3Q23 results in line with our expectations
　　China State Construction International (CSCI) announced its 3Q23 results: In 1-3Q23, revenue and attributable revenue from joint ventures (JV) rose 7.7% YoY to HK$81.93bn, and operating profit and attributable profit from JV grew 17.6% YoY to HK$11.56bn. In 3Q23, revenue and attributable revenue from JV rose 23.8% YoY to HK$25.05bn, and operating profit and attributable profit from JV grew 10.0% YoY to HK$3.45bn, in line with our expectations.
　　Trends to watch
　　New contract value maintains double-digit growth in 1-3Q23; construction and technology-driven orders were strong growth drivers. In 1-3Q23, the new contract value totaled HK$140.4bn, up 11.7% YoY. By contract type, technology-driven, investment-driven, construction- driven, and operation-driven orders accounted for 39.3%, 20.5%, 38.8%, and 1.4%, and construction- and technology-driven orders grew 35.9% and 11.3% YoY, representing the major growth drivers of orders. We expect the firm to achieve its new contract value target of HK$180bn in 2023.
　　We expect the firm to maintain strong growth in Hong Kong SAR and Macao SAR thanks to construction of Northern Metropolis and public housing projects. According to corporate filings, the firm won the largest design-build public housing project in Macao to date, further consolidating its leading position in the Macao market. The Task Force for Collaboration on the Northern Metropolis Development Strategy held a meeting in Shenzhen on October 11. Financial Secretary of the Hong Kong SAR government Mr. Paul CHAN Mo-po, said that the construction of the Northern Metropolis is well underway, and the barrage scheme in Yuen Long, Hong Kong is the firm’s first large-scale infrastructure project in the Northern Metropolis.
　　In the medium-to-long term, we believe large public housing projects in Hong Kong SAR and Macao SAR will continue to drive strong demand for the housing and infrastructure construction businesses. We expect the firm to maintain rapid business growth in Hong Kong SAR and Macao SAR by leveraging its leading position in the local construction market and its technological strengths.
　　MiC (Modular integrated Construction) technology continues to be upgraded and penetrate the construction market; upbeat on the leading technologies to empower business expansion. The firm’s Modular Integrated Construction (MiC) product system has been applied in multiple scenarios such as residential, commercial, and urban renewal projects. According to corporate filings, the firm’s Huapichang project in Beijing is one of the first pilot projects in Beijing and the first in the Xicheng district involving building new housing in old residential communities for existing residents. The Baibu project in Jiaxing is the second high-rise concrete MiC in China and the first in Zhejiang, and it has received the first and only AAA prefabrication design certification in Zhejiang.
　　In addition, the firm utilizes technology to drive green transformation. On October 9, its subsidiary China State Construction Engineering (Hong Kong) Limited launched the first clean energy plan for the Hong Kong construction industry. The company is the first to introduce hydrogen power generation technology and develop a clean energy construction site in Hong Kong. Looking ahead, we believe technologies such as MiC will continue to empower project acquisition and improve quality and efficiency, providing momentum for the firm’s sustained growth in the medium and long term.
　　Financials and valuation
　　We keep our earnings forecasts unchanged. The stock is trading at 4.0x 2023e and 3.6x 2024e P/E. We maintain our OUTPERFORM rating. Considering the firm’s low risk appetite, we cut our target price 15% to HK$10.5, implying 5.6x 2023e and 5.0x 2024e P/E and offering 40% upside.
　　Risks
　　Disappointing order delivery, business expansion in the Chinese mainland, and construction demand in Hong Kong SAR.