Investment positives
We initiate coverage on Horizon Construction Development with an OUTPERFORM rating and a target price of HK$3.00, based on 4.8x 2024e EV/EBITDA. The firm is a domestic leader in equipment operation services, ranking first in terms of market share for various equipment.
Why an OUTPERFORM rating?
Rental market for construction machinery and equipment nearing Rmb1trn; AWP rental market highly concentrated. The construction machinery and equipment operation service market now exceeds Rmb900bn, and is likely to maintain a CAGR of about 10% through 2027 thanks to an increasing penetration rate of rental services. However, the market is fragmented due to the low barriers to entry and wide varieties of equipment.
The combined market share of the top-three construction machinery and equipment rental companies was 1.5% in China in 2021, well below the 34% in the US. However, the concentration rate of the aerial work platform (AWP) rental segment exceeds the sector average, with the combined market share of the top-three firms standing at 58% in 2022, due to the high unit prices of AWPs, short service cycle per rental contract, high requirements for operating capabilities, and low barriers to use.
AWP rental market rapidly growing; improving economies of scale and rising market share for leading names. The more practical, safe and efficient AWPs are replacing traditional scaffoldings. The ownership of AWP equipment totaled about 490,000 units in 2022, and the rental market for such equipment was Rmb13.3bn. The AWP rental market may grow at a CAGR of 16% to Rmb31.0bn in 2027, thanks to expanding use cases and strengthening marketing efforts.
Small companies have largely stopped procuring new equipment or started entrusting their equipment to others due to falling rental prices, funding shortage and heavy debt servicing burden. Meanwhile, leading companies have kept scaling up and gaining market share on the back of their advantages in funding and operation. Leading AWP rental companies have enjoyed improving economies of scale and above-industry operating efficiency since 2023.
Horizon Construction Development: A leading AWP rental service provider with solid business operation. The firm enjoys strong advantages in the AWP rental market.
Economies of scale: The firm boasts about 180,000 AWPs under management and over 400 service outlets as of end-2023, and leads the sector in terms of the leasing rate.
Funding: Thanks to the support from its major shareholders, the firm has ample lines of credit from banks at a low financing cost (4.2%- 4.3%). In addition, Shanghai Horizon Equipment & Engineering (major platform for business operation in the Chinese mainland) has been assigned the “AAA” corporate credit rating by China Chengxin International Credit Rating.
Supply chains: The firm partners with numerous financial leasing companies to operate its sublease business under an asset-light model. We believe this may help accelerate the expansion in its equipment volume. The firm had over 50,000 AWPs under the asset- light model as of 3Q23.
Solid business operation: The firm seeks to match the terms of its assets and liabilities, and strictly controls the quality of its accounts receivable through its stringent risk control system. In addition, the firm is taking the lead in overseas expansion and expanding to new varieties of equipment, conducive to boosting its growth。
How do we differ from the market? We think the market has overlooked the firm’s advantages in funding and cash flow management, which we think are crucial in the market for equipment operation services.
Potential catalysts: Improving stock liquidity; exit of mid-sized rental companies; accelerating overseas development
Financials and valuation
Our EPS forecast is Rmb0.41 for 2024 and Rmb0.48 for 2025, a CAGR of 26%. The stock is trading at 4.2x 2024e and 3.7x 2025e EV/EBITDA. We initiate with an OUTPERFORM rating and a target price of HK$3.00, implying 4.8x 2024e and 4.2x 2025e EV/EBITDA with 52% upside.
Risks
Falling rental prices due to intensifying competition; materials business weighing on earnings; high gearing ratio.