September 20, 2016 ACTION Buy China State Construction Intl (3311.HK)

Return Potential: 47% Equity Research Addressing four key investor concerns; add to Conviction Buy List

Source of opportunity Investment Profile We address 4 key investor concerns on CSCI and conclude that: 1) mainland Low High growth will resume helped by c.30% of its PPP backlog starting construction/ Growth Growth Returns * Returns * entering full-swing construction in late 1H/early 2H and c.40% PPP backlog Multiple Multiple now in full-swing construction, 2) blended GM to expand with increasing Volatility Volatility mainland revenue %, 3) consensus is low and backlog/assets already explain Percentile 20th 40th 60th 80th 100th bulk of valuation, offering room for earnings revision/rerating with catalysts China State Construction Intl (3311.HK) upcoming, 4) HK/Macau LT outlook intact but ST headwinds remain. CSCI Asia Pacific Industrials Peer Group Average trades at attractive 8x 2017E P/E despite our forecast for 19% 2015-18E net * Returns = For a complete description of the investment profile measures please refer to the income CAGR vs. peers’ avg. at 7x/6%. Reiterate Buy and add to CL. disclosure section of this document.

Key data Current Catalyst Price (HK$) 10.04 (1) 3Q16 revenue/operating profit to be released in late-Oct (based on history), 12 month price target (HK$) 14.80 Market cap (HK$ mn / US$ mn) 45,060.9 / 5,808.7 providing an update on order execution speed and the 4Q growth outlook; Foreign ownership (%) -- (2) Progress update via news reports or the company on key projects, such as the Wuhan Underground Integrated Space project phase II (reported to 12/15 12/16E 12/17E 12/18E EPS (HK$) New 1.03 1.15 1.28 1.56 start in November), helping investors regain confidence on CSCI’s ability to EPS revision (%) 0.0 (0.1) 0.6 0.0 EPS growth (%) 16.2 11.3 11.4 21.5 convert signed contracts into effective contracts. (3) Monthly new order EPS (dil) (HK$) New 1.02 1.14 1.27 1.54 releases showing resilient growth in mainland China, which coupled with P/E (X) 11.7 8.7 7.8 6.5 P/B (X) 2.3 1.5 1.4 1.2 updates on effective contract conversion, would help boost CSCI’s growth EV/EBITDA (X) 13.3 10.7 8.8 8.1 Dividend yield (%) 2.7 3.4 3.8 4.6 outlook. (4) Potential asset injections from its parent company. ROE (%) 20.3 19.4 18.3 19.5 CROCI (%) 15.8 15.4 15.0 14.8

Valuation Price performance chart We revise our 2016/17/18E by 0%/+1%/0% on slightly higher 14.0 28,000 13.5 27,000 mainland GM and increased finance expense assumptions. We maintain our 13.0 26,000 2017E EV/GCI vs. CROCI/WACC based 12-month TP at HK$14.80, implying 12.5 25,000 12.0 24,000 49% potential upside (cash return multiple/EV/GCI premium unchanged at 11.5 23,000 11.0 22,000 0.9x/10%), one of the highest among our H-share coverage. Now trading at 10.5 21,000 8x 2017E P/E, we see attractive risk/reward and add it to CL-Buy. 10.0 20,000 9.5 19,000

9.0 18,000 Key risks Sep-15 Dec-15 Mar-16 Jul-16 Slower-than-expected mainland China effective contract conversion; higher- China State Construction Intl (L) Hang Seng Index (R) than-expected default or delays in BT receivables collection. INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Absolute 1.1 (10.5) (7.6) Asia Pacific Buy List Rel. to Hang Seng Index (11.9) (21.4) (13.9)

Asia Pacific Conviction Buy List Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 9/20/2016 close.

Coverage View: Neutral

Tian Lu, CFA +852-2978-0748 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with companies Jacqueline Du covered in its research reports. As a result, investors should be +86(10)6627-3147 [email protected] Beijing Gao Hua Securities Company Limited aware that the firm may have a conflict of interest that could Frank Shi affect the objectivity of this report. Investors should consider +852-2978-0108 [email protected] Goldman Sachs (Asia) L.L.C. this report as only a single factor in making their investment Diana Zhao +65-6654-5191 [email protected] Goldman Sachs (Singapore) Pte decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research September 20, 2016 China State Construction Intl (3311.HK)

China State Construction Intl: Summary Financials

Profit model (HK$ mn) 12/15 12/16E 12/17E 12/18E Balance sheet (HK$ mn) 12/15 12/16E 12/17E 12/18E

Total revenue 37,913.2 43,786.5 52,633.9 60,944.1 Cash & equivalents 8,015.2 7,379.7 6,873.8 6,117.1 Cost of goods sold (32,883.4) (38,053.0) (45,399.0) (52,155.4) Accounts receivable 23,260.4 21,475.1 23,308.3 24,707.2 SG&A (995.5) (1,313.6) (1,526.4) (1,706.4) Inventory 108.8 104.3 124.4 142.9 R&D 0.0 0.0 0.0 0.0 Other current assets 1,022.9 1,183.7 1,412.2 1,622.4 Other operating profit/(expense) 35.9 (175.1) 0.0 0.0 Total current assets 32,407.3 30,142.8 31,718.8 32,589.5 EBITDA 4,394.7 4,739.8 6,222.1 7,615.1 Net PP&E 2,772.0 7,882.0 8,185.3 8,492.8 Depreciation & amortization (324.6) (495.1) (513.6) (532.9) Net intangibles 6,807.9 6,610.0 6,412.2 6,214.3 EBIT 4,070.1 4,244.7 5,708.5 7,082.2 Total investments 9,294.8 10,343.7 12,693.0 16,897.9 Interest income 67.9 80.2 73.8 68.7 Other long-term assets 18,782.6 22,488.8 27,641.7 37,273.4 Interest expense (618.0) (743.5) (721.0) (840.4) Total assets 70,064.5 77,467.4 86,651.0 101,468.0 Income/(loss) from uncons. subs. 496.2 645.6 1,052.7 1,512.3 Others 729.1 1,450.0 550.0 350.0 Accounts payable 27,919.3 29,191.4 32,339.0 35,722.9 Pretax profits 4,756.2 5,714.1 6,700.0 8,214.9 Short-term debt 808.2 558.2 708.2 1,308.2 Income tax (654.5) (857.1) (1,005.0) (1,232.2) Other current liabilities 2,016.5 2,328.9 2,799.5 3,241.4 Minorities 51.4 50.0 50.0 0.0 Total current liabilities 30,744.0 32,078.5 35,846.6 40,272.5 Long-term debt 16,965.0 14,715.0 16,065.0 21,465.0 Net income pre-preferred dividends 4,153.1 4,907.0 5,745.0 6,982.7 Other long-term liabilities 1,108.6 1,305.9 1,399.8 1,503.1 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 18,073.6 16,021.0 17,464.8 22,968.1 Net income (pre-exceptionals) 4,153.1 4,907.0 5,745.0 6,982.7 Total liabilities 48,817.6 48,099.4 53,311.5 63,240.6 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 4,153.1 4,907.0 5,745.0 6,982.7 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 21,146.7 29,317.7 33,339.2 38,227.1 EPS (basic, pre-except) (HK$) 1.03 1.15 1.28 1.56 Minority interest 100.3 50.3 0.3 0.3 EPS (basic, post-except) (HK$) 1.03 1.15 1.28 1.56 EPS (diluted, post-except) (HK$) 1.02 1.14 1.27 1.54 Total liabilities & equity 70,064.5 77,467.4 86,651.0 101,468.0 DPS (HK$) 0.330.340.380.47 (%) 32.0 30.0 30.0 30.0 BVPS (HK$) 5.21 6.53 7.43 8.52 Free cash flow yield (%) (0.3) (2.3) 2.3 (4.4)

Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth 10.1 15.5 20.2 15.8 CROCI (%) 15.8 15.4 15.0 14.8 EBITDA growth 8.7 7.9 31.3 22.4 ROE (%) 20.3 19.4 18.3 19.5 EBIT growth 9.1 4.3 34.5 24.1 ROA (%) 6.1 6.7 7.0 7.4 Net income growth 20.1 18.2 17.1 21.5 ROACE (%) 15.6 15.8 15.4 15.5 EPS growth 16.2 11.3 11.4 21.5 Inventory days 1.5 1.0 0.9 0.9 Gross margin 13.3 13.1 13.7 14.4 Receivables days 237.9 186.5 155.3 143.8 EBITDA margin 11.6 10.8 11.8 12.5 Payable days 319.8 273.9 247.3 238.2 EBIT margin 10.7 9.7 10.8 11.6 Net debt/equity (%) 45.9 26.9 29.7 43.6 Interest cover - EBIT (X) 7.5 6.8 9.3 9.7

Cash flow statement (HK$ mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 4,153.1 4,907.0 5,745.0 6,982.7 D&A add-back 324.6 495.1 513.6 532.9 P/E (analyst) (X) 11.7 8.7 7.8 6.5 Minorities interests add-back (51.4) (50.0) (50.0) 0.0 P/B (X) 2.3 1.5 1.4 1.2 Net (inc)/dec working capital (3,909.7) (446.9) (3,764.7) (7,561.9) EV/EBITDA (X) 13.3 10.7 8.8 8.1 Other operating cash flow (216.4) (644.0) (960.6) (1,430.5) EV/GCI (X) 1.7 1.2 1.2 1.0 Cash flow from operations 300.1 4,261.1 1,483.3 (1,476.8) Dividend yield (%) 2.7 3.4 3.8 4.6

Capital expenditures (425.5) (5,257.3) (469.1) (492.5) Acquisitions (997.1) (816.7) (2,096.2) (3,935.4) Divestitures 351.0 0.0 0.0 0.0 Others 136.3 413.3 799.6 1,242.8 Cash flow from investments (935.2) (5,660.6) (1,765.7) (3,185.2)

Dividends paid (common & pref) (1,210.3) (1,546.5) (1,723.5) (2,094.8) Inc/(dec) in debt 3,115.1 (2,500.0) 1,500.0 6,000.0 Common issuance (repurchase) 9.9 4,810.5 0.0 0.0 Other financing cash flows (716.8) 0.0 0.0 0.0 Cash flow from financing 1,197.8 764.0 (223.5) 3,905.2 Total cash flow 562.7 (635.5) (505.9) (756.7) Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Analyst Contributors

Tian Lu, CFA Diana Zhao [email protected] [email protected]

Jacqueline Du [email protected]

Frank Shi [email protected]

Goldman Sachs Global Investment Research 2 September 20, 2016 China State Construction Intl (3311.HK)

Contents

Investor concerns overdone; adding to CL-Buy 3 Will mainland China revenue growth be resumed? 4 How will mainland China gross margin change? 7 Have above expectations been priced in and what are the catalysts? 9 Hong Kong/Macau growth outlook 10 Key risks 13 Financials 15 Valuation 16

Prices in this report are based on the market close of Sep 19, 2016

Exhibit 1: Global Engineering & Construction valuation comparison table

China E&C Comps Market cap P/E P/B EV/EBITDA EPS Growth ROE CROCI Net debt/equity Company Ticker Current price Rating (US$ mn) 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E China Communications Construction (A) 601800.SS Rmb11.3 Neutral 27,472 10.9X 10.2X 1.3X 1.1X 11.4X 11.3X 8% 7% 12% 12% 10% 9% 110% China Communications Construction (H) 1800.HK HK$8.3 Buy 17,389 6.9X 6.5X 0.8X 0.7X 9.6X 9.7X 8% 7% 12% 12% 10% 9% 110% China Railway Construction (A) 601186.SS Rmb9.2 Neutral 16,923 8.2X 7.5X 0.9X 0.8X 6.0X 5.7X 9% 9% 12% 12% 11% 11% 48% China Railway Construction (H) 1186.HK HK$8.9 Neutral 14,107 6.8X 6.2X 0.8X 0.7X 5.4X 5.2X 9% 9% 12% 12% 11% 11% 48% China Railway Group (A) 601390.SS Rmb7.3 Neutral 23,405 11.6X 10.9X 1.1X 1.0X 8.7X 8.0X 10% 6% 10% 10% 9% 9% 51% China Railway Group (H) 0390.HK HK$5.7 Neutral 15,596 7.7X 7.3X 0.7X 0.7X 6.8X 6.4X 10% 6% 10% 10% 9% 9% 51% Sinopec Engineering Group 2386.HK HK$6.3 Neutral 3,602 9.3X 10.0X 0.9X 0.9X 3.9X 4.1X -23% -7% 10% 9% 8% 7% -42% China State Construction Intl 3311.HK HK$9.9 Buy* 5,733 8.6X 7.7X 1.5X 1.3X 10.6X 8.7X 11% 11% 19% 18% 15% 15% 27% China Machinery Engineering Corp. 1829.HK HK$4.7 Buy 2,505 8.1X 7.8X 1.1X 1.0X 0% 5% 14% 13% 17% 16% 5% Median 8.2X 7.7X 0.9X 0.9X 7.8X 7.2X 9% 7% 12% 12% 10% 9% 48% US E&C Comps Market cap P/E P/B EV/EBITDA EPS Growth ROE CROCI Net debt/equity Company Ticker Price Rating (US$ mn) 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E Chicago Bridge & Iron CBI $27.3 Neutral 2,961 5.8X 6.0X 1.1X 1.0X 5.1X 4.6X -19% -4% 22% 17% 18% 15% 57% Fluor Corp. FLR $49.5 Neutral 8,575 15.4X 15.4X 2.1X 2.0X 6.8X 6.2X -17% 0% 14% 13% 23% 18% 2% Granite Construction Inc. GVA $47.3 Neutral 1,871 34.4X 21.0X 2.1X 2.0X 12.4X 8.7X 6% 64% 6% 10% 7% 8% -1% Jacobs Engineering Group JEC $50.3 Sell 6,563 16.1X 15.8X 1.3X 1.2X 8.0X 7.2X 3% 2% 8% 8% 8% 9% -8% KBR Inc. KBR $14.5 Neutral 2,093 10.5X 10.5X 1.7X 1.3X 5.2X 6.1X -6% 0% 17% 15% 20% 37% -22% Median 15.4X 15.4X 1.7X 1.3X 6.8X 6.2X -6% 0% 14% 13% 18% 15% -1% Europe E&C Comps Market cap P/E P/B EV/EBITDA EPS Growth ROE CROCI Net debt/equity Company Ticker Price Rating (US$ mn) 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E Saipem SPMI.MI €0.4 Buy* 4,088 15.0X 17.6X 0.5X 0.5X 4.4X 4.8X -15% -15% 5% 3% 6% 6% 21% Technip TECF.PA €51.6 Not Rated 6,629 9.5X 16.0X 1.2X 1.2X 3.3X 4.6X 21% -40% 13% 7% 18% 12% -47% Tecnicas Reunidas TRE.MC €32.8 Neutral 1,972 14.6X 12.4X 4.0X 3.4X 6.6X 6.7X 100% 17% 29% 30% 43% 35% -101% Petrofac PFC.L £818 Neutral 3,633 9.7X 8.9X 3.2X 2.7X 6.3X 6.2X -23% 8% 32% 33% 12% 14% 81% Eiffage FOUG.PA €69.5 Neutral 7,075 16.5X 14.1X 1.8X 1.7X 9.1X 8.8X 23% 17% 12% 13% 5% 5% 308% Vinci SGEF.PA €67.4 Buy* 41,743 16.3X 14.6X 2.3X 2.1X 8.7X 8.1X 8% 12% 15% 15% 9% 9% 75% Median 14.8X 14.4X 2.1X 1.9X 6.5X 6.4X 15% 10% 14% 14% 10% 10% 48% Price as of 19-Sep-2016 close All financials are calendar-year based. * On our regional conviction list

