For 1H2008, the company realized turnover of Rmb95.21bn (+25.8% yoy), net profit attributable to parent of Rmb1.88bn (+36.8% yoy) and basic EPS of Rmb0.09, mostly in line with our forecast.
Amount of new contracts sharply increased. The company signed contract amount of Rmb179.8bn, an increase of 39.7% yoy, of which fundamental construction accounted for Rmb155bn (+100.7% yoy) and fastest growth settled in railway construction (Rmb83.6bn) and urban roadway transportation (Rmb14.4bn). Apparently, the company benefited from rapid development of railway construction investment in the Eleventh-Five Year Plan, we forecast new contract amount signed in 2008 will be Rmb300bn at the lowest, thus future earnings are guaranteed by plentiful project reserves.
Composite gross margin maintained flat with that of 2007. During the period under view, raw materials went up while composite gross margin (10.9%) was basically flat year-on-year, presenting a climbing trend, which was basically in line with our forecast. This was mainly due to flat management and reduced management chains; meanwhile, centralized purchase of bulk materials and large-sized equipment effectively controlled producing cost. Composite gross margin is expected to continue steady advances.
Administrative expenses were effectively controlled. Management expense ratio stood at 4.29%, a decline of 1.1ppt yoy if deducted effects of Rmb1.174bn offset of welfare expenses, mainly thanks to reinforcement of adjustment on origination structure and management level reduction.
Earning forecast and rating: We forecast EPS 2008-2010E be Rmb0.22, Rmb0.30 and Rmb0.40, representing PE of 24x, 18x and 13x respectively, with relatively high estimation. Considering its leading position within the industry and comparatively explicit earning growth, we believe the company should have certain premium and maintain “Overweight” rating for the counter.
Potential risks: Higher short-term estimation and worse-than-expected railway construction investment in the Eleventh-Five Year Plan.