Hsin Chong Construction Group Ltd.
Stock quote: 0404.hk
Current Price: 1.09
Target price: 1.99
PE: 3.76
Emperor Securities Ltd. (30/8/2012)
AGENDA
 COMPANY PROFILE
 BUSINESS OVERVIEW
 SWOT ANALYSIS
 FINANCIAL ANALYSIS
Company Profile
Hsin Chong Construction Group Ltd. (0404.HK)
• Founded in 1939 and listed on HKEX in 1991
• 8,674 Employees
• Mainly operating in Hong Kong, Macau, and PRC
• Turning attention to property development in China --acquiring land
for $1.83bn in Tieling in 2011
Vision, Mission and Values
Vision:
The leader in Construction and Property- related
Services
Mission:
We are committed to
•Creating value for our customers and delivering
quality services at world-class standard
•Delivering value to our shareholders through
maximizing market share and returns
Vision, Mission and Values
Values
Integrity
Service
Teamwork
Quality
Social
Responsibility
Innovation
Business Description
Hsin Chong Construction Group Ltd. is an investment holding company which covers
a wide range of businesses including:
1. Building construction,
2. Civil engineering construction,
3. Electrical and mechanical installation,
4. Renovation and fitting-out,
5. Property development and investment,
6. Provision of construction,
7. Management consultancy services,
8. Property management and facility management
services.
The company enjoyed a history of over 70 years
and sound track record.
source: annual report
Business description and Industry Overview
1. Second biggest of the “big 4” in its local industry (along with Tysan
Holding Ltd (0687), Chun Wo Development Ltd (0711) and Yau Lee
Holding Ltd (0406)); with the largest competitor China State Construction
International Holdings Ltd (3311) from Mainland China.
2. Industry characteristics: Aperiodic (related to projects available, rather
than property price), low gross margin, high gearing ratio to finance
projects and long payback period;
3. Key gauging parameter: New Contracts Received, which represents the
additional revenue stream in the future, and Outstanding Workload that
brings revenues that were pre-set in previous contracts.
Hsin Chong possesses a stable clientele with long history of cooperation
with various government departments, education institutes and MTRC.
source: Interim report
Landmark Projects
• Ocean Park in Aberdeen (1976)
• New Housing Authority Headquarters Building
(1980)
• KCRC Station Redevelopment (1998)
• Venetian Group project in the Cotai Strip of
Parcels 5/6 (2013E)
Company Outlook
1. New Contracts
On 18 July, 2012, HC announced two newly-awarded
contracts(HK$12.6bn):
• Galaxy Resort & Casino Phase 2 in Cotai City, Macau.
• MTR Station Shatin to Central Link Contract No.1109, Two
Railway Stations and 1,600 metres Railway Tunnels.
Source: Hsin Chong website
Company Outlook
2. Hsin Chong is riding on the HK construction boom
Figure: Business Segment of Hsin Chong in 2010 - 2011
Source: Hsin Chong 2011 Annual Report
Company Outlook
3. Outstanding Workload till 31 Jul 2012
Source: Hsin Chong 2012 Interim Report
HSIN CHONG
Strategic Transformation Outlook
Industry
DiversificationExpanding into higher
profit margin property
development as a longterm commitment.
Transforming top
construction co. into fullyintegrated property group.
Establishing a
competitive advantage
over the peers
HC will benefit from its large
exposure in the building
construction segment.
The Tieling project in China
would become a new
earning growth driver in the
future, with the support from
stable traditional
construction business.
Company Overview: Strategic transformation
Property development:
1. Hsin Chong has acquired 1.8 million squared meters of land in Tieling, Liaoning
valued at 2.5 billion HKD, and it is planning for the next 6-8 years to develop a new
township comprised of both residential and commercial properties with total planned
gross floor area of 3 million square meters.
The Tieling project in China would become a new earning growth driver in the future:
Industry highlights
1. Since 2006, construction activities in Hong Kong have bounced back:
private sector increased from $24.86bn in 2006 to $35.28 in 2011 and
public sector increased from $17.14bn in 2006 to $42.07bn in 2011.
Figure: Private and Public Sector Construction Spending in HK
Source: HKSAR Census and Statistics Department
Industry highlights
2) Structures & facilities work in HK registered significant growth since 2009.
Figure: Building and Structures & Facilities Work in HK
Source: HKSAR Census and Statistics Department
SWOT Analysis--Strengths
1) Long History and goodwill;
HC has gained a good reputation during the past decades.
The group has demonstrated its construction expertise in
many landmark private and government projects. It was
awarded contracts from Hong Kong Housing Authority, MTR,
Venetian Orient, Swire, Huawei, HSBC, etc.
These positive track records help HC’s future development.
