ebbed. Public sector demand for construction projects expected to increase significantly in 2016, helping to mitigate a decline in private sector construction demand.
2016 Build Jurong Innovation District, with the first phase targeted for completion around 2022.
Add S$1b to the Changi Airport Development Fund.
More than S$2.5b of public sector contracts for smaller projects (with construction value estimated at below S$100m).
Bring forward S$700m of public sector infrastructure projects to start in FY2017 and FY2018, including upgrades for community clubs and sports facilities.
Continue making significant investments in economic infrastructure such as the new Changi Airport Terminal 5 (costing tens of billions of SGD), the Kuala Lumpur-Singapore 2017 High Speed Rail, and the Tuas Terminal.
Almost double the MRT network by 2030, putting eight out of 10 households within a 10-minute walk of a railway station, with an estimated cost to the government of more than S$20b over the next five years.
Sources: Singapore Budget 2016 and 2017 and CER
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Competitive Analysis
Figure 15: SWOT analysis S Strengths W Weaknesses One of largest foundation works companies in Hong Kong High net gearing could limit the company’s ability to take and a major property developer in Singapore on more contracts, given the high working-capital requirements at the initial stages of projects Extensive experience in the construction industry in Hong Kong and Singapore Short operating history outside Hong Kong and Singapore
Conducts both foundation and superstructure works, Capital-intensive real estate business could drag down which are two major activities in the construction industry ROE value chain. Most of the company’s peers operate only Needs to continually bring in new construction contracts foundation works and property development projects to sustain cash flows Parent has strong track record and reputation in the Relies on subcontractors to execute projects global construction industry
Experienced management team with strong track record of executing construction projects
Uses ‘investment fund model’ to take on large-scale real estate projects in partnership with other companies. This broadens the scope of projects it can take on and reduces financial and cash flow hurdles O Opportunities T Threats Favourable outlook for the construction sector in Hong Intensifying competition from Chinese property developers Kong and Singapore. The governments in both cities are for acquiring land in Hong Kong and Singapore, which focusing on increasing housing supply could result in land prices rising further
Expanding businesses into other markets in Southeast Rising labour costs Asia Any decline in demand for housing in Hong Kong or Strong demand for residential property in the Belt and Singapore Road countries in Southeast Asia Adverse foreign exchange movements. The company’s functional currencies are the HKD and SGD for its businesses in these respective markets whereas its presentation currency is HKD
Source: CER
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Figure 16: Porters Five Force
Bargaining power Bargaining power of suppliers of customers Weak to Medium. Construction Medium. The large number of materials are essentially commodities, construction companies means that which means limited bargaining power clients have plenty of choice. Not for suppliers. Skilled-labour supply is a many, peers however, can handle moderate concern in both Hong Kong the scale and breadth of projects and Singapore. Supply of land for the that the company can. In the property development segment, however, property development segment, is limited and subject to competition from rising property prices and housing rivals. The company is exploring the shortages mean high bargaining ‘investment fund’ model to power over customers. facilitate its participation in large projects. Intensity of Rivalry Weak to Medium. Although there are many competitors in the construction and property industries in Hong Kong and Singapore, not many can match the company for scale and breadth. The company’s suppliers have only moderate bargaining power, as do its customers. In addition, construction and property are not easily substituted Threat of Threat of new entrants substitutes Medium. There are a fair number of Weak. Construction clients have listed and unlisted small cap construction little choice other than to appoint companies in Hong Kong, implying that constructors for their projects. In barriers to entry are modest. However, the the property development company is expanding in scale and can segment, the only alternative to handle both foundation and superstructure buying a home is to rent. works in the construction segment, which However, rents have risen in line should mitigate the threat from newcomers with property prices and cultural somewhat. In the property development preferences in Asia for home segment, substantial capital ownership limit the attractiveness requirements are a moderate of rental properties. hurdle for newcomers.
Source: CER
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Financials
Revenue
Revenue declined by 22% YoY in FY16. This was mainly due to property development revenue dropping by 28% YoY, as it sold two private condominium projects in FY15 compared with two executive condominium projects in FY16. Private condominiums typically generate higher ASPs than executive condominiums as the latter receive government subsidies. We forecast 23% YoY growth in FY17 and 14% YoY in FY18, driven by revenue growth in the property-development segment, a full-year contribution from the Singapore construction contractor acquired in July 2016, and an expanding overseas business.
