CHINA STATE CONSTRUCTION ENGINEERING CORP.(601668)：HOUSING CONSTRUCTION STEADY DESPITE HEADWINDS;INFRASTRUCTURE PROJECTS STRONG

　　1H22 results in line with our expectations
China State Construction Engineering Corp (CSCEC) announced its 1H22 results: Revenue grew 13.2% YoY to Rmb1.1trn, and attributable net profit rose 11.2% YoY to Rmb28.5bn. In 2Q22, revenue grew 8.1% YoY to Rmb575bn, and attributable net profit rose 6.4% YoY to Rmb16bn. The results were in line with our expectations.
　　GM rose 0.1ppt YoY to 11.9% in 2Q22. Blended expense ratio grew 0.6ppt YoY to 4.9% in 2Q22, with R&D and financial expense ratios up 0.3ppt and 0.6ppt YoY. CSCEC booked Rmb8.67bn in provisions for asset and credit impairment losses, up 140% YoY due to increased provision for bad debts from accounts receivable. Non-operating income grew 360.4% YoY to Rmb1.67bn in 2Q22 due to recognition of gains from the consolidation of businesses. In 2Q22, attributable net profit margin largely stayed flat YoY at 2.7%. Net operating cash inflow totaled Rmb53.61bn in 2Q22, improving from the Rmb3.96bn outflow in 2Q21, possibly due to the slowdown in accounts payable turnover. Net cash inflow from investing activities was Rmb2.98bn in 2Q22, improving from the Rmb4.07bn outflow in 2Q21.
　　Trends to watch
　　Housing construction sustains steady growth despite falling demand for real estate and COVID-19 resurgence. In 1H22, revenue from housing construction grew 14.0% YoY, maintaining steady growth despite falling sector demand and negative impacts from COVID-19. Gross margin (GM) of the housing construction segment grew 0.3ppt YoY to 6.9% in 1H22, driving gross profit (GP) up 29.9% YoY. In 1H22, new housing construction orders grew 9.1% YoY, continuing the mid-to-high single digits growth in the past 2 years. We believe the orders could support steady growth in housing construction revenue in 2H22.
　　Infrastructure construction GM up significantly; orders and revenue will likely remain strong in 2H22. In 1H22, revenue and GP from the infrastructure construction business grew 13.0% and 36.8% YoY, with GM up 1.7ppt YoY to 10.9%. New orders increased 31.1% YoY in 1H22, maintaining the strong growth momentum since 2020 (up 30.1% and 24.1% YoY in 2022 and 2021). China's infrastructure investment has seen rapid growth since June driven by the country's pro-growth policy. Furthermore, the firm's infrastructure construction orders and revenue growth rates formed a low base in 3-4Q21. Therefore, we expect its infrastructure construction orders and revenue to maintain rapid growth in 2H22.
　　Real estate business will likely maintain industry-leading sales and profit margin. In 1H22, revenue from the real estate business grew 3.7% YoY. Its GP fell 13.1% YoY, and GM dropped 4.1ppt YoY to 21.0% in 1H22. Contracted sales value dropped 15.3% YoY in 1H22, with subsidiary China Overseas Property declining 28.2%. As of 1H22, the firm's land reserve shrank 16.3% YoY, with that of China Overseas Property down 20.8%. Thanks to the real estate segment's advantage in brand strength, financing, and cost control, we expect it to maintain industry-leading sales in 2H22, supporting relatively stable revenue and earnings.
　　Financials and valuation
　　We maintain our 2022 and 2023 earnings forecasts. The stock is trading at 3.7x 2022e and 3.3x 2023e P/E. Maintain OUTPERFORM and TP of Rmb7.80 (5.7x 2022e and 5.1x 2023e P/E), offering 53.8% upside.
　　Risks
　　Unexpected declines in real estate investment; GFA of newly started housing construction projects continues to fall.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。