Year to date, China Railway Construction Corp’s share price has already gained by a fifth, but analysts, to a tee, still believe the stock is worth investing in. According to Bloomberg data, the 18 analysts with active coverage on this stock all rate this counter “buy” or equivalent. CICC is the most bullish, with a target price of HK$12.85 ($2.20), while others are mainly in the HK$7 to HK$9 range.
Using current metrics, China Railway Construction’s share price is attractive. It trades at a historical P/E of just 3 times and a forward P/E of 2.5 times while yielding 5.35%. Earnings for FY2022 ended December 2022 increased by 7.9% y-o-y to RMB26.6 billion ($4.9 billion) on the back of a revenue of RMB1.1 trillion, up 7.48%.
Historically, the company can trace its roots to the Railway Engineering Corps, a unit of China’s military. Since it was corporatised and eventually listed in 2008, it has built up operations all over China and in more than 130 countries and regions worldwide, undertaking high-profile projects like building the main stadium in Qatar for the World Cup. Its scope of activities covers project planning and design consultation, real estate development, industrial manufacturing and materials logistics. It provides investment, financing and maintenance to project owners too.
In FY2022, the value of newly-signed contracts amounted to RMB3.25 trillion, up 15.09% over the preceding year. By the end of 2022, 14,038 public-private partnership projects were registered (but not awarded) with the Chinese government, with an investment value of RMB20.92 trillion.
Given the company’s heft, it is in good stead to win a fair share of these contracts. The post-pandemic business environment should bode well for the company. “China Railway Construction’s strong backlog and market-share gains should secure revenue amid faded pandemic impacts, which could underpin more than 10% profit growth in the next two years,” estimates Bloomberg Intelligence analyst Denise Wong.
She warns, however, that over the longer term, domestic orders growth might slow to the low-double digits as the company turns more selective and as high-quality projects could be increasingly scarce due to an already high base.
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Another reason is local governments’ financing constraints and the country’s greater focus on digital networks, which require limited civil works. For the nearer term, China Railway Construction’s revenue and profit growth is seen to accelerate in the next few quarters due to easing comparisons vs 2022, which was still largely hurt by the pandemic.
For the most recent 1QFY2023 ended March, the company’s revenue increased by 3.4% y-o-y from an increase in construction activities. Earnings, in the same period, were up 5.1% y-o-y. It won new orders worth RMB540 billion, up 16% y-o-y.
Still, she adds that the company may beat its internal target of RMB3.31 trillion of new orders, or 2% growth, based on 1Q’s momentum. Based on our in-house valuation, we think China Railway Construction Corp’s intrinsic value is around HK$6.22, around 10% above its current trading price of HK$5.57.
