SINOMA INTERNATIONAL ENGINEERING(600970)：OPTIMIZES BUSINESS MODEL; CEMENT ENGINEERING LEADER TO TAKE OFF

　　Investment positives
　　We initiate coverage on Sinoma International Engineering with an OUTPERFORM rating and a target price of Rmb17.30, implying 16x　2023e and 13x 2024e P/E based on the P/E valuation method. Sinoma is the world's largest provider of cement technology, equipment, and engineering system integration services. It has three main businesses: Engineering, equipment, and operation & maintenance.
　　Why an OUTPERFORM rating?
　　Engineering business entering new growth period, which should boost Sinoma's long-term growth. Sinoma mainly provides　engineering and technological services represented by cement engineering, procurement, and construction (EPC) services. In recent years, domestic demand for new cement production lines has shrunk, and production line construction has slowed in overseas markets.
　　Therefore, we expect relatively limited incremental demand from new cement projects. However, the firm may explore technical upgrading of a large number of its clients’ old production lines, both in China and abroad. The per-line value of such services is high, and could contribute to growth in the firm’s engineering business.
　　Furthermore, Sinoma is diversifying its engineering business and seeking incremental volume in fields such as environmental protection and green energy. In the medium term, we believe engineering services will remain the primary revenue contributor and expect this business unit to optimize its efficiency and grow steadily.
　　Business structure adjustment and business model optimization enable Sinoma to explore new growth boundaries. Sinoma’s　strategy is to focus on one core business and two main growth drivers, optimizing its presence in equipment manufacturing and operation & maintenance services. We believe there is still plenty of space for expansion in the equipment business. The equipment and engineering businesses could support each other and generate significant synergies. As an extension of the value chain, operation & maintenance services are asset-light, high-GM, and flexible. We think the firm can replicate its success in new projects based on its experience.
　　Given the ample room for exploring potential property owners' needs and that property owners usually sign long-term contracts, we expect the operation & maintenance business to grow faster than the firm’s other businesses. The operation & maintenance and equipment businesses cover hardware and software; we expect them to increase the firm's profit margin and ROA and contribute more than 50% of gross profit in 2023, becoming a crucial earnings contributor.
　　To continue benefiting from China's Belt and Road Initiative. This　year marks the 10th anniversary of the Belt and Road Initiative (BRI), and we believe there is still a large demand for specialized engineering projects in Belt and Road regions. The firm's new overseas contracts grew rapidly in 1H23, up 205% YoY in 1H23 and 519% YoY in 2Q23. We believe the firm will continue to benefit from the BRI given its long-term efforts to develop overseas business, robust technology, good reputation, rich customer resources, and efforts in diversifying businesses. We think its ample backlog of contracts will lay a solid foundation for future earnings growth.
　　How do we differ from the market? The market thinks that the cement　engineering business lacks incremental volume. However, we think the exploration of existing production line businesses and the rapid ramp-up of equipment and operation & maintenance businesses can serve as new growth drivers.
　　Potential catalysts: Progress in the BRI fuels the firm’s overseas orders ramp-up; operation & maintenance and equipment businesses grow faster than expected.
　　Financials and valuation
　　We estimate the firm’s 2023 and 2024 EPS at Rmb1.07 and Rmb1.29, with a CAGR of 25%. The stock is trading at 13x 2023e and 10x 2024e P/E. We assign an OUTPERFORM rating and a target price of Rmb17.30 (16x 2023e and 13x 2024e P/E), offering 28% upside.
　　Risks
　　Fluctuations in overseas demand; disappointing contract execution; slower-than-expected development of equipment and operation & maintenance businesses.
【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。

   【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。