hsin chong construction group ltd. stock quote: 0404.hk current price: 1.09 target price: 1.99

Hsin Chong Construction Group Ltd.Stock quote: 0404.hkCurrent Price: 1.09Target price: 1.99PE: 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

Values

Vision, Mission and Values

Business DescriptionHsin 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)

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.

Company Outlook

Source: Hsin Chong website

2. Hsin Chong is riding on the HK construction boom

Company Outlook

Figure: Business Segment of Hsin Chong in 2010 - 2011

Source: Hsin Chong 2011 Annual Report

3. Outstanding Workload till 31 Jul 2012

Source: Hsin Chong 2012 Interim Report

Company Outlook

HSIN CHONGStrategic Transformation Outlook

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:

Company Overview: Strategic transformation

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.

Source: HKSAR Census and Statistics Department

Figure: Private and Public Sector Construction Spending in HK

Industry highlights

2) Structures & facilities work in HK registered significant growth since 2009.

Source: HKSAR Census and Statistics Department

Figure: Building and Structures & Facilities Work in HK

1) Long History and goodwill;

SWOT Analysis--Strengths

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.

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 fully-integrated property group.

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

• 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.


Summarize

• Capacity limitation• Diversified in property development• Failing to get orders beyond the company’s

capacity

SWOT Analysis--Weaknesses

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.

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 low-income 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.


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.


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)

4) Limited Qualified Players in the Industry

4a) Limited Qualified Players in the Industry


Types ofConstruction

licenses

Approved contractors for public works:

SWOT Analysis--opportunitiesFigure: List of Approved Contractors for Public Works in HK in 08/2012

Source: Development Bureau of HKSAR Government

SWOT Analysis--opportunitiesIn Hong Kong, the approved contractors for public works can be categorized into three classes:

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.

Grades of the class Maximum Contract Value

A 30 million

B 75 million

C No ceiling


Tieling City, a dream city concept exhibited in the Shanghai World Expo that might become the long-term development model of the Chinese government.

5) Tieling--building a dream city in China

• 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

Summarize


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.

For the whole industry:

•Increasing material cost•Increasing staff compensation•Shortage of professional workers

SWOT Analysis- Threats

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

Source: Hsin Chong Construction Group Ltd. Annual Report 2011

Key selected items(in HK $million)

Financial Analysis— Peer Comparison

Financial Ratio Analysis

Source: AASTOCKS.com

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)

Profit marginProfitability

Equity multiplier Financial leverageTax & Interest Burden

Source: Financial Statement of 404,3311,711,577,406 & HKBU RESEARCH

DuPont Analysis—Peers comparison

Hsin Chong Stock Report


Dividend History


Historical stock prices

Figure: 0404.HK 8 year

basic chart

Source: AA STOCK.com


Source: AA STOCK.com


basic chart


basic technical analysis



lower low

bullish divergence

higher high

bearish divergence

26day EMA longer and slower.

Peer Comparison—vs. Chun Woo 俊和發展集團 (711)

Compare % 3 year daily

Hsin Chong vs.

Chun Wo(711)


Peer Comparison—vs. Yao Lee 有利集團(406)


Hsin Chong vs.

Yau Lee(406)


Peer Comparison—vs. Paul Y 保華建業 (577)


Hsin Chong vs.

PAUL Y(577)


Industry highlights

Source: HKET 22/10/2012

Thank You!

hsin chong construction group ltd. stock quote: 0404.hk current price: 1.09 target price: 1.99

Documents

hsin chong website2

business segment of

provision of construction

property price

property management

civil engineering construction

new contracts

company outlooksource