Morningstar | CSCI Posted Disappointing 4Q Results; FVE Lowered to HKD 7.50
No-moat China State Construction International, or CSCI, reported a 2018 second-half result below our estimates. As China’s financing environment continues to tighten, we expect the constructor to cut back on the number of public-private-partnership, or PPP, projects, leading to lower margins in the years to come. The negative impact on profitability, however, will be partially offset by a lower level of capital expenditures going out. As a result, we lower our fair value estimate for CSCI to HKD 7.50 from HKD 10.00 and see the company as fairly-valued.Despite a year-over-year top-line decline of 5%, the firm posted a 34% drop in net profit. Excluding one-off impairment losses, CSCI’s second-half net profit dropped by 7%, resulting mainly from a 50% jump in interest expenses. The HKD 817 million impairment losses were related to less than expected coal truck traffic at one of the firm’s highways, which equates to fewer tolls to be collected. Management does not expect any impairment charges to occur in 2019. Helped by improved profitability in its Hong Kong and Macau construction projects, CSCI maintained its gross margin at around 16% during the second half. We do not believe strong margins in Hong Kong and Macau are sustainable, as competitions from other state-owned constructors will squeeze margins in the two special administrative regions as the mainland slows.
We continue to echo management's view that the Chinese authority will boost the 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 amount approved 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 CSCI to record a net profit of HKD 5 billion in 2019, a 12% increase from that of 2018, but roughly 7% short of management’s guidance of 5.4 billion.
China State Construction International Holdings is an investment holding company and provides corporate management services. Through its subsidiaries and associated companies, Co. is engaged in the construction business, project consultancy services, thermoelectricity business, infrastructure project investments, toll road operation, precast structures business, facade contracting business, the manufacture and sale of ready-mixed concrete, property management and the operation of slaughterhouse. As of Dec 31 2014, Co. conducted its businesses through the following reportable segments: Hong Kong, Mainland China, Macau, Overseas and FEG Group.
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