1H23 results in line with our expectations
　　China State Construction International (CSCI) announced its 1H23 results: Revenue rose 2.4% YoY to HK$55.11bn and net profit attributable to shareholders grew 15.1% YoY to HK$4.85bn, in line with our expectations.
　　GM rose 2.2ppt YoY to 15.7% in 1H23. Selling and G&A expense ratio　rose 0.2ppt YoY to 2.3%, and financial expense ratio rose 0.1ppt YoY to 2.8%. Attributable net profit from joint ventures and associates was HK$350mn, up 65.0% YoY, with HK$345mn from joint ventures (up 285.3% YoY) and HK$173mn from associates (down 22.9% YoY). Net margin rose 1ppt YoY to 8.8%.
　　In 1H23, net operating cash inflow was HK$168mn (vs. HK$102mn in　1H22). Net investment cash inflow fell HK$802mn YoY to HK$1.09bn. Net debt ratio fell 1.9ppt from end-2022 to 67.5%. The company distributed a dividend of HK27.5 cents per share in 1H23, maintaining a dividend payout ratio of 30%.
　　Trends to watch
　　Plans for large public buildings in Hong Kong SAR and Macao SAR boost market uptrend; cash flow on the Chinese mainland continues　to improve. In 1H23, the Hong Kong business continued to benefit from Hong Kong’s 10-year hospital development plan, with new orders up 41.1% YoY and turnover up 6.0% YoY. We remain upbeat on the implementation of large-scale public construction projects related to the Northern Metropolis Development Strategy and Lantau Tomorrow Vision.We estimate that it will provide room for the sustained growth of the company’s Hong Kong business.
　　In 1H23, new orders and revenue of the Chinese mainland business grew 8.0% and 46.7% YoY, and net cash outflow narrowed YoY. We believe the company will continue to focus on regions where it enjoys competitive advantages and strictly control project turnover, which will continue to improve cash flow and achieve sustained growth of the Chinese mainland business.
　　Proportion of technology-enabled businesses rose to 51%, and MiC and C-SMART technologies continued to be upgraded. In 1H23, the　company secured HK$49.6bn worth of new orders for its technology- driven businesses, a strong 67.9% YoY increase in new orders, and the　roportion of new orders increased significantly from 43.6% a year ago to 51.1%. In 1H23, the company continued to expand application fields and coverage of its MiC business. It expanded its presence in Anhui, Shenzhen, and Beijing with modular integrated construction (MiC) technologies for schools and elevators. The company continues to develop and apply six major construction technologies, and we believe technologies such as MiC and C-SMART construction technology sites will continue to empower project acquisition and improve quality and efficiency, providing momentum for sustained growth in the medium and long term.
　　Financials and valuation
　　We keep our earnings forecasts unchanged. The stock is trading at 4.7x 2023e and 4.2x 2024e P/E. We maintain an OUTPERFORM rating and target price of HK$12.3, implying 6.6x 2023e and 5.9x 2024e P/E and offering 41% upside.
　　Risks
　　Disappointing payment collection from business in the Chinese mainland; slower-than-expected progress of public construction projects in Hong Kong.