Hsin Chong Construction Group (404.HK) A New Chapter of HC

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1 Company Research Report Company Research Report Date Industry 2013/10/07 Construction Hsin Chong Construction Group (404.HK) A New Chapter of HC Buy Closing Price Target Price $1.11 $1.99 Share Information Stock Code 404 Outstanding Shares (bn) 2.86 Market Cap ($bn) mth Avg Daily Turnover ($mn) mth High/Low ($) 1.67/0.84 CFPS ($) 0.23 BVPS ($) 2.23 P/E (x) 10.7 P/B (x) 0.52 ROA (%) 8.71 ROE (%) 2.76 Debt/Equity (%) Div. Yield (%) 4.50 Price Performance HKD$ HC HSI /12 01/13 04/13 07/13 10/13 1-mth 3-mth 6-mth 12-mth Change (%) Rel. to HSI (%) Research Department Tel : (852) Fax : (852) esl.research@emperorgroup.com Completion of New Times Plaza : On 25 September, 2013, HC had been completed the acquisition of the New Times Plaza in Beijing, with valuation over RMB1.7 bn. We believe that after the acquisition of New Times Plaza in Beijing, including HC s currently property development in Tieling, at Liaoning Province, HC is transforming from top construction co. into fully-integrated property group. Successful Placing of the HK$1.35bn: On 25 Sept. 2013, under the placing agreement, HC successfully placed 1.35bn shares with HK$1.00 per share to not less than 6 placees. The gross proceeds are HK$1.35bn and the net proceeds after deducting placing commission are HK$1.28bn. After the completion of placing, HC used the proceed of HK$250mn to redeem NSL convertible bond, and NSL has to converted the remaining balance of convertible bond (the principal amount of HK$509mn) into shares at conversion price of HK$1.53 per share. Diversify the Source of HC s Income: Following the completion of the acquisition, HC can further enhance its property investment portfolio in the first tier city in the PRC and will benefit from: 1.) Beijing has one of the highest per capita resident income levels in the PRC; 2.) Beijing is the center to the headquarters of many major multinational companies, and China s state-owned enterprises in the PRC. The acquisition of New Times Plaza will be a further step for HC to continue expanding its property business in the PRC and diversify its source of Income. Maintain Buy recommendation, target price $1.99: We maintain the buy recommendation with a target price of $1.99, based on 19.0x FY13E P/E falling to 7.9x FY14E. The NAV discount will be narrowed eventually as investors begin to recognize its property development profit potential in China and we expected that HC will proceed more related projects for development in the near future. Financial Information Year Ended 31 Dec. FY11 FY12 FY13E FY14E FY15E Revenue ($mn) 5,884 7,249 9,725 13,975 15,869 Growth (%) 53% 23% 34% 44% 14% Net Profit ($mn) Growth (%) 26% 4% 57% 142% -13% EPS ($) Growth (%) 22% -23% -45% 142% -13% P/E (x) DPS Dividend Yield (%) 5.4% 4.2% 2.3% 5.6% 4.9% 1

2 Figure 1: HC s shareholding structure change after the completion of the acquisition and the placing as well as before and after the the NSL convertible bond Before and the After but before the After and the No. of Shares % No. of Shares % No. of Shares % The estate of 375,921, ,921, ,921, the deceased Dr. David CHU Shu-ho Dr. Catherine 790, , , CHU Sub-total 376,711, ,711, ,711, Mr. Wilfred 20,000, ,000, ,000, WONG Yingw ai NSL 143,000, ,000, ,816, Sub-total 163,000, ,000, ,816, Public Existing public 635,638, ,638, ,638, Placees Sub-total of public 635,638, ,985,638, ,985,638, Total 1,175,349, ,525,349, ,858,166, Source: Hsin Chong Construction Group 2