Figure 17: CNQC International revenue trend (L) and revenue breakdown (R)
(HK$m) Others Real estate development in Singapore 16,000 Construction in Singapore Foundation and construction in Hong Kong and Macau 14,000 100%
90% 12,000 80%
10,000 70% 60% 8,000 50% 6,000 40%
4,000 30% 20% 2,000 10% 0 0% FY15 FY16 FY17E FY18E FY19E FY16 FY17E FY18E FY19E
Sources: Company and CER
We expect the Singapore property development to remain the company’s major revenue contributor over FY17-19. We forecast a segment sales CAGR of 10% from FY16 to FY19, supported by a steady project pipeline and stable ASP growth. Singapore residential property prices peaked in 2013 and have largely declined over the past few years owing to the government introducing a series of cooling measures for the property market. However, prices started showing signs of a recovery in 2Q17 as oversupply in the residential property market appears to have improved. We expect the SGD/HKD rate to be stable over the medium term having held fairly steady over the past two years at an average of about 5.6.
Based on our sensitivity analysis in the table below, we estimate that a 0.1% move in the SGD/HKD rate would shift our FY17 revenue forecast by 0.5% and that a 5% shift in the ASP per sqft for the company’s property sales would shift FY17 revenue by 1%.
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Figure 18: FY17 revenue growth sensitivity analysis: SGD/HKD versus property ASP
SGD/HKD
5.4 5.5 5.6 5.7 5.8 5.9
693 19% 19% 20% 21% 22% 23%
732 20% 21% 22% 23% 24% 25%
S$ per sqft 770 21% 22% 23% 24% 25% 26%
809 22% 23% 24% 25% 26% 27%
847 23% 25% 26% 27% 28% 29%
Sources: Company and CER
Figure 19:SGD/HKD stabilize at around 5.6 since 2015
6.0 2015 average: 5.64
5.9 2017 YTD average:5.58 5.8
5.7
5.6 2016 average:5.63 5.5
5.4
5.3
5.2 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17
Sources: Bloomberg and CER
We project a 25% revenue CAGR for the Singapore construction segment from FY16 to FY19, as this segment was only acquired in FY16 and did not make a full-year revenue contribution that year. We also expect segment revenue growth to be supported by the company gaining market share in this industry.
We forecast a 11% revenue CAGR for the Hong Kong and Macau construction business from FY16 to FY19. The company had a substantial order backlog of HK$2.1bn at the end of FY16, which was equivalent to 1.3x segment revenue for the year. We expect the company to take on an increasing number of housing construction projects in the long run, as it has expanded its value chain to include superstructure construction in addition to its traditional foundation-works business. We think that this should also help the company take on larger contracts than in the past.
Figure 20: Construction project pipeline Kwun Tong Inland Lot No. 761 Shatin Town Lot No. 482 & No. 578 No. 18–20 Caine Road No. 101–111 Wanchai Road Foundation works for a Housing Authority project in Diamond Hill Foundation works for Lamma Power Station Extension Superstructure construction work for a residential project in Kau To Shan, Shatin
Sources: The company and CER
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Profitability
We forecast overall gross margins of 12.9-14.4% over FY17-19. By segment, we expect margins for the Singapore property development segment to rise along with a recovery in property prices there. We expect the gross margin for the construction business to be about 9-10% over FY18-19 as the recently acquired Singapore construction business generates higher gross margins than Hong Kong and Macau construction. Gross margins for construction companies in Hong Kong have been adversely affected in recent years by government delays in granting funds to start new public projects, which has resulted in their revenue mix shifting towards less profitable private projects.
We expect the company to benefit from operating leverage over the medium term as it is expanding its businesses. This should result in scale benefits and help reduce costs as a percentage of revenue. We forecast the operating margin rising from 8.3% in FY17 to 10.1% in FY19.
Net profit growth was modest at only 1.4% YoY in FY16, although this was much better than most of the company’s peers, which recorded YoY declines across the board. We attribute the company’s strong performance to its diverse business exposure, compared with its peers mostly operating in a single business only. Overall, we expect a combination of rising margins for the company’s Singapore businesses and operating leverage stemming from scale benefits to support a net profit CAGR of 17% from FY16 to FY19.
