China’s Largest Construction Firm Defies Rebound

China Construction Communications Co., CCCC, 1800 hk, 601800, dropped another 5% + in Hong Kong.  It has now dropped over 10% in Hong Kong since 4/21/16 on disappointing 1st quarter new contracts. The latest drop has been less severe in Shanghai, but has shown a greater year to date drop of 13.7%.

CCCC stock

Source: Bloomberg

While much has been made recently over a China rebound, thanks to construction activities and commodities related to a housing price resurgence, (primarily in tier 1 cities), market optimism has not spread to this mainly infrastructure construction company.  (Infrastructure revenues = 86% of 2015 annual revenues).

The latest price drop has been blamed on q1’s new contracts, which showed only a 2% increase from the prior year.  This drop brought a downside risk prediction from Nomura,  which projected a target price of 10.06 at buy.  Despite the lower year on year increase, CCCC reportedly held onto its guidance which was a 9.6%% increase in new projects and a 6.0% increase in revenue, stating that the start of the year was not reflective of the full year.

In fairness, historical quarterly earnings have fluctuated based on the quarter, with the final quarter at the highest.

CCCC quartely

Historical Data based on hkex filings; 1Q 2016 from press report.

While the company may state that the first quarter is its slowest, as is born out in historical comparisons, the decline of 2014 and minimal growth from 1q, 2014 indicates good reason for skepticism.

Full quarterly results have yet been released for 2016 on the Hong Kong Exchange. However, its last annual release showed a continuting downward trend in ROE.

CCCC roe

Source: Morningstar

A summary of the annual report of this 112,000 employee firm follows:

cccc annual

*Helped by effect Tx rate drop – from 21.1% to 19.1% due to “high-tech” enterprise qualification

Source: HK Filings

The company has limited means to match its 2015 performance growth or its projected goals. While it has been pushing to add international exposure, revenue outside of China represented only 19% of the total for 2015.  The company has primarily been investing outside of China in Hong Kong, Macao and Africa but has been prohibited from working on any road projects funded by the World Bank until 2017, due to fraudulent practices found on a road project in the Phillipines in 2009. The company is therefore primarily dependent upon infrastructure projects in China, which have approached saturation, are heavily indebted and have questionable ability to repay debt let alone turn a profit.

Conclusion – CCCC, the dominant China infrastructure SOE company has dropped significantly over the last 12 months but uncertainty in future earnings adds extreme risk to its valuation.  Comparing Financial Times projections to Company projections, shows the Hong Kong listing price to have room to fall, particularly since the company itself projects only 6% annual revenue growth and with 2% year on year for the first quarter.




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