3 Income Statement HKD(million) Year Ended 31 Dec E 2014E 2015E Revenue Cost of Good Sold (5378) (6789) (9032) (12593) (14520) Gross Profit Share of net profit GA Exp. (319) (342) (459) (660) (750) Other income Other loss (27) (30) (44) (63) (72) Operating Profit Net Finance Cost (4.0) 9.0 (13.6) (17.4) (19.7) Profit Before Tax Tax (22) (21) (34) (156) (136) MI Net Profit EPS DPS Cash Flow Statement HKD(million) Year Ended 31 Dec E 2014E 2015E CF from Operating Act CF from Investment Act. (273) 60 (948) (832) (498) CF from Financial Act Cash & CE at beg. of year Inc./(dec.) in Cash & CE (35) (18) 90 Exchange gains / loss Cash & CE at end of year Balance Sheet HKD(million) E 2014E 2015E Prop. Develop Stocks & Contracts Rec. & Prepay Other Current Asset Bank bal. & Cash Current Assets PPE Invest. Prop Intangible Asset Goodwill J-Control Entities Other NC Asset Non-current Assets Total Assets Bank loans Payable & Accruals Cur. tax liab Others (0) 0 0 Current liabilities Senior loan note Convertible bonds Def. tax liab Others Non-current liabilities Total Liabilities Equity Financial Ratio Year Ended 31 Dec E 2014E 2015E Profitability (%) Gross Margin 9% 6% 7% 10% 8% EBITDA Margin 6% 5% 5% 8% 6% EBIT Margin 4% 3% 3% 6% 5% Pre-tax profit margin 4% 3% 3% 6% 5% Net Profit Margin 3% 2% 3% 5% 4% Growth Rate (%) 0% 0% 0% 0% 0% Revenue 53% 23% 34% 44% 14% EBITDA 16% -1% 46% 109% -8% EBIT 16% -11% 72% 160% -12% Net Profit 26% 4% 57% 142% -13% EPS 22% -23% -45% 142% -13% Operation Current Ratio (X) Quick Ratio (X) GA Exp/ Sales (%) 5% 4% 4% 4% 4% A/R (Day) A/P (Day) Financial Ratio Div. Payout Ratio (%) 27% 24% 24% 24% 24% Net debt/equity (%) 47% 36% 40% 38% 34% Sales / total assets (x) Total assets / equity (x) Return on Asset (%) 4% 3% 3% 7% 5% Return on Equity (%) 14% 9% 9% 16% 12% 3

4 DISCLAIMERS & DISCLOSURES The information contained in this report has been compiled from sources believed to be reliable and has been compiled with high integrity, but Emperor Securities Limited ( Emperor Securities ) or any member of Emperor Capital Group ( ECG ) does not make any representation or warranty as to its accuracy, completeness or correctness. The information and opinions contained in this report are or may be subject to change or revision without any notice. This report is for information purposes only. No representation, warranty or guarantee whatsoever, whether expressed or implied, is made as to its accuracy or completeness and should not be construed as an offer to buy or sell or the solicitation of an offer to buy or sell the securities mentioned. Emperor Securities and ECG do not accept any responsibility or liability whatsoever for any direct or consequential loss or damage of whatsoever nature arising from or as a result of the use in whole or in part of this report or any of its contents. The research analyst(s) who prepared this report hereby confirm the views expressed in this report only reflect the personal views of the research analyst(s) about the subject company(ies) and their securities. The research analyst(s) also confirm the research analyst(s) were not, are not, and will not be receiving any direct or indirect compensation or other benefits for expressing the specific recommendation(s) or view(s) in this report. Emperor Securities and ECG and their respective directors, officers, partners, representatives, or employees may have positions or otherwise be directly or indirectly interested in the securities mentioned in this report or may buy, sell, or deal or offer to buy, sell, or deal in or with such securities from time to time, whether as principal for its or their own account or as agent or in any other capacity for or on behalf of another person. Copyright protection and other rights exist or subsist in this report, which may accordingly not be used for any other purpose, nor sold, distributed, published, or reproduced in any manner without the express consent of Emperor Securities., Research Department Mr. Stanley Chan Mr. David Yuen Associate Director Tel : (852) stanleychan@emperorgroup.com Senior Research Analyst Tel : (852) davidyuen@emperorgroup.com Ms. Chelsey Tam Research Analyst Tel : (852) chelseytam@emperorgroup.com Mr. Frankie Chan Research Analyst Tel : (852) frankiechan@emperorgroup.com 4

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