Balance sheet
CNQC’s net gearing was 400% at the end of FY15, declining to 157% at the end of FY16. This was due mainly to funds raised through placements of new shares, as mentioned earlier. These placements diluted earnings, but we believe that the resulting easing of the company’s balance sheet pressure should help it pursue new business opportunities, such as through acquiring additional land and securing new contracts. This in turn should support long-term earnings growth.
Shareholder returns
The company’s ROE was 26% in FY16, well above its peers’ average of 14%. This was due to its higher margins than the peer group and high leverage, despite efforts to deleverage. We forecast ROE easing to an average of 22% over FY17-19, still high compared with the company’s rivals.
The company resumed paying dividends in FY15, having not paid a dividend in FY14. The dividend yield for FY16 is 6%, above the 4.6% of its peer group. A number of its peers do not pay dividends. Despite rising working capital requirements, we expect the company to gradually increase its DPS with a payout ratio of 27-37% over FY17-19.
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Valuation
We initiate coverage with a Buy rating. Our target price of HK$3.90 is based on a sum-of-the-parts (SOTP) model, which we see as appropriate given the company’s operations in two distinct business segments. Our target price is equivalent to 6.1x FY17 P/E and 5.0x FY18 P/E.
We value its construction business at 7x FY17 P/E, applying a 40% discount to the average for Hong Kong and Singapore listed constructors as a benchmark. We value its Singapore property business at 9x FY17 P/E, using Singapore listed property developers as a benchmark but applying a 40% discount, which we see as justified given the company’s smaller size than most of its peers (at just US$0.5b market cap versus US$1.2-11.6b for Singapore property developers). Although some analysts value property development businesses using estimated NAV, we believe that P/E is more appropriate in this case as the company’s property development business turns projects around quickly, rather than accumulating substantial land bank for development over the long term. This is mainly due to the Singapore government imposing substantial penalties on property developers that do not build and sell all the new units of a development within five years from a site’s contract purchase date. Singapore property developers hence tend to adopt a conservative approach to acquiring land bank. In addition, the company does not own investment properties, unlike some of its diversified real estate peers, and instead focuses solely on residential property development.
Figure 21: SOTP valuation Total (HK$m) Per share (HK$) Construction business 7x 2017E P/E 1,440.70 1 SG property development business 9x 2017E P/E 3,704.60 2.6 Subtotal 5,145.30 3.6 Net debt at end 2017 829.8 0.6 MI -159.9 -0.1 Overall value 5,815.20 4 Source: CER estimates
Could undergo a similar re-rating to CSCI
The stock has underperformed Singapore construction companies by 32 ppts and developers by 36 ppts YTD despite stronger earnings. The shares trade at 6.1X FY17 and 5.0x FY18 P/E, which we would see as reasonable if the company were still a simple foundation works contractor. However, it has now evolved into a regional property developer and construction works provider. We believe that this business expansion should sustain earnings growth over the long term and drive a re-rating for the shares.
We believe that the company could follow a similar path to CSCI, a leading constructor in Hong Kong. CSCI stock has undergone a substantial re-rating since the company began transforming its business in 2008. Over 2008-2009, CSCI stock traded at just 8x forward P/E. This has risen to an average of 13x since 2010, supported by strong earnings growth post business transformation.
