August 17, China Construction International(03311) the interim results for the year to the end of June were disclosed, with newly signed contracts of HK $70.53 billion, an increase of 40.4% over the same period last year; operating income of HK $36.371 billion, an increase of 29.9%; gross profit of HK $6.013 billion, an increase of 18.6% over the same period last year; and net profit of shareholders of HK $3.5 billion, an increase of 20.8% over the same period last year. Overall, the high double-digit growth of core finance is slightly better than the market expected.

In addition, what is even more gratifying is that in the first half of the year, the net operating cash outflow of China Construction International was HK $970 million, which was much smaller than the net outflow of HK $5.03 billion in the same period last year.

Or buoyed by interim results, China Construction International's shares rose as much as 6.79 per cent on Aug. 18 and have risen nearly 40 per cent since 2021.

The synchronous improvement of profit scale and profit quality is the transformation and upgrading of the company to "long to short" and "science and technology empowerment", and the "qualitative change" of the company quietly, while the mid-term operating results in 2021 are only the prelude to the transformation and upgrading of the company and drive the financial upturn.

Let's take a look at why the ongoing transformation and upgrading of China Construction International can bring about a continuous improvement in financial data.

Let's start with the changes in the company's orders in the middle of this year. New orders signed by China Construction International in the first half of the year rose 40 per cent to HK $70.53 billion compared with the same period last year, with the mainland, Hong Kong and Macao up 69 per cent, 28 per cent and-1 per cent respectively. It is not difficult to see that mainland China is still the main driver of the company's order revenue growth in the first half of the year.

The increase in the volume of orders in the mainland is also reflected in the revenue side: in the first half of 2021, the company came from the mainland, Hong Kong, Macao and China.(referring to overseas markets) revenues were HK $20.8 billion, HK $10.47 billion, HK $2.93 billion and HK $2.17 billion, up 48.3%, 1.7%, 50.3% and 24.7% respectively over the same period last year.

The volume of orders in the mainland is mainly due to the rapid growth of short-cycle business.It is reported that its short-cycle investment projects such as GTR accounted for 87% in the first half of this year, a further increase over the same period last year. What is the impact of short-term investment projects on their operating cash flow?

It is necessary to review the changes in the company's business model in the mainland in recent years.

It is reported that China Construction International has been undertaking PPP projects on a large scale since 2015 in line with the industry trend, but since 2017, due to the tightening of supervision and financing of PPP projects in the mainland, the landing of PPP projects has slowed down, and the cycle of superimposed projects has been long, resulting in a significant slowdown in asset turnover, which in turn has led to a continuous decline in ROE. In this context, the company in 2019 to the government indemnificatory apartment directional repurchase and other new types of project expansion, business structure adjustment has achieved remarkable results.

GTR, or Government Targeted Repurchase (government-directed buyback model). Compared with the company's previous PPP projects, the payback cycle of government-directed buyback projects is obviously shorter. Generally speaking, the payback cycle of PPP projects is more than 10 years, while the government-directed buyback projects are generally about 3-4 years. China Construction International disclosed the payback model for a GTR project in its 2019 performance presentation, as shown below. It can be seen that the GTR project has obvious advantages in the project payback cycle.

Therefore, for China Construction International, the increase in the proportion of GTR projects is an important magic weapon for the improvement of its cash flow.

According to the financial report data, benefiting from the successful transformation of business in the mainland, China Construction International Investment Business continues to move towards "shorter cycle and faster turnover", operating cash flow has improved, and a net operating cash outflow of HK $971 million in the first half of the year has been significantly improved compared with HK $5.03 billion in the same period last year. At the same time, there is more cash on hand, with HK $20.32 billion on hand during the period.

Good cash flow is an important guarantee for dividends. Helped by these cash flow levels, the company also maintained a relatively robust dividend ratio, with earnings per share rising 21 per cent year-on-year to HK69.4 cents in the first half, up 18 per cent year-on-year to HK20 cents, and the dividend ratio remained around 30 per cent.

The replacement of GTR short-cycle projects with long-cycle projects has improved the company's cash flow. With the gradual implementation of the GTR project to contribute income, there is reason to believe that the company's OCF is expected to become a regular employee in the next 1-2 years. Pushing up the level of ROE is another important reflection of the improvement of GTR projects, and the acceleration of project turnover is an important reason.

If the positive change of GTR to China Construction International is at the level of business model, then the change of "science and technology empowerment" to the company is at the "core" level, and the impact is more far-reaching.

In 2020, China Construction International put forward a new strategy, that is, through the new engine of "technology + investment + construction", relying on science and technology to drive the high-quality development of engineering. In fact, behind this new strategy is the company's determination to empower science and technology to promote the development of the group. It is reported that the company has accumulated advantages in science and technology for many years. At present, in addition to assembly technology, It also has six core technologies: design, construction and operation of large-scale sewage treatment plant, urban tunnel crossing and immersed tube tunnel technology, international standard large-scale hospital engineering construction technology, and special-shaped glass curtain wall construction technology based on accurate design of BIM.

These technological advantages play a very important role in obtaining high-quality projects, improving profitability, saving capital costs and speeding up turnover. The fundamental reason lies in the "science and technology" represented by the six core technologies. Constantly strengthen the "core" competitiveness of China Construction International.With the blessing of scientific and technological forces, we have reason to believe that China Construction International is expected to maintain the trend of rapid and steady development in the trillions of yuan of engineering industry in the future.

According to Zhitong Finance, China Construction International is mainly engaged in infrastructure investment and construction engineering business, and mainly relies on the prefabricated construction technology of Hailong Technology, a wholly-owned subsidiary, to expand the group's main business. At present, more than 50% of the company's projects use technologies such as Hailong MiC. In the first half of this year, Hailong Technology made another breakthrough in MiC (Modular Integrated Building) technology-- the rapid completion of a seven-story permanent building in 12 days, which further added an important contribution to the company's rapid growth.

Thanks to technological empowerment, Hailong Technology achieved high-quality growth in the first half of the year: according to relevant data, Hailong's turnover increased by 50.6 per cent to HK $1.34 billion in the first half of 2021 compared with the same period last year, and its export gross profit margin was maintained at more than 40 per cent. At the same time, it also relies on the "power of science and technology" to provide a new and powerful driving force for the development of the group. In the first half of the year, Hailong Technology directly leveraged more than 10 billion new contracts signed by the Group.

Based on the above, with the help of multiple factors such as the high turnover of the company's transformation in the mainland and the new breakthroughs in modular integrated