EUR 850.00 For Business Accounts Only

Morningstar | China Communications Construction Results in Line; FVE Maintained at HKD 8.60

No-moat China Communications Construction Company, or CCCC, reported 2018 second-half results in line with our estimates. As China’s financing environment continues to tighten, we expect the constructor to cut back on the number of public-private-partnership projects, leading to lower margins in the years to come. The negative impact on profitability, however, will be offset by a lower level of capital expenditures going out. As a result, we maintain our fair value estimate of HKD 8.60 on CCCC and see the company as fairly valued.

The firm managed to turnaround from the roughly CNY 33 billion in operating cash outflow in the first half, to book more than CNY 42 billion in operating cash inflow in the second half of 2018. As promised, the constructor “revitalized” some of its assets through issuing multiple asset-backed securities, which generated cash inflows totaled CNY 5.6 billion. Capital expenditures decreased by 24% compared with the same period last year, as CCCC invests less into build-own-transfer projects.

We continue to think that China will boost its economy by pumping money into infrastructure investments during 2019. Recently, the central government approved the issue of CNY 2.15 trillion in special purpose bonds to boost infrastructure spending, a more than 50% increase from the amount authorized last year. We believe such a stimulus will be short-lived, and further slowdown on the country's infrastructure spending is inevitable over the long term. We now expect CCCC to record a net profit of CNY 17 billion in 2019, a 13% decrease from that of 2018.