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Figure 22: CSCI re-rating on its transformation story
(x) 25
2008-2017 average: 12x 20
15
10
5 2008-09 average: 8x
0 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Sources: Bloomberg and CER
Figure 23: Peer comparison Last Mkt 3M FY0 EPS FY1 EPS FY2 EPS Div Price cap avg T/O Year growth growth growth FY0 PER FY1 PER FY2 PER yield Name Ticker CCY (LC) (US$m) (LC$m) end (%) (%) (%) (X) (X) (X) (%) CNQC 1240 HKHK$ 2.67 4868 12/2016 (12.4) 7.9 22.6 6.6 6.1 5.0 6.0 Singapore property developers Capitaland Ltd CAPL SP SGD 3.73 11,631 33 12/2016 12.0 (27.1) 1.0 9.6 18.2 18.0 2.7 Ho Bee Land Ltd HOBEE SP SGD 2.37 1,155 0 12/2016 (10.4) (40.1) (1.0) 6.3 12.1 12.2 2.6 City Developments Ltd CIT SP SGD 11.45 7,632 17 12/2016 (15.8) (11.2) 11.4 17.3 18.2 16.3 0.7 Frasers Centrepoint Trust FCT SP SGD 2.12 1,437 2 09/2016 (28.2) (16.7) 21.4 15.5 18.8 15.5 5.7 Average (10.6) (23.8) 8.2 12.2 16.8 15.5 2.9 HK Foundation Constructor Hong Kong International Cons 687 HK HK$ 3.96 1,727 7.7 03/2016 (0.6) N/A N/A 12.7 N/A N/A 2.5 New Concepts Holdings Ltd 2221 HK HK$ 3.98 259 4.1 03/2017 (16.7) N/A N/A 39.6 N/A N/A 0.0 Leap Holdings Group Ltd 1499 HK HK$ 0.20 135 3.1 03/2017 (74.8) N/A N/A 117.6 N/A N/A 0.0 In Construction Holdings Ltd 1500 HK HK$ 0.83 88 0.7 03/2017 15.2 N/A N/A 6.4 N/A N/A 23.8 Wan Kei Group Holdings Ltd 1718 HK HK$ 0.60 74 0.3 03/2017 N/A N/A N/A N/A N/A N/A 0.0 Kh Group Holdings Ltd 1557 HK HK$ 1.31 67 0.7 03/2017 N/A N/A N/A N/A N/A N/A 0.0 Yee Hop Holdings Ltd 1662 HK HK$ 0.99 66 0.1 03/2016 N/A N/A N/A 4.5 N/A N/A 0.0 Cherish Holdings Ltd 2113 HK HK$ 0.65 64 0.5 03/2017 N/A N/A N/A 224.1 N/A N/A 0.0 Sam Woo Construction Group L 3822 HK HK$ 0.22 48 0.3 03/2017 (49.1) N/A N/A 4.7 N/A N/A 6.8 Shun Wo Group Holdings Ltd 1591 HK HK$ 0.09 46 1.8 03/2017 N/A N/A N/A 18.0 N/A N/A 0.0 Sheung Yue Group Holdings Lt 1633 HK HK$ 0.49 42 5.5 03/2017 N/A N/A N/A 8.0 N/A N/A 0.0 Average (25.2) N/A N/A 48.4 N/A N/A 3.0 Singapore Construction Companies Low Keng Huat Singapore Ltd LKH SP SGD 0.665 363 0.1 01/2017 (0.1) N/A N/A 8.5 N/A N/A 4.5 Chip Eng Seng Corp Ltd CHIP SP SGD 0.725 333 0.5 12/2016 (43.1) N/A N/A 16.4 N/A N/A 5.5 Ksh Holdings Ltd KSHH SP SGD 0.765 318 0.9 03/2017 (33.9) (10.4) 76.9 11.8 11.6 6.6 4.0 Lian Beng Group Ltd LBG SP SGD 0.605 223 0.6 05/2017 N/A N/A N/A 5.9 N/A N/A 3.7 Hock Lian Seng Holdings Ltd HLSH SP SGD 0.445 169 0 12/2016 (2.8) (52.9) 24.2 8.8 13.6 11.0 5.6 Wee Hur Holdings Ltd WHUR SP SGD 0.230 156 0.0 12/2016 (63.3) N/A N/A 12.0 N/A N/A 2.6 Lum Chang Holdings Ltd LCH SP SGD 0.355 100 0.0 06/2017 N/A N/A N/A 10.8 N/A N/A 4.4 Soilbuild Construction Group SOIL SP SGD 0.196 97 0.0 12/2016 (36.2) N/A N/A 19.2 N/A N/A 5.1 Koh Brothers Group Ltd KOH SP SGD 0.305 92 0.0 12/2015 (1.0) N/A N/A N/A N/A N/A 1.2 Keong Hong Holdings Ltd KHHL SP SGD 0.485 82 0.0 09/2016 (7.9) N/A N/A 4.0 N/A N/A 6.7 Average (23.5) (31.6) 50.6 10.8 12.6 8.8 4.3
Sources: Bloomberg and CER estimates, * excluding outlier
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Catalysts
Winning more new contracts than we expect.