Source: Datastream, Goldman Sachs Global Investment Research.

Investor concerns overdone; adding to CL-Buy

CSCI has rebounded 12% since it fell so steeply following weak 1H16 results. At the time, we re-iterated our Buy call and published out stress-testing of CSCI’s mainland China order execution/margin (For details, please refer to China State Construction Int’l: Stress-testing mainland order execution/margin; maintain Buy published on Aug 17 2016).

In the wake of that report, we have fielded four key questions from investors, which we address in turn here.

 Will mainland China revenue growth be resumed?

 How will mainland China gross margin change?

 Have above expectations been priced in and what are the catalysts?

 Hong Kong/Macau growth outlook.

Goldman Sachs Global Investment Research 3 September 20, 2016 China State Construction Intl (3311.HK)

Will mainland China revenue growth be resumed?

GS view: Yes in 2H16/2017. Sustainability hinges on effective contract conversion. CSCI booked mainland infrastructure investment revenue of HK$6bn in 1H16, flat vs1H14 and 1H15, despite the backlog growing 147% between June 14 and June 16. As a result, CSCI’s backlog conversion rate has grown from a 1H11-2H14 median of 4.9 years to 9.1 years in 1H16, despite recently signed contracts having a construction period of 2-4 years.

We attribute this lengthening in the conversion rate to both a slowdown in CSCI’s traditional affordable housing new contracts and to China’s transition from traditional Build-Transfer (BT)/Build-Operate-Transfer (BOT) to Public-Private-Partnership (PPP) projects — which involve more complicated financing structure, and lengthier approval/negotiation process. We estimate that this lengthening implies only c.20% of CSCI’s new contracts signed during 2015-1H16 and c.40% of CSCI’s backlog as of June 16 are effective and under full-swing construction.

Greater confidence in near-term growth

However, our confidence on CSCI’s near-term (2H16/2017) growth has been reinforced as we see that c.40% of its PPP project backlog signed since 2015 have turned effective in late 1H16/early 2H16 vs. c.0% by end-2015 and will contribute c.HK$2.5bn/HK$7.4bn additional revenue in 2H16/2017, vs. its 2H15/2015 China revenue at HK$7/13bn, per our estimate.

For instance, just taking into consideration relevant news report, we identify HK$17bn projects starting construction and HK$13bn entering full swing construction in late 1H16/early 2H16. As such we now forecast CSCI’s 2H16/2017 China revenue to book 26%/36% yoy growth.

Beyond 2017, while we expect CSCI to continue converting effective backlog and deliver solid revenue growth — given its track record, favorable project exposure to economically vibrant cities/regions and steady stimulus policy roll-out with increasing focus on actual construction starts — we refresh our scenario analysis on its mainland order execution.

Our bull/ base/bear case scenarios imply CSCI’s mainland infra investment revenue to grow at +53%/+28%/+16% 2015-18E CAGR. Specifically, we assume that:

 Bull case: Backlog conversion rate reverting to 1H11-2H14 median of 4.9 years, implying a backlog effective rate of 81% by 2018E

 Base case: Backlog conversion rate rising to 9.6 years in 2H16 and falling to 9.1/8.9 years in 2017/18E, implying a backlog effective rate of 44% by 2018E

 Bear case: Backlog conversion rate continuing rising, reaching to 12 years by 2018E, implying a backlog effective rate of 33% by 2018E

Goldman Sachs Global Investment Research 4 September 20, 2016 China State Construction Intl (3311.HK)

Exhibit 2: In our bull/base/bear case scenarios on CSCI’s Exhibit 3: …implying that backlog effective rate will mainland backlog conversion rate, CSCI will grow its reach 81%/44%/33% by 2018E… mainland revenue at 2015-18E CAGR of 53%/28%/16%... CSCI mainland China backlog effective rate

Mainland infrastructure Mainland infrastructure investment Backlog backlog conversion rate (line, in years) investment revenue yoy (bar) Bull case Base case Bear case 250% 14 effective rate 2015-18E mainland China infrastructure 120% investment revenue CAGR 12 200% Bull case: +53% 100% Base case: +28% 10 150% Bear case: +16% 80% 81% 8 60% 100% 44% 6 40% 44% 50% 33% 4 20% 0% 2 0% -50% - 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2017E 2018E 2H16E 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2017E 2018E 2H16E Note: Effective backlog = backlog needed for CSCI to derive its Note: Backlog coverage rate = (backlog as of 12-month ago + revenue assuming a 4-year backlog conversion rate. Backlog past 12-month new contract)/past 12-month revenue, so to effective rate = effective backlog/total backlog. remove the effects of revenue recognition seasonality.