SWOT Analysis--Strengths
2) Being a full-fledged one-stop construction and
property related services provider;
By achieving the strict standard with a full scope of services,
transforming from a local construction company into a fullyintegrated property group.
SWOT Analysis--Strengths
3) Experienced management team;
HC also has a group of experienced management teams which
is capable of meeting the strict standard in the industry. Wilfred
Wong, Chairman of HC, has over 20 years of experience in
property development and construction and is currently a Deputy
to the NPC of the PRC. This is useful in PRC business
development
SWOT Analysis--Strengths
Summarize
• Long History and a good reputation;
• Being a full-fledged one-stop construction and property
related services provider;
• Experienced management team;
• Being one of the contenders awarded the grade C
contractor;
• Strong technical team;
• Quality;
• Site safety assurance.
SWOT Analysis--Weaknesses
• Capacity limitation
• Diversified in property development
• Failing to get orders beyond the company’s
capacity
Aspects beyond the company’s capacity includes:
1)The equipment and technology limit make the
group unable to bid some large contracts.
2)Firm’s capacity may limit for future expansion.
SWOT Analysis--opportunities
1) Increasing land supply to meet underlying
housing demand
The new government led by Mr. CY Leung has
committed to ease the shortage in housing, implying
that future land supply should be enough to meet local
housing need. The increase in land supply would
eventually bring about a significant increase in
construction work in future.
SWOT Analysis--opportunities
2) Increasing public housing supply for lowincome class
According to the 2011-12 Policy Address, the
government pledged to complete construction of about
75,000 units of public housing units in the next 5 years
to reduce the average waiting period to 3 years. The
significant increase in public housing supply in the next
few years would benefit the local construction sector.
SWOT Analysis--opportunities
3) Significant increase in the public sector’s
spending—10 mega infrastructure projects in
the pipeline
According to the previous Policy Address, the
government has committed for the 10 mega
infrastructure projects. The significant increase in
public sector spending in the next few years would
benefit the local construction sector.
SWOT Analysis--opportunities
4) Limited Qualified Players in the Industry
Based on the four major types of public works
(excluding port works) only 16 out of 256 contenders
(See Chart ) were awarded the grade C contractor
license as of July 2012.
Between1998 to 2006, the relatively low business
volume and fierce competition within the industry has
forced some weaker players out the market in the last
decade. (See Figure)
SWOT Analysis--opportunities
4a) Limited Qualified Players in the Industry
Approved contractors for
public works:
1) buildings
Class A
• up to $30million
2)port works
5)Waterworks
Types of
Construction
licenses
Class B
• up to $75million
Class C
3) roads and
drainage
4)Site
formation
• any values exceeding $75million (no
ceiling)
SWOT Analysis--opportunities
Figure: List of Approved Contractors for Public Works in HK in 08/2012
Source: Development Bureau of HKSAR Government
SWOT Analysis--opportunities
In Hong Kong, the approved contractors for public works can be categorized
into three classes:
Grades of the class
Maximum Contract Value
A
30 million
B
75 million
C
No ceiling
Hsin Chong is one of the few C license holders in Hong Kong and only 16
out of 256 contenders were awarded the grade C contractor license as of
July, 2012. (See figure)
Among the “Big Four”, only Chun Wo and Hsin Chong has 4 C grades. After
the 10 mega infrastructure projects rolls out, these two companies would
massively benefit from the grade since there is less competition.
However, in the smaller scale contracts, this advantage will not be as
obvious. The competition might be more fierce.
SWOT Analysis--opportunities
5) Tieling--building a dream city in China
Tieling City, a dream city concept
exhibited in the Shanghai World Expo
that might become the long-term
development model of the Chinese
government.
SWOT Analysis--Opportunities
Summarize
• Increasing land supply to meet underlying housing demand;
• Increasing public housing supply for low-income class;
• Significant increase in the public sector’s spending on
infrastructure projects;
• Limited qualified players in the industry;
• Tieling--building a dream city in China;
SWOT Analysis--opportunities
The future for the industry is quite promising:
a)40,000 residential houses will be provided every year and the new
Chief Executive of Hong Kong has promised more.
b) The government has asserted 62.3 billion HKD in expenditure in
infrastructure, rising from 30 billion two years ago.
c) The Mega 10 infrastructure projects will be initiated on schedule.
SWOT Analysis- Threats
For the whole industry:
•Increasing material cost
•Increasing staff compensation
•Shortage of professional workers
Labour costs are rising steadily
source: Census and statistics
dpt.