Overseas construction businesses ramping up rapidly.
A strong recovery in Singapore property market
Risks
Property development projects typically require substantial capital investment during the land acquisition and construction phases. The company not being able to meet its work capital needs could have negative impact on earnings.
Delays in launching property projects for sale owing to a deterioration in the economic environment could have negative impact on earnings.
Both the property development and construction businesses operate on a project basis. The company not being able to secure new construction contracts or maintain an adequate property project pipeline (should it prove unable to replenish its land bank at a reasonable cost) could have an adverse effect on revenue.
Fluctuations in currency exchange rates may have an adverse impact on financial performance. The company’s functional currencies are the SGD and HKD for the markets in which it operates, with more than 40% of revenue from Singapore. However, the company’s presentation currency is the HKD. The HKD strengthening against the SGD could have an adverse impact on profit.
There could be execution risk in overseas markets given the company’s short track record outside of Hong Kong, Macau, and Singapore.
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Company Background and History
CNQC International became a listed company in Hong Kong through a backdoor listing in March 2014, in which it acquired Sunley Holdings, a foundation works company with operations in Hong Kong and Macau. Sunley listed in Hong Kong in 2012. CNQC’s parent, Guotsing Holding Group (Guotsing PRC) acquired a controlling interest in Sunley through a mandatory unconditional cash offer in March 2014 at HK$2.40 per share. According to the August 2016 ENR rankings, Guotsing PRC’s major operating subsidiary, Qingjian Group Corporation, ranked 64 among the top 250 international Constructors in terms of 2016 revenue. Sunley changed its name to CNQC in September 2014.
Figure 24: Revenue breakdown by segment
Others, 2% Foundation and construction in Hong Kong and Macau, 17%
Real estate development in Singapore, 45%
Construction in Singapore, 36%
Sources: Company and CEI
Figure 25: Shareholding structure
Guotsing Holding Great Wall Pan Asia Public shareholders Company Limited International
65.22% 9.93% 24.85%
CNQC International Holdings Limited
Sources: HKEx and CER
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Following the backdoor listing, Guotsing PRC has injected a number of assets into CNQC International, which have helped diversify its businesses.
In May 2015, the company acquired a Singapore property development and construction business from its parent for a total consideration of HK$2.62bn, met by issuing 951,872,727 non-redeemable convertible preference shares for HK$2.75 per share.
In May 2016, the company acquired a Singapore construction contractor that provides related services to the city’s government. The acquisition consideration of S$101m was met by cash of S$51m and issuing 100m shares at HK$2.80 per share.
Figure 26: Company milestones
Acquired Welltech, mainly engaged in providing construction services to Singapore government Acquisition of Singapore’s agencies as main property development and contractor and investing in construction businesses Singapore property development projects as financial investor Guotsing Holding acquired 75% of Sunley stakes. Sunley renamed to CNQC International
Listed on HKEx
Started first property development projects 2016
Tapped into Singapore market, started construction 2015
Foundation business in HK 2014
2012 2008 1993 1999
Sources: Company and CER
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Figure 27: Company’s track record by segment Project name Property Development Business RiverSound Residence private condominiums project River Isles private condominiums project WaterBay Executive condominiums project Ecopolitan Executive condominiums project Singapore Construction segment Topiary Executive condominiums project China Cultural Centre Senja Green public housing Punggol Breeze public housing Punggol Spring public housing Hougang Capeview public housing West Plains public housing Fernvale Lea public housing The Minton private condominiums project HK & Macau Construction segment Bored piling works for Venetian Cotai Bored piling works for Cotai Hotel Casino complex Foundation and pile cap works Tseung Kwan O Town Lot #95 Foundation works for Kwun Tong 761 Foundation works for Shek Kip Mei Proposed shopping mall development at Po Tai Street, Ma On Shan Foundation works for Tsing Yi 181 Site formation and pile cap works Kau To Shan
Sources: Company and CER
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Management Profiles
Executive Director and Chairman
Mr. Cheng Wing On, Michael has over 30 years of experience in the engineering and construction industry. Prior to establishing Sunnic Engineering Limited in May 1993, he served as a structural engineer in Sun Hung Kai Engineering Company Limited, a company principally engaged in the design business and engineering, from August 1980 to January 1982 and Leung Kee Holdings Limited, now known as Up Energy Development Group Limited (307 HK) from January 1983 to December 1993 with his last position serving as a managing director.
