2023 results largely in line with our expectations
　　China State Construction International (CSCI) announced that in 2023, revenue rose 11.5% YoY to HK$113.7bn; and net profit attributable to shareholders grew 15.2% YoY to HK$9.2bn. In 2H23, revenue increased by 22% YoY to HK$58.6bn; and net profit grew 15% YoY to HK$4.3bn. Its results in 2023 were largely in line with our expectations and market consensus.
　　Chinese mainland: Revenue increases markedly; boosting overall earnings at the company. In 2023, the firm's revenue on the Chinese mainland rose 36.1% YoY to HK$66.19bn, representing 58% of total revenue. GM of its business on the Chinese mainland slid 3.2ppt YoY to 19.4% in 2023, as the company increased efforts to grow high-turnover businesses. Gross profit of businesses on the Chinese mainland as a percentage of total gross profit reached 79% in 2023. Hong Kong SAR and Macao SAR: Businesses grow steadily; GM recovers. In 2023, the firm's revenue from Hong Kong SAR and Macao SAR fell 13% YoY to HK$41.6bn. Factoring out the impacts of pandemic prevention and control projects, revenue from Hong Kong SAR and Macao SAR increased by 10% YoY in 2023. In 2023, GM of businesses in Hong Kong SAR and Macao SAR rose 1.2ppt YoY to 6%; and gross profit from these regions as a percentage of total gross profit reached 15%. Profit margin increases. In 2023, the firm's overall GM rose 0.7ppt YoY to 14.4%; selling and G&A expense ratio fell 0.1ppt YoY to 2.3%; and net profit margin increased by 0.3ppt YoY to 8.1%. The firm completed the ROE target ahead of schedule. In 2023, its ROE increased by 1.2ppt YoY to 15.1%, reaching the target ROE level of 15% in 2025.
　　New orders continue to increase rapidly; technology and investment contracts increase notably. In 2023, the firm's new orders increased by 17% YoY to HK$188bn. Specifically, new orders on the Chinese mainland rose 4.5% YoY to HK$96.1bn; and new orders in Hong Kong SAR and Macao SAR grew 37% YoY to HK$80.5bn. By type of contracts, technology, investment, construction, and operation contracts accounted for 40%, 34%, 25%, and 1% of total new orders. New technology and investment orders increased by 45% and 21% YoY in 2023.
　　Cash flows continue to improve. Net cash inflows from operating activities increased in 2023, as the company stepped up efforts in cost control and project management. In 2023, net cash inflows from operating activities increased by HK$0.3bn YoY to HK$0.5bn (+150% YoY). Net cash inflows from operating activities on the Chinese mainland turned positive for the first time since the firm began to operate domestic businesses. In addition, investment cash flows rose HK$0.7bn YoY to HK$1.2bn in 2023.
　　Trends to watch
　　Continuing to improve projects on the Chinese mainland, Hong Kong SAR, and Macao SAR; selling MiC products in additional cities. We think the company has a leading position in Hong Kong SAR and Macao SAR, and it may continue to benefit from large construction programs in these regions. In addition, the firm focuses on high-quality regions on the Chinese mainland. In 2023, new orders in the Yangtze River region and the Guangdong-Hong Kong-Macao Greater Bay Area as a percentage of total new orders at the company reached 90%. The firm is selling MiC products in Beijing, Guangzhou, and Jiaxing. It has undertaken the Beijing birchbark plant retrofitting project and other projects that require advanced technologies. We think it may continue to undertake such projects and improve quality and efficiency on the back of its MiC and other advanced technologies. Advanced technologies will boost its growth in the medium and long term, in our opinion.
　　Financials and valuation
　　We maintain our 2024 earnings forecast and introduce our 2025 net profit forecast at HK$12bn. The stock is trading at 4.2x 2024e and 3.7x 2025e P/E. We maintain an OUTPERFORM rating, and consider the valuation switches to 2024, we lift our target price 5% to HK$11. Our TP implies 5.3x 2024e and 4.6x 2025e P/E, offering 25% upside.
　　Risks
　　Cash flows and/or orders disappoint.