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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.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.

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Hsin Chong Construction Group Ltd. Stock quote: 0404.hk Current Price: 1.09 Target price: 1.99

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  1. 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)

  2. AGENDA • COMPANY PROFILE • BUSINESS OVERVIEW • SWOT ANALYSIS • FINANCIAL ANALYSIS

  3. 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

  4. 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

  5. Vision, Mission and Values • Values

  6. 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

  7. 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.

  8. Hsin Chong possesses a stable clientele with long history of cooperation with various government departments, education institutes and MTRC. source: Interim report

  9. 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)

  10. 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

  11. Company Outlook Figure: Business Segment of Hsin Chong in 2010 - 2011 2. Hsin Chong is riding on the HK construction boom Source: Hsin Chong 2011 Annual Report

  12. Company Outlook 3. Outstanding Workload till 31 Jul 2012 Source: Hsin Chong 2012 Interim Report

  13. HSIN CHONGStrategic Transformation Outlook

  14. 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:

  15. Figure: Private and Public Sector Construction Spending in HK 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

  16. Figure: Building and Structures & Facilities Work in HK Industry highlights • 2) Structures & facilities work in HK registered significant growth since 2009. Source: HKSAR Census and Statistics Department

  17. 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. • 1) Long History and goodwill;

  18. SWOT Analysis--Strengths By achieving the strict standard with a full scope of services, transforming from a local construction company into a fully-integrated property group. • 2) Being a full-fledged one-stop construction and property related services provider;

  19. SWOT Analysis--Strengths 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 • 3) Experienced management team;

  20. 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.

  21. SWOT Analysis--Weaknesses • Aspects beyond the company’s capacity includes: • The equipment and technology limit make the group unable to bid some large contracts. • Firm’s capacity may limit for future expansion. • Capacity limitation • Diversified in property development • Failing to get orders beyond the company’s capacity

  22. SWOT Analysis--opportunities 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. • 1) Increasing land supply to meet underlying housing demand

  23. SWOT Analysis--opportunities 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. • 2) Increasing public housing supply for low-income class

  24. SWOT Analysis--opportunities 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. • 3) Significant increase in the public sector’s spending—10 mega infrastructure projects in the pipeline

  25. 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)

  26. SWOT Analysis--opportunities Approved contractors for public works: Types of Construction licenses • 4a) Limited Qualified Players in the Industry

  27. SWOT Analysis--opportunities Figure: List of Approved Contractors for Public Works in HK in 08/2012 Source: Development Bureau of HKSAR Government

  28. SWOT Analysis--opportunities • In 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.

  29. 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.

  30. 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;

  31. SWOT Analysis--opportunities • The future for the industry is quite promising: • 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.

  32. SWOT Analysis- Threats • For the whole industry: • Increasing material cost • Increasing staff compensation • Shortage of professional workers

  33. Labour costs are rising steadily source: Census and statistics dpt.

  34. 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

  35. Financial Highlights Key selected items(in HK $million) Source: Hsin Chong Construction Group Ltd. Annual Report 2011

  36. Financial Analysis— Peer Comparison Financial Ratio Analysis Source: AASTOCKS.com

  37. Asset turnover Operating efficiency Equity multiplier Financial leverage Profit margin Profitability Tax & Interest Burden 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)

  38. DuPont Analysis—Peers comparison Source: Financial Statement of 404,3311,711,577,406 & HKBU RESEARCH

  39. Hsin Chong Stock Report Source: AASTOCKS.com

  40. Dividend History Source: AASTOCKS.com

  41. Historical stock prices Figure: 0404.HK 8 year basic chart Source: AA STOCK.com

  42. Figure: 0404.HK 3 year basic chart Historical stock prices Source: AA STOCK.com

  43. higher high Figure: 0404.HK 1 year basic technical analysis lower low bearish divergence Historical stock prices bullish divergence 26day EMA longer and slower. Source: AASTOCKS.com

  44. 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

  45. Peer Comparison—vs. Yao Lee 有利集團 (406) Compare % 3 year daily Hsin Chong vs. Yau Lee(406) Source: AASTOCKS.com

  46. Peer Comparison—vs. Paul Y 保華建業 (577) Compare % 3 year daily Hsin Chong vs. PAUL Y(577) Source: AASTOCKS.com

  47. Industry highlights Source: HKET 22/10/2012

  48. Industry highlights Source: HKET 22/10/2012

  49. Thank You!

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