Executive Director and CEO
Mr. Wang Congyuan has over 20 years of experience in the engineering and construction industry. From September 2007 to October 2015, Mr. Wang CY took the positions of secretary to the board of directors, assistant to the president, the vice president and the joint chairman of 青建集团股份公司 (Qingjian Group Co., Ltd.) and from December 2012 to October 2015, he was the vice president and the executive vice president of Guotsing PRC. During the period from August 2012 to December 2013, he served as the president of 青建国际集团有限公司 (Qingjian International Group Co., Ltd.*). Mr. Wang Congyuan, was also the chairman and the chief executive officer of 青岛青建地产集团有限公司 (Qingdao Qingjian Real Estate Group Co.,Ltd.*) during the period from July 2014 to August 2015. Mr. Wang Congyuan holds a master’s degree in finance from PBC School of Finance (“五道口金融学院 ”) of Tsinghua University ,the People’s Republic of China (the “PRC”) and holds a bachelor’s degree in thermal engineering from The University of Science and Technology Beijing, PRC. He is a senior engineer and a member of the Chartered Institute of Building. Mr. Wang Congyuan was accredited as 青岛市最具成长性企业家 (The Entrepreneur with Highest Potential in Qingdao*) in December 2012, and was awarded 山东省富民 兴鲁劳动奖章 (The Award for Improvement of Living Standard in Shandong Province*) in April 2014.
Executive Director
Mr. Zhang Yuqiang is responsible for assisting the Chief Executive Officer in the overall operations and management of the Group. Prior to joining the Group, Mr. Zhang acted as the deputy general manager of international business division of Qingjian from 2001 to 2007. During 2007 to 2012, he consecutively acted as the assistant to president of Qingjian, vice president and general manager of 青建集 团股份公司阿尔及利亚分公司 (Algeria Branch Company of Qingjian*), and deputy president of the international business department and property department of Qingjian and the vice-president of the Guotsing PRC. Mr. Zhang has more than 30 years‘ experience in the property construction industry. Mr. Zhang graduated from 山东建筑工程学院 (Shandong Construction Engineering Institute*), the PRC, with a Bachelor’s degree in Engineering in 1984. He obtained a Master’s degree in Business Administration from Nankai University (南开大学 ), the PRC, in June 2010. Mr. Zhang qualified as a certified constructor of the Ministry of Construction of the PRC in November 2007.
Executive Director
Mr. Ho Chi Ling is responsible for execution of the foundation projects of the Group. He has about 30 years’ experience in the engineering and construction industry. Mr. Ho is also the director of certain subsidiaries of the Company. Prior to joining the Group in 1997, he had worked for major contractors and
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HK & CHINA / CONSTRUCTION engineering consultants in Hong Kong for 12 years, involving in civil engineering and building projects including drainage, foundation, water mains, and site formation. He holds a Bachelor’s degree in Engineering in Civil and Environmental Engineering from the University of Newcastle upon Tyne (now known as Newcastle University) in the United Kingdom awarded in July 1992, a Master of Science in Project Management from the Hong Kong Polytechnic University which was completed largely via online course modules with degree awarded in December 2005 and a Master of Arts in Arbitration and Dispute Resolution from The City University of Hong Kong awarded in February 2009. He is a member of the Hong Kong Institution of Engineers and a Registered Professional Engineer (Civil discipline) in Hong Kong.
Executive Director
Mr. Wang Linxuan has more than 20 years of experience in construction and real estate development industries in Singapore and China. During the period from June 1998 to May 2015, Mr. Wang Linxuan was the project manager and deputy general manager of 青岛博海建设集团有限公司 (Qingdao Bohai Construction Group Co. Ltd.*). From April 2008 to August 2011, Mr. Wang Linxuan took the positions of director and general manager of 高密博海置业有限公司 (Gaomi Bohai Properties Co. Ltd.*). During the period from September 2011 to May 2015, Mr. Wang Linxuan was the managing director of 高技工程私营有限公司 (Welltech Construction Pte Ltd*). Mr. Wang Linxuan was also the deputy general manager of 青岛博海投资有限公司 (Qingdao Bohai Investment Co. Ltd.*) from December 2013 to May 2015. Mr. Wang Linxuan holds a bachelor’s degree of Science in Architectural Engineering from Shandong Institute of Architecture and Engineering, the PRC, and a master’s degree in business administration from National University of Singapore. Mr. Wang LX was also awarded the qualification of 国家一级注册建造师 (National First-class Registered Architect*) by the PRC in August 2010 and is a senior engineer.
