1H14 in line
In 1H14, MCC recorded revenue of Rmb96.2bn (+5.5% YoY) and net profit of Rmb1.81bn, implying EPS of Rmb0.09, up 22.2% YoY, in line with our expectation.
Revenue growth not high, the company paid more attention to quality than scale. Gross margin fell, while expense ratio declined by a sharper magnitude; net margin increased. In 1H, gross margin fell 0.8ppt YoY to 12.3% due to rapid increase in housing construction business with low gross margin. Security deposit for engineering projects increased, leading to increase in net operating cash outflow.
Trends to watch
Newly signed orders surged sharply. In 1H, the company signed new orders jects (+79.6% YoY), implying obvious effect of transformation. Resource segment reduced loss notably, driving rapid growth of earnings. The company's resource segment mostly made a turnaround, and the capacity utilization ratio increased. As such, 2H should make more contribution to earnings.
Earnings revisions
Maintain earnings forecasts and TPs. We maintain 2014/15e net profit of Rmb4bn/5.5bn (+34.2%/37.5% YoY), with EPS unchanged at Rmb0.21/0.29. Maintain TPs of Rmb2.3/HK$2.3 for MCC-A/H.
Valuation and recommendation
The resource segment reduced loss significantly, and the transformation took effect. Maintain BUY. Currently, MCC-H is trading at 7.2x/5.1x 2014/15e P/E and 0.6x/0.5x P/B. Maintain BUY given the company's strong transformation (e.g. expansion o, partial land disposal and transfer of asset beneficiary rights on BT projects to accelerate cash recovery, exploration of mixed ownership for small companies and big projects), asset quality improved, rapid growth of earnings and re-rating opportunities.
Risks
Resource price decline or slower than expected development.