Risk factors
• Failure to win orders
• Cost hikes
• Strong-than-expected competition hurting margin
• Management diverting resources to property
development
• Refinancing risk
• Project quality problems
• Miscalculation of project financials resulting in losses
Financial Highlights
Key selected items(in HK $million)
2011
2010
2009 2011vs 2010
6381
4258
3482
50%
83%
Gross profit
540
445
369
21%
46%
Net profit after taxation
190
157
119
21%
60%
Profit attributable to equity holders
172
136
109
26%
58%
Basic earning per share
(in HK cents)
24.8
20.3
16.3
22%
52%
Revenue
Gross margin
8.50% 10.50% 10.60%
Net margin
3.00% 3.70% 3.40%
Source: Hsin Chong Construction Group Ltd. Annual Report 2011
2010 vs 2009
Financial Analysis— Peer Comparison
Company Code
Closing
Price
MtkCap
(10/10/2012)
(HKD)
HSIN
CHONG
EPS
HKD(bn)
2011
2009
2011
2010
2009
Financial
Ratio
Analysis
1.10
0.248 0.203 0.163
4.76
6.11
5.03
20.26
21.65
33.03
-0.06 0.0362
9.38
N/A
9.39
0.0812 0.1642 0.1286
16.87
6.09
8.94
404
1.18
3311
8.96
35.65
CHUN WO
711
0.57
0.55
YAO LEE
406
1.37
0.6
CSCI
Source: AASTOCKS.com
PE(x)
2010
0.4422 0.3362 0.2492
0.0576
DuPont Analysis
• The investors value a company by decomposing ROE into
four parts:
•
ROE = (Net Income/Equity)
= (Net Income/EBIT)*(EBIT/Sales)*(Sales/Assets)*(Assets/Equity)
Tax & Interest Burden
Profit margin
Profitability
Asset turnover
Operating efficiency
Equity multiplier
Financial leverage
DuPont Analysis—Peers comparison
Tax&Interest
burden
Company
404
2011
2010 2011
0.88
0.85
Favorable
3311
Profit margin
2010
0.03
0.04
Assets turnover Equity multiplier
2011
1.06
2010
1.63
Favorable
Fair
2011
2010
3.08
3.21
Fair
market
cap(current)
ROE
2011
9.71
2010
19.33
1090000000
Favorable
0.83
0.12
0.11
0.61
0.64
2.81
4.04 15.90
24.23
34020000000
711
0.38 -10.51
0.04
0.00
0.78
0.77
2.82
2.95
3.66
(4.15)
548040000
577
0.16
0.17
0.05
0.05
1.29
1.64
5.19
4.36
5.15
5.59
437010000
406
0.44
0.76
0.02
0.03
1.22
1.18
2.70
2.17
2.58
5.14
578230000
0.74
Source: Financial Statement of 404,3311,711,577,406 & HKBU RESEARCH
Hsin Chong Stock Report
Hsin Chong Stock Report Details
Issue Type
Common Stock
Market Cap
1.09B
52 Weeks High
1.43
52 Weeks Low
0.75
PE
4.96
Yield
5.08
NAV
1.9286
EPS
0.2480
DPS
0.06
Price/PNAV
0.6118
Source: AASTOCKS.com
Dividend History
announcem
Year-End Event
ent
Particular
Payable Date
24/8/2012
2012/12
Interim
0.0250
5/10/2012
23/3/2012
2011/12
Final
0.0250
25/6/2012
31/8/2011
2011/12
Interim
0.0350
7/10/2011
28/3/2011
2010/12
Final
0.0300
15/6/2011
20/8/2010
2010/12
Interim
0.0300
30/9/2010
13/4/2010
2009/12
Final
0.0550
7/7/2010
11/9/2009
2009/12
Interim
0.0250
20/10/2009
1/4/2009
2008/12
Final
0.0200
9/6/2009
5/12/2008
2008/12
Interim
0.0200
6/1/2009
Source: AASTOCKS.com
Historical stock prices
Figure:
0404.HK
8 year
basic chart
Source: AA STOCK.com
Historical stock prices
Figure:
0404.HK
3 year
basic chart
Source: AA STOCK.com
Historical stock prices
higher high
Figure:
0404.HK
1 year
basic technical analysis
lower low
bearish divergence
bullish divergence
26day EMA longer
and slower.
Source: AASTOCKS.com
Peer Comparison—vs. Chun Woo
俊和發展集團(711)
Compare %
3 year daily
Hsin Chong
vs.
Chun Wo(711)
Source: AASTOCKS.com
Peer Comparison—vs. Yao Lee 有利集團 (406)
Compare %
3 year daily
Hsin Chong
vs.
Yau Lee(406)
Source: AASTOCKS.com
Peer Comparison—vs. Paul Y 保華建業 (577)
Compare %
3 year daily
Hsin Chong
vs.
PAUL Y(577)
Source: AASTOCKS.com
Industry highlights
Source: HKET 22/10/2012
Industry highlights
Source: HKET 22/10/2012
Thank You!