Non-Executive Director
Mr. Zhang Zhihua is responsible for overseeing the overall performance of the Group. Prior to joining the Group. Mr. Zhang served as the financial director stationed in corporate of Qingdao Municipal Stateowned Assets Administration during 1999 to 2005. Mr. Zhang was the deputy general manager of Qingjian from 2005, and he served in Qingjian consecutively as the vice president (from September 2007), executive vice-president (from March 2009), executive president and general accountants (from December 2010), president of Qingjian (from December 2011), the chairman of the board of directors of Qingjian (from January 2013) and the president of the Guotsing PRC (from November 2012 to December 2013). Mr. Zhang has been the chief executive officer of the Guotsing PRC from December 2013 to December 2015. He is a director of CNQC Development Limited Mr. Zhang obtained a master degree in Business Administration from Nankai University (南开大学), the PRC, in 2009, and is a qualified auditor in the PRC.
Non-Executive Director
Mr. Wang Xianmao has more than 20 years of experience in engineering and construction industry. Mr. Wang was the deputy general manager and chief engineer of 青岛建设集团股份公司阿尔及利亚项目组 (Algeria project team of Qingdao Construction Group Co. Ltd*) in 2002. During the period from 2002 to 2012, Mr. Wang consecutively acted as the vice general manager (from December 2002 to March 2004), deputy general manager (from March 2004 to February 2007) and general manager (from February 2007 to December 2012) of 青岛建设集团零零一工程有限公司 (Qingdao Construction Group 001 Engineering Limited*) (Formerly known as “青岛零零一工程有限公司 (Qingdao
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001 Engineering Limited*”). Mr. Wang was appointed as the chief executive officer of Guotsing PRC in December 2016, prior to which he also acted as the vice president (from December 2012 to December 2013), executive president (from December 2013 to November 2015) and deputy vice president (from December 2015 to December 2016) of the Guotsing PRC. Mr. Wang Xianmao holds a bachelor’s degree in civil engineering from Qingdao University of Technology, the PRC and a master’s degree in business administration from Nankai University, the PRC. Mr. Wang Xianmao was qualified as a research associate in engineering application in March 2014. Mr. Wang was also awarded the qualification of 中国一级注册建造师 (National First-class Registered Architect*) in April 2014. Mr. Wang Xianmao was accredited as 青岛市优秀企业 家 (The Outstanding Entrepreneur in Qingdao*) in December 2014, and was awarded as 青岛市劳动模范 (Model worker in Qingdao*) in April 2015. Mr. Wang was also a director of 中非民间商会第二届理事会 (the 2nd board of directors of the China-Africa Business Council), the vice president of 中国 对外 承包工程商会第七届理事会 (the 7th council of the China International Contractors Association) and the secretary officer of 青岛国际工程发展联盟 (Qingdao International Engineering Development Alliance).
