CSCEC:Benefitting from cyclical recovery in China

Reiterate Buy, new TP at RMB9.96; benefitting from cyclical recovery in China

    We reiterate our Buy rating on CSCEC with new target price of RMB9.96 pershare. CSCESC now trades at attractive valuations of 46% discount to NAV and5.7x 2016E P/E. CSCEC should benefit from the latest cyclical recovery in Chinaproperty, new constructions, and also an increase in PPP infrastructure givenits leading positions in all markets. For FY15, CSCEC’s market share in terms ofnew contract value in China was 7.8% and in terms of GFA under constructionwas 7.4%; both figures remained stable, indicating the company’s solid leadingposition within the industry. Hence, we believe that CSCEC will benefit fromrecovery in the property market in China.

    Benefitting from the cyclical recovery, thanks to the leading market position

    CSCEC should benefit from the cyclical recovery in China’s property market(via COLI) and also a strong pick up in commodity property constructions andFAI. In 3M16, sales value and volume of commodity properties in Chinaincreased by 54%/33% yoy, respectively. FAI for the same period has alsoincreased by 6.2% yoy. For 1Q16, CSCEC’s new contract value has increasedby 27% yoy to RMB348.3bn with GFA under construction up by 6% yoy (in-linewith the industry’s 5.8% yoy growth). In addition, COLI also recorded doubledigityoy growth in both sales volume and value in 3M16. As we are expectingthe property market to undergo a cyclical recovery in 2016, we believe CSCECwill continue to be a beneficiary due to its leading market positions.

    FY15 result in-line with estimates, demonstrating solid financials

    For FY15, revenue of CSCEC increased by 10% yoy to RMB881bn with netprofit up by 15.5% to RMB26.1bn. EPS was up by 10% yoy to RMB0.84/share,in-line with our estimate. The company declared DPS of RMB0.2/share,representing a stable 23% dividend payout ratio. As of end-2015, CSCEC’s netgearing was down from 61% at end-2014 to 37%, thanks to the increase incash position to RMB216bn. The company’s blended gross margin remainedstable as well as the SG&A expenses, indicating the strong execution of thecompany despite the general market turmoil in 2015.

    Attractive valuations at 46% NAV discount, 5.7x 2016E P/E

    Our new target price of RMB9.96 (lowered from RMB10.97) is based on 20%discount to our NAV of RMB12.45, down from RMB12.19, mainly as wefactored in the latest FY15 results. Key risks: unexpected policy/economicvolatility, and risks on collection of receivables.