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 4: …and our base case is in line with our finding that c.40% of CSCI’s PPP backlog signed since 2015 is now in full-swing construction, and will contribute c.HK$2.5/7.4bn incremental revenue in 2H16/2017 per our estimates Summary of announced CSCI mainland China PPP new orders, Jan 15 to Aug 16

Contract Confirmed Construction Signed Signed Full-swing Project name amount (HKD reporting of Relevant news report period date quarter construction mn) start (months) Infrastructure and Industrial Park Public-Private-Partnership Aug-16 3Q16 3,150 24 Projects, Haining, Zhejiang Province Infrastructure Public-Private-Partnership Project, Wangcheng Aug-16 3Q16 2,380 24 New District, Nanchang, Jiangxi Province

Jul-16 3Q16 Phase Three of Infrastructure PPP Project, Caofeidian, Tangshan 1,890 24

Infrastructure Public-Private-Partnership Projects, Bonded Area, Jun-16 2Q16 3,120 24 Changsha (no affordable housing)

Urban Comprehensive Development Projects with Public-Private- Mar-16 1Q16 3,220 √ Started on May 16 36 Partnership (PPP) Model, Foshan, Guangdong

Phase Two of Ring Road Project with PPP Model, Dazhou, Mar-16 1Q16 860 √ Started on Jul 16 24 Sichuan Province Zheng’an-Xishui Expressway Project with Public-Private- Feb-16 1Q16 6,480 √ √ Started in Sep 16 48 Partnership (PPP) model, Zunyi, Guizhou

Infrastructure Project with Public-Private-Partnership (PPP) Jan-16 1Q16 2,380 √ √ Started in Mar 16 24 model, Tangshan, Hebei (no affordable housing) Nov-15 4Q15 Relocation Housing Projects, Zhengzhou 5,630 √ Started on Mar 16 24 Phase 1 started on Sep 16, Construction of Underground Integrated Space, Central City of delivering on Apr 17 Oct-15 4Q15 3,840 √ √ 21 Optical Valley, Wuhan, Hubei Phase 2/3 starting on Nov 16, delivering on Jun 19 Relocation Housing and Hospital Projects with Public-Private- Sep-15 3Q15 2,380 √ √ Started in May 16 24 Partnership (PPP) model, Zhenjiang No confirmed starting date Public Facilities and Relocation Housing Projects with PPP model, Sep-15 3Q15 2,500 √ Gov't pushing for accelerated 24 Huaian, Jiangsu construction Public Facilities Project with PPP model, Shaoxing, Zhejiang Sep-15 3Q15 1,500 24 Province (no affordable housing)

No confirmed starting date Relocation Housing Project with Public-Private-Partnership (PPP) Aug-15 3Q15 2,500 √ Gov't pushing for accelerated 24 model, Huaiyin District, Huaian construction Apr-15 2Q15 PPP Highway Project, Bengbu, Anhui Province 4,690 √ √ Started in Sep 15 48 Total 46,520 34,480 19,770

Source: Sina, Sohu, respective local government websites, company data.

Goldman Sachs Global Investment Research 5 September 20, 2016 China State Construction Intl (3311.HK)

Exhibit 5: We also see such recovery as in-line with industry trend which shows an average 1-year lag between new order acceleration and revenue pick-up Five major construction companies’ combined infra revenue/new order yoy growth comparison

Infra revenue yoy (LHS) Infra new orders yoy (RHS) 80% 70% 60% 60% 50% 40% 40% 30% 20% 20% 10% 0% 0% -10% -20% -20% -30% -40% -40% 2005 2006 2007 2008 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Note 1: The five major construction companies are China State Construction Engineering Corp (CSCEC), Metallurgical Corp of China (MCC), China Railway Construction Corp (CRCC), China Railway Group (CRG) and China Communications Construction Company (CCCC). Note 2: Where possible, we used infra new order/revenue. However for MCC we used total revenue/total new orders since it doesn’t disclose infra new orders in interim results.

Source: Company data, Goldman Sachs Global Investment Research

Exhibit 6: In the long-term we expect CSCI to deliver steady effective contract conversion as its projects are mainly exposed to cities/regions where the economy is robust and fiscal revenue growth is above-average … CSCI’s Jan 15 to Aug 16 mainland China infrastructure construction new contract breakdown by city

Jan 15 to Aug 16 CSCI mainland China new order breakdown by city, bn HKD Zhengzhou, Zibo, 2.3 Others, 6.0 Nanchang, 8.2 2.4 Zhenjiang, Hebei: Zunyi, 6.5 Tangshan, HK$4.27bn 2.4 Zhangzhou, Shandong: 2.6 Binzhou, HK$3.5bn Zibo: HK$2.25bn Changsha, Jiaxing, 5.2 3.1 Anhui: Hangzhou, Foshan, 3.2 Hefei, HK$3.3bn 5.0 Bengbu, HK$4.69bn Hefei, 3.3 Huai'an, 5.0 Jiangsu: Binzhou, 3.5 Huai'an, HK$5.0bn Tangshan, Zhenjiang, HK$2.38bn Wuhan, 3.8 Bengbu, 4.7 4.3

Zhejiang: Hangzhou, HK$5.0bn Fiscal Revenue (LHS) Shaoxing, HK$1.5bn Rmb bn Jiaxing, HK$5.21bn Fiscal Revenue Yoy (RHS) 140 25% 120 Henan: 20% Zhengzhou, HK$8.19bn 100 15% Hubei: 80 China 2015 fiscal Wuhan, HK$3.84bn 60 10% 40 Fujian: 5% Zhangzhou, HK$2.58bn 20 Sichuan: 0 0% Chengdu, HK$1.0bn Jiangxi: Ziyang, HK$1.25bn Nanchang, HK$2.38bn Zibo Hefei

Dazhou: HK$0.8bn Zunyi Wuhan Foshan Jiaxing

Guangdong: Huai'an Chongqing: Bengbu Hunan: Binzhou Tangshan

Foshan, HK$3.22bn Changsha Zhenjiang Hechuan, HK$1.38bn Hangzhou Nanchang Zhangzhou Changsha, HK$3.12bn Zhengzhou Guizhou: ***All fiscal revenue figures are 2015 numbers except Zunyi, HK$6.48bn Binzhou, Jiaxing, Zibo and Zunyi (2014)

Source: Company data, China National Bureau of Statistics.

Goldman Sachs Global Investment Research 6 September 20, 2016 China State Construction Intl (3311.HK)

Exhibit 7: …and we see steady infrastructure stimulus policy roll-out, with an increasing focus on actual project start Summary of key infrastructure stimulus policies and their latest update

Policy name Summary Latest update Fiscal

Rmb1.8 trillion special bond issued by China Development Bank and Agricultural Development Bank of China to invest in the Performing auditing on invested projects for Special construction bond equity of infrastructure projects/related companies (public or construction progress to-date, capital usage status program private) or participate in local government infrastructure financing and pushing for actual project start and investing fund

Over Rmb700bn fund size (subscribed by central/local gov't Central gov't PPP guidance fund announced 1st Central/local government budget and various financial companies/private investors) to Rmb2.4bn investment in a Inner Mongolia subway PPP guidance fund invest in both equity/debt of PPP projects. project on Jul 2016

Rmb300bn fund (phase 1 at Rmb100bn) to invest in strategic Formed Rmb40/30bn special funds in 1H16 to invest China Insurance infrastructure projects such as "One belt One road", Beijing- in overseas energy and transportation infrastructure Investment Fund Tianjin-Hebei integration, Yangtze River economic belt as well as along One Road One Belt and Shanghai urban areas like shantytown renovation, municipal infrastructure. infrastructure

For selected sample PPP projects, Rmb3mn subsidy for Local gov'ts such as Guizhou/Jilin also announced PPP subsidy program Rmb1bn projects. projects

Swap local government's high cost loan/trust with lower interest bonds. Designed as market driven commercial measure involving Local government debt commercial banks etc. purchasing these bonds swap 2015 program size: Rmb3.2 trillion 2016/17 total program size: Rmb11 trillion

Source: Ministry of Finance, Sina, State Council, respective local government websites.

How will mainland China gross margin change?

GS view: Gradually fall through 2018E given less interest income — but the blended margin will improve on the mix shift to higher margin mainland revenue. Another surprise in the 1H16 results for the market was a 4.2pp decline in its mainland China GM to 22.2%, although we note this is in line with our expectation of 22.1% for mainland China infrastructure investment GM in 2016 full year. We attribute the 1H16 decline to a lower interest-bearing receivable balance as a result of (1) early collection of some BT receivables, and (2) liquidation of its HK$10bn BT receivable in 2015.

Going forward, we forecast CSCI’s mainland GM to continue decline from 24.8% in 2015 to 22.0% in 2018E, along with the decline in interest income’s share of CSCI’s mainland revenue — given the interest income model is generally discouraged in PPP projects. We expect this to be partly offset by a higher construction gross margin as general infrastructure has better construction gross margin than affordable housing.

However, mainland China gross margin is still significantly higher than Hong Kong/Macau (c.20% vs. c.6-7%). With mainland revenue growth resuming, we forecast CSCI’s blended GM to expand by 1.2pp from 13.3% in 2015 to 14.4% in 2018E.

We have received investor questions on whether mainland gross margin can decline even more as a result of competition, narrowing HK-China interest spread. While we see CSCI gradually moving toward local borrowing/local lending in the mainland, we extend out scenario analysis above and introduce different GM assumptions on top of flexing our revenue forecast.

Goldman Sachs Global Investment Research 7 September 20, 2016 China State Construction Intl (3311.HK)

In our bull/base/bear case, we still see CSCI’s net profit growing at +40%/+19%/+6% 2015- 18E CAGR. More specifically, we assume that:

 Bull case: 2016-18E mainland GM staying stable at the 2015 level of 24.8%.

 Base case: Mainland GM gradually moderating to 22.0% by 2018E

 Bear case: Mainland GM falling to the 2009-11 average level of 17.4% by 2018E

Exhibit 8: CSCI’s 1H16 mainland China blended gross Exhibit 9: …in line with our expectations for a gradually margin contracted to 22.2%... falling mainland China GM — as higher margin interest CSCI mainland China blended GM, 1H12-1H16 income declines given repayment of receivables CSCI mainland China revenue/infra investment receivable/ gross margin comparison, 2009-18E

Mainland revenue (LHS) Mainland China blended GM HKD mn 45,000 Mainland infra investment receivable (LHS) 27.0% 27.0% 26.3% 40,000 Mainland gross margin (RHS) 25.0% 25.0% 35,000 23.2% 23.6% 22.9% 30,000 23.0% 23.0% 22.3% 22.2% 21.6% 25,000 21.0% 21.0% 20,000 19.0% 19.0% 15,000 19.0% 17.0% 10,000 17.0% 17.0% 5,000 15.0% - 15.0% 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Source: Company data. Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 10: However we still see its blended GM Exhibit 11: In our bull/base/bear case where mainland increasing over 2016-18E thanks to a favorable mix shift gross margin remains steady/moderates/falls sharply, toward higher-margin mainland China CSCI will grow its 2015-18E net profit at a CAGR of CSCI blended gross margin breakdown by business 40%/19%/6%

16.0% Net profit yoy growth (bar) Mainland gross margin (line) 2015-18E net profit CAGR 14.0% 60% Bull case: +40% 30% Base case: +19% Others 12.0% 50% Bear case: +6% 25% 10.0% FEG Mainland others 40% 20% 8.0% Mainland interest 6.0% 30% 15% Mainland construction 4.0% Macau 20% 10% 2.0% HK 10% 5% 0.0% 0% 0% -2.0% 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 8 September 20, 2016 China State Construction Intl (3311.HK)

Have above expectations been priced in and what are the catalysts? GS view: Consensus earnings are 5-7% below GSE and we expect its potential upward revision to drive a rerating of the multiple. Existing backlog/assets already explain the bulk of CSCI’s market cap. Potential catalysts include 3Q16 result, key project progress update, and to a lesser extent monthly new orders.

Consensus 2016 revenue/net income are 2%/7% below GSE and imply 2H16 yoy growth of 14%/1%. Given the one-off provision in 2H15 and growth from Macau in 2H16 before the MGM casino is completed, we see consensus numbers implying a slight increase in mainland revenue and further deterioration in mainland GM (vs. GSE of 26% mainland revenue yoy and flat mainland GM yoy).

Further, the sum of only CSCI’s liquid assets and potential net profit from existing backlog, assuming a 20%/7% gross margin for mainland China/cash construction contracts (in line with the historical average), has already reached HKD42bn (for simplicity ignore time value and illiquid PP&E/intangibles) vs. CSCI’s current market cap at HKD44bn. We attribute this to 1) investors’ lack of confidence in the backlog actually being executed, 2) future new contract growth sustainability. We expect the catalysts set out below to help the market re- establish confidence in CSCI’s effective backlog conversion ability/growth outlook and drive multiple rerating/earnings revisions.

 3Q16 results with revenue/operating profit incl. JV/associate income to be released in late-Oct (based on historical experience)

 Progress update by news report/company on certain key projects, such as on the Wuhan Underground Integrated Space phase II which is expected to start in Nov

 Monthly new order release.

Exhibit 12: We are 5-7%/2-8% above market net income/ Exhibit 13: …and expect earnings revision/rerating as the revenue consensus… market confidence in CSCI’s growth is reestablished

12-m forward P/E (LHS) Net income vs. consensus Revenue vs. consensus 20X Consensus current year EPS growth (RHS) 60% Actual/GSE current year EPS growth 9% 18X 50% 8% 16X 7% 14X 40% 6% 12X Target price implied 12-m forward P/E at 30% 5% 10X 9.5X 20% 4% 8X 3% 6X 10% 4X 2% 0% 2X 1% 0X -10% 0% 2016E 2017E 2018E Jul-17 Jul-12 Oct-13 Jan-15 Apr-16 Feb-17 Jan-10 Apr-11 Feb-12 Dec-17 Dec-12 Jun-15 Jun-10 Sep-16 Sep-11 Mar-14 Aug-14 Nov-15 Nov-10 May-13

Source: Bloomberg, Goldman Sachs Global Investment Research. Source: Bloomberg, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 9 September 20, 2016 China State Construction Intl (3311.HK)

Exhibit 14: We see CSCI’s backlog and assets already explaining bulk of its valuation

60,000 HKD mn

50,000 44,477 41,902 40,000 1,645 33,418 8,501 44,378 30,000 5,578 Cash cosntruction: 14,324 4,232 20,000 1,429 19,765

10,000 Mainland: 14,998

0 Net Cash Loan A/R Payable HK Conc. JV & FEG Total Mkt cap profit property Rights asso share value from backlog Key assumptions: Mainland China/cash construction each has gross margin of 20%/7%, operating expense ratio of 3% and tax rate of 15%. FEG share value based on FEG (0830.HK, Not covered)’s Sep 19 market cap and CSCI’s shareholding. Rest based on book value.

Source: Datastream, company data, Goldman Sachs Global Investment Research.

Hong Kong/Macau growth outlook

GS view: Hong Kong new contracts will continue growing given many new infra initiatives are gradually being rolled out — but 2016 may face revenue headwind given the fall in new contracts in 2014. Macau construction market is shifting away from gaming to public infrastructure but we don't yet factor these in, until concrete investment plans are made.

Hong Kong

We forecast CSCI’s HK new contracts to grow at 20% 2015-2018E CAGR as we see many public infrastructure initiatives/projects being steadily rolled out over the next 5 to 10 years. For instance, seven out of the ten mega infrastructure projects launched by HK government in 2007 have either not yet started or are still in phase I/II — while some other initiatives, such as the HK$140bn HK-airport third runway, HK$200bn 10-year healthcare development, and HK$110bn railway network expansion plans, are early in the tendering process. We estimate that counting only those projects that have available investment plans will contribute HK$83bn in annual incremental investment over the next 10 years vs. HK’s public sector construction market size at HK$77bn in 2015 — underpinning our view of sustained growth in the HK public sector construction market.

However, we do see near-term revenue headwinds for CSCI as its new contracts from 2014 (an important source of 2016 revenue) fell 49% yoy in 2014 after “Occupy Central” protests. We forecast its to book revenue growth in 2016 of 2% yoy and 2015-18E CAGR of 10%.

Macau

Formally announced on Sep 8, 2016, Macau’s five-year development plan targets to reduce the city’s reliance on gaming and to shift focus to improving public infrastructure — including 12 key projects covering utilities, transportation, environment protection, healthcare and video surveillance.

Goldman Sachs Global Investment Research 10 September 20, 2016 China State Construction Intl (3311.HK)

Coupled with potential land reclamation after approval from the China central government in late-2015 (newly approved water area at 85 sqkm vs. Macau’s current size at 31 sqkm), these projects will transform Macau’s construction market from a more volatile casino- driven market to a more stable infrastructure-driven market, in our view.

However detailed investment plans/timing of these projects are yet to be announced so we have not yet factored these into our numbers. We now forecast Macau’s new contracts/ revenue to grow at 2015-18E CAGR of 13%/11% — with a majority of the growth taking place in 2016 as the MGM casino project enters its peak construction period, with revenues then declining in 2017 as new projects will not make up for previous MGM revenue.

Exhibit 15: We forecast steady growth in CSCI’s HK new Exhibit 16: …helped by many major infra projects contract… gradually rolled out… CSCI’s HK new contract vs. revenue

HKD mn New contract Revenue HKD bn 900 833 25,000 2016 Jan-Aug HK new contract = 91% of 2016 GSE, 800 in line with historical average of c.90% 700 20,000 600 500 15,000 Already 108% of 2015 400 HK public sector 300 construction market 10,000 200 83 77 100 5,000 0 Announced major Annual incremental 2015 HK's public 0 infra projects investment sector construction 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 market size

Source: Company data, Goldman Sachs Global Investment Research. Source: Hong Kong Census and Statistics Department, Goldman Sachs Global Investment Research, Hong Kong government website.

Exhibit 17: …creating a favorable market environment for the public construction market Hong Kong’s total public/private sector site construction spending

HKD mn Public sector sites Private sector sites "10 mega projects" along with other major 200,000 “Rose Garden Project” infrastructure projects 180,000 which focused on Port and Airport Development 160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

Source: Hong Kong Census and Statistics Department, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 11 September 20, 2016 China State Construction Intl (3311.HK)

Exhibit 18: Out of the 10 mega infrastructure projects announced since 2007 — seven either still haven’t started completely or are still in phase I/II… Summary of HK’s 10 mega infrastructure projects and latest update

"10 Major Infrastructure Projects"

Estimated Project Type (per Actual/Estimated Estimated Ending Project Name Details Progress Contract Value Govt document) Starting Time Time (HK$ bn)

97% completed as of Jun 2016; MTR would reveal whether the 7km long subway project connecting south Hong Kong Island South Island Line Transport May-11 2016 line could open on schedule next month as there are 16.9 to existing Island MTR line. complications at Admiralty station. Track laying at the 11km Tai Wai-Hung Hom section (phase 1) 17km subway project connecting Central to Shatin. 2019/2021 (2 is underway and is expected to be operational in 2019. The 6km The Sha Tin to Central Link (SCL) Transport Jul-12 83.9 Construction commenced in July 2012. phases) Hung Hom-Admiralty section (phase 2) is scheduled to open in 2021.

Tuen Mun Western Bypass project costs and projects are under The Tuen Mun Western Bypass and review. Construction has commenced at both the Northern and Transport Linking Northwest New Territories and Lantau Island. Nov-11 2016-2018 46.7 Tuen Mun-Chek Lap Kok Link Southern connection viaduct sections. The completion date for the Southern connection viaduct is under review.

75% completed as of Dec 2015. Additional public funding of The Guangzhou-Shenzhen-Hong Cross-boundary 26km long high-speed railway project. The project has been Jan-10 2018 HK20bn approved in Mar 2016 due to costs overrun. Slated to 84.4 Kong Express Rail Link * Infrastructure started gradually. complete in 3Q18.

Hongkong government has confirmed that the bridge's Connecting Hong Kong with Macau and Zhuhai. The completion would be pushed back because of unstable material Cross-boundary Hong Kong-Zhuhai-Macao Bridge * reclamation projects started in Dec 2009. Other construction Dec-11 2017 supplies, shortages of labour, as well as dealing with aviation 117.0 Infrastructure parts scheduled to tender in 2012. height limits, environmental protection requirements and slower than expected progress in land reclamation.

A railway link to shorten travelling time between Hong Kong to Hong Kong-Shenzhen Airport Co- Cross-boundary Shenzhen Airport to 17 mins. The project is in preliminary N/A 2020-2030 N/A operation Infrastructure study stage.

Hong Kong-Shenzhen Joint Government of Hong Kong and Shenzhen are jointly Government of Hong Kong and Shenzhen are jointly Cross-boundary Development of the Lok Ma Chau researching and planning the development and other cross N/A 2020 researching and planning the development and other cross N/A Infrastructure Loop boundary issues. boundary issues.

New Urban An integrated arts and cultural district offering a mix of world- Phase 1 is expected to be completed in 2017. Phase 2 is West Kowloon Cultural District Development class arts and cultural facilities, talented artists, quality 2013 2020-2030 targeted for completion by 2020. The third phase has been 45.0 Areas programs and distinctive architecture. postponed until after 2020.

New Urban Redeveloping old Kai Tak Airport site into a comprehensive 2013/2016/2021 (in Phase 1 is already completed. Phase 2and 3 still under Kai Tak Development Plan Development project including tourism and residential sites. The project has Jul-05 100.0 3 phases) development. Areas been started gradually.

New Urban The New Development Areas will provide land for housing, The New Development Areas will provide land for housing, New Development Areas (NDAs) Development employment, environment-friendly industries. Now the project Planning 2024 employment, environment-friendly industries. Now the project N/A Areas is at planning stage. is at planning stage. Total 493.9

Source: Hong Kong government website.

Exhibit 19: …along with multiple major infrastructure initiatives over the next 10 years Summary of other upcoming construction opportunities in Hong Kong

Other upcoming construction opportunities in Hong Kong

Estimated Project Type (per Actual/Estimated Estimated Ending Project Name Remarks Progress Contract Value Govt document) Starting Time Time (HK$ bn)

To increase operational capacity as existing runways at Hong Kong 3rd runway of HK Airport Airport Planning 2024 141.5 International Airport at around 90% capacity.

Development of healthcare in next 10 years Hospital Healthcare facilities including 9 new hospitals to be built. Planning 2026 Plan was recently announced in 2016 policy address. 200.0

The plan of public housing in next 5 years Public Housing 97,100 units to be built. Planning 2021 Plan was recently announced in 2016 policy address. 46.7

A 4.7km long dual 3-lane truck road that extends from Yau Ma Tei to Central Kowloon Route Road 2016 2023 Executive council authorised the project in Jan 2016. 43.7 the Kai Tak Development and Kowloon Bay.

A dual two-lane highway approximately 4.2 km long connecting Tseung Trunk road connecting Tsueng Kwan O - Lam Road Kwan O (TKO) at Po Shun Road in the east with proposed Trunk Road 7/1/2016 Mid-2021 Construction commenced in mid 2016. 15.1 Tin Tunnel and Central Kowloon Route T2 in Kai Tak Development in the west.

Plans involve 1) Northern Link and Kwu Tung station, 2) Hung Shui Kiu station, 3) Tung Chung West extension, 4) Tuen Mun South Extension, Expansion plan of railway network Railway 2018 2026 110.0 5) East Kowloon line, 6) South Island line (West) and 7) North Island line.

To improve the section of road from Marina Cove to the south of Sha Hiram's Highway Improvement Stage 2 Road Planning N/A Preliminary design and investigation works are in progress N/A Ha.

Project includes 1) removal of remaining disused structures within the site, the temporary refuse collection point, the temporary public car Ground decontamination works at the site of of park, the Cadogan Street Temporary Garden, as well as the other Scheduled to commence after the approval of funding by Ex-Kennedy Town Incineration Plant/Abattoir Others N/A N/A N/A structures at Sai See Street; 2) in-situ reprovisioning of a temporary LegCo Finance Committee. and adjoining area public car park and a temporary refuse collection point; and 3) carrying out ground decontamination works

Advance site formation and engineering formation and engineering infrastructure works The project is the first phase of the Kwu Tung North and Fanling North Proposed road and sewage works for the project were Infrastructure N/A N/A N/A at Kwa Tung North and Fanling new New Development Areas (KTN and FLN NDAs) development published in the GAZETTE on 31 December 2015. development areas

Project comprises construction of a footbridge across the southern part Infrastructure works for Tseung Kwan O Stage Infrastructure of the Eastern Channel of Junk Bay and a sewage pumping station and N/A N/A Detailed design is in progress. N/A (Landfill site, Tseung Kwan O) sewerage works for proposed developments in the Stage I Landfill.

Total 557.0

Source: Hong Kong government website.

Goldman Sachs Global Investment Research 12 September 20, 2016 China State Construction Intl (3311.HK)

Exhibit 20: We have factored in a slow growth in Macau Exhibit 21: …but see potential upside as Macau shifts new contract and decline in 2017 revenue post MGM focus from casino to public infrastructure casino completion… Summary of key infra opportunities outlined in Macau’s Five- CSCI’s Macau new contract/revenue Year Development Plan

New contract Revenue Revenue yoy growth (RHS) Key Infra Opportunities Outlined in Macau's Five-Year Development Plan Project Type (per 12,000 300.0% Details HKD mn Govt document) 250.0% 10,000 1. New City Zone A development 200.0% Urban development 2. Fourth pure water supply pipeline 3. Existing water reservoirs renovation 8,000 150.0% 1. Urban light rail Transportation 2. Guangdong-Macau mutual access projects 6,000 100.0% 3. Fourth cross-sea road 50.0% 1. Existing waste incineration plant renovation/expansion 4,000 Environment 2. Fly ash fixation and burial site 0.0% protection 3. Existing waste water treatment plant upgrade 2,000 -50.0% 1. Island District Medical Complex 0 -100.0% Healthcare 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2. Public healthcare infectious disease building

City security All-Macau video surveillance system

Source: Company data, Goldman Sachs Global Investment Research. Source: Macau government website.

Key risks

While the market has shifted its focus to growth after the 1H16 results, we still see CSCI’s BT receivables as the key potential risk to our thesis in the longer term.

Although CSCI has been careful in selecting projects in economically vibrant cities and it generally requires local governments to include their repayment to CSCI in their annual fiscal budget plan, it is possible that CSCI fails in collecting certain payments and has to make provisions. We estimate that a 1pp BT receivable provision on 1H16 numbers would impact its 2016 earnings by -6%.

Our current numbers do not factor in any impairment losses as CSCI has a strong track record in collecting receivables — managing to collect HK$26bn receivable over 2010-15 without incurring any impairment, in our estimates. We will continue monitoring its existing receivables closely.

Goldman Sachs Global Investment Research 13 September 20, 2016 China State Construction Intl (3311.HK)

Exhibit 22: We estimate that 1pp BT receivable provision on 1H16 numbers will impact CSCI’s 2016 earnings by -6% CSCI’s receivable analysis, 2010-1H16

HKD mn 2010 2011 2012 2013 2014 2015 1H16 Receivable analysis 1. Trade receivable, net of allowance for doubtful debts 2,661 3,875 8,071 14,919 22,464 32,380 30,619 0-30 days 1,894 2,835 3,410 4,467 5,374 10,699 9,975 31-90 days 313 457 1,518 3,205 3,031 4,450 5,010 Over 90 days 455 583 3,144 7,247 14,060 17,231 15,634 Among: BT receivable due over 90 days 341 467 2,636 6,443 13,691 16,705 14,984

2. Retention receivable 1,015 1,351 1,792 1,820 2,026 2,578 2,815 3. Other receivable 0 0 433 1,426 953 1,166 1,307

4. Interest in infrastructure project investment 693 697 924 1,197 1,506 1,572 1,592 Current (a) 19 23 9 11 17 36 36 Non-current (b) 674 673 915 1,186 1,489 1,536 1,556

5. Amounts due from investee companies 362 356 361 400 412 282 193 6. Amounts due from customers for contract work 194 2,944 5,621 1,075 1,354 2,422 3,082 7. Loans to JCEs 221 0 0 0 0 1,104 451 8. Amounts due from JCEs 0 6 5 7 1,342 1,564 1,490 9. Amounts due from related companies 0 11 27 0 0 0 0 10. Amounts due from subsidiaries 148 423 634 0 0 0 0 11. Amounts due from an intermediate holding company 18 72 0 0 0 0 0

12. Held for sale assets 0 0 0 9,169 10,922 0 0 Amounts due from customers for contract works 0 0 0 8,477 9,994 0 0 Trade and other receivables 0 0 0 522 798 0 0 Bank balances and cash 0 0 0 36 53 0 0 Other current assets 0 0 0 135 76 0 0

Total receivables 5,312 9,734 17,868 29,843 40,850 43,068 41,550 Non-current BT related 1,449 4,113 9,186 17,721 28,686 23,367 21,600 Current BT related 199 713 2,101 5,195 4,270 10,131 9,821 cash construction related 3,664 4,908 6,582 6,927 7,894 9,569 10,129 Current year earnings impact IF: Additional 0.5% BT receivable allowance rate -1% -2% -3% -4% -5% -4% -3% Additional 1.0% BT receivable allowance rate -2% -3% -5% -8% -10% -8% -6% Additional 1.5% BT receivable allowance rate -2% -5% -8% -13% -14% -12% -10% Additional 2.0% BT receivable allowance rate -3% -6% -11% -17% -19% -16% -13%

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 14 September 20, 2016 China State Construction Intl (3311.HK)

Financials

Exhibit 23: CSCI delivers the highest net income growth Exhibit 24: …as well as the best net margin… among our H-share construction coverage…

2015 2016E 2017E 2018E 2015-18E net income CAGR Net margin 20,000 20% 14.0% 18,000 18% 16,000 16% 12.0% 14,000 14% 10.0% 12,000 12% 2015 10,000 10% 8.0% 2016E 8,000 8% 2017E 6,000 6% 6.0% 4,000 4% 2018E 4.0% 2,000 2% 0 0% 2.0% CSCI CRCC CRG CCCC Bar = net income (LHS); marker = 2015-18E net income CAGR (RHS) 0.0% Net income unit in HKD mn for CSCI, Rmb mn for rest CSCI CRCC CRG CCCC

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 25: …leading to the strongest ROE… Exhibit 26: …despite having the lowest gearing

Return on Equity Net debt to equity 25.0% 160.0%

140.0% 20.0% 120.0% 2015 2015 100.0% 15.0% 2016E 2016E 80.0% 2017E 2017E 10.0% 2018E 60.0% 2018E 40.0% 5.0% 20.0%

0.0% 0.0% CSCI CRCC CRG CCCC CSCI CRCC CRG CCCC

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 27: CSCI also has moderately better dividend Exhibit 28: …but has in-line operating cash flow yield yield compared to peers…

Dividend yield Operating cash flow yield 5% 12.0%

5% 10.0% 4% 8.0% 4% 2015 2015 6.0% 3% 2016E 2016E 3% 4.0% 2017E 2017E 2% 2018E 2.0% 2018E 2% 0.0% 1% CSCI CRCC CRG CCCC 1% -2.0% 0% -4.0% CSCI CRCC CRG CCCC

Source: Datastream, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 15 September 20, 2016 China State Construction Intl (3311.HK)

Valuation

Exhibit 29: H-share infrastructure construction & Exhibit 30: 12-m TP implies 49% upside potential as of machinery coverage 2017E EV/GCI vs. CROCI/WACC plot Sep 19th; add to CL-Buy CSCI 12-m target price derivation table

2.5X 2017E EV/GCI China State Construction Intl

2.0X 2017E 3311.HK Sector EV/GCI vs. CROCI/WACC 0.90x CRSC Historical EV/GCI premium/ (discount) 5% Zhuzhou Current EV/GCI premium/ (discount) -20% 1.5X Premium/ (discount) applied 10% CROCI/WACC 1.6x Implied EV/GCI 1.6x Gross capital invested (RMB mn) 40,998 CRRC H CSCI 1.0X Shanghai H Implied EV (RMB mn) 65,472 Net debt and minority interest (RMB mn) 8,513 CCCC H Lonking Implied market cap (RMB mn) 56,959 CRG H Number of shares (mn) 4,488 0.5X Dongfang H SEG CRCC H Pricing currency HK$ Target price 14.8 y = 0.9x SANYI Current price 9.91 2017E CROCI/WACC Upside/downside to target price 49% 0.0X CMEC Rating Buy 0.0X 0.5X 1.0X 1.5X 2.0X 2.5X Implied 2016 P/E 12.8x Implied 2017 P/E 11.5x Implied 2018 P/E 9.5x

The stock is on the Asia-Pacific Conviction list.

Source: Datastream, Goldman Sachs Global Investment Research. Source: Datastream, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 16 September 20, 2016 China State Construction Intl (3311.HK)

Disclosure Appendix Reg AC We, Tian Lu, CFA, Jacqueline Du, Frank Shi and Diana Zhao, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Tian Lu, CFA: Asia Pacific Infrastructure, China Capital Goods. Jacqueline Du: Asia Pacific Infrastructure, China Capital Goods. Asia Pacific Infrastructure: China Communications Construction (A), China Communications Construction (H), China Machinery Engineering Corp., China Railway Construction (A), China Railway Construction (H), China Railway Group (A), China Railway Group (H), China State Construction Intl, Sinopec Engineering Group. China Capital Goods: China Railway Signal & Communication, CRRC Corp. (A), CRRC Corp. (H), Dongfang Electric Corp. (A), Dongfang Electric Corp. (H), Estun Automation Co., Guangxi Liugong, Haitian International Holdings, Han's Laser Technology Industry Group, Hangzhou Zhongheng Electric Co., Heli, Henan Pinggao Electric Co, Hollysys Automation Technologies Ltd., Huagong Tech Co., Lonking Holdings, Sany Heavy, Sany Heavy Equipment International, Shanghai Electric Group (A), Shanghai Electric Group (H), Shanghai STEP Electric Corp., Shantui, Shenzhen Inovance Techology Co., Siasun Robot&Automation Co., Tian Di Science & Technology, Yangtze Optical Fibre and Cable, Zhengzhou Coal Mining Machinery, Zhuzhou CRRC Times Electric Co., Zoomlion (A), Zoomlion (H). Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs has received compensation for investment banking services in the past 12 months: China State Construction Intl (HK$10.04) Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: China State Construction Intl (HK$10.04) Goldman Sachs had an investment banking services client relationship during the past 12 months with: China State Construction Intl (HK$10.04) Goldman Sachs had a non-securities services client relationship during the past 12 months with: China State Construction Intl (HK$10.04) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 31% 54% 15% 66% 60% 50% As of July 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 2,963 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months.

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Price target and rating history chart(s)

China State Construction Intl (3311.HK) Stock Price Currency : Hong Kong Dollar Goldman Sachs rating and stock price target history 18.00 16.4 29,000 17.00 14.9 16.00 14.3 27,000 13 11.9 16.5 15.00 25,000 14.00 13.00 12 23,000 12.00 21,000 11.00 19,000 10.00 9.00 12.6 17,000 8.00 15,000 Feb 24 Dec 8 N B A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J 2013 2014 2015 2016 Index Price Stock Price Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 6/30/2016. Rating Covered by Tian Lu, CFA, Pric e tar get as of Feb 24, 2014 Price target at removal Not covered by current analyst Hang Seng Index

The price targets show n should be considered in the context of all prior published Goldman Sachs research, which may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

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