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Company Description CNQC International operates three business segments: foundation and construction in Hong Kong and Macau; construction in Singapore; and real estate development, mainly in Singapore. The company plans to expand its real estate development business to other countries, such as Indonesia, Myanmar, and Vietnam
Income Statement (Consolidated) Balance Sheet (Consolidated) FY-end 31 Dec (HK$ m) 2015 2016 2017E 2018E 2019E FY-end 31 Dec (HK $ m) 2015 2016 2017E 2018E 2019E Sales 11,053 8,606 10,584 12,037 13,510 Total assets 14,927 14,772 14,088 16,249 17,919 Cost of sales (9,248) (7,318) (9,217) (10,383) (11,563) Current assets 13,917 12,742 11,779 13,664 15,061 Gross profit 1,806 1,288 1,368 1,655 1,947 Cash & ST investments 1,900 2,016 3,426 3,784 3,405 Other income 10 14 11 12 14 Marketable securities 0 0 0 0 0 Operating expenses (719) (453) (550) (608) (662) Account & notes receivable 2,818 1,870 2,117 2,407 2,702 Operating profit 1,101 906 881 1,119 1,366 Inventories 9,138 8,758 6,131 7,357 8,829 Finance cost, net (119) (74) (31) (32) (37) Others 62 96 105 115 126 Pre-tax profit 982 827 847 1,086 1,330 Non-current assets 1,010 2,030 2,309 2,585 2,858 Tax (241) (158) (136) (174) (213) Net fixed assets 499 868 1,178 1,484 1,785 Minorities 163 84 78 137 168 Others 948 1,934 2,204 2,470 2,732 Net profit 577 585 633 776 950 Total liabilities 13,446 11,710 10,568 12,127 13,059 EBITDA 1,195 1,020 1,000 1,242 1,494 Current liabilities 8,907 8,468 8,072 9,296 9,818 EBIT 1,101 906 881 1,119 1,366 Account payable 5,258 4,735 6,267 7,268 7,516 EPS (HK cents) 46.1 40.4 43.7 53.5 65.5 ST borrowings 3,437 3,542 1,613 1,836 2,110 DPS (HK cents) 12.0 16.0 17.5 21.4 26.2 Others 212 192 192 192 192 Sources: Company, CER estimates Non-current liabilities 4,538 3,241 2,496 2,831 3,241 Long-term debts 4,486 3,165 2,419 2,755 3,165 Others 52 76 76 76 76 Cash Flow (Consolidated) Total equity 1,481 3,062 3,520 4,123 4,860 FY-end 31 Dec (HK $ m) 2015 2016 2017E 2018E 2019E Shareholders' equity 1,501 2,980 3,360 3,826 4,396 Operating cash flow 727 1,727 4,719 491 (304) Minority shareholders (20) 82 160 297 464 Investment cash flow (74) (580) (382) (381) (380) Total liabilities + total equities 14,927 14,772 14,088 16,249 17,919 Free cash flow 689 1,250 4,319 91 (704) Net cash / (debt) (6,024) (4,691) (606) (807) (1,870) Financing cash flow 142 (954) (2,928) 248 304 Working capital 5,010 4,273 3,707 4,369 5,243 Net cash flow 796 193 1,410 358 (380) Total capital employed 6,019 6,303 6,016 6,954 8,101 Sources: Company, CER estimates Shareholders' equity + Minorities 1,481 3,062 3,520 4,123 4,860 Net gearing (%) 401.4 157.4 18.0 21.1 42.5 Sources: Company, CER estimates
Financial Summary FY-end 31 Dec 2015 2016 2017E 2018E 2019E Growth (%) Revenue 51.4 -22.1 23.0 13.7 12.2 EBITDA 68.7 -14.7 -2.0 24.3 20.2 EBIT 94.2 -17.8 -2.8 27.1 22.1 Net profit 108.9 1.4 8.2 22.5 22.4 EPS 98.7 -12.4 8.2 22.5 22.4 Margins (%) Gross 16.3 15.0 12.9 13.7 14.4 EBITDA 10.8 11.9 9.410.3 11.1 EBIT 10.0 10.5 8.39.3 10.1 Net 5.2 6.8 6.0 6.4 7.0 Others (%) Effective tax rate 24.5 19.1 16.0 16.0 16.0 Payout ratio 26.0 39.6 40.0 40.0 40.0 RoCE 16.7 14.7 14.3 17.3 18.1 Average RoE 51.3 26.1 20.0 21.6 23.1 Average RoA 4.8 4.5 4.9 6.0 6.5 Interest cover (x) 3.0 3.3 3.5 4.3 4.8 Sources: Company, CER estimates
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China Everbright Research Limited Rating System
Buy Expected to outperform the benchmark index by >15% over the next six months Accumulate Expected to outperform the benchmark index by 5 - 15% over the next six months Hold Expected to outperform or underperform the benchmark index by <5% over the next six months Reduce Expected to underperform the benchmark index by 5 - 15% over the next six months Sell Expected to underperform the benchmark index by >15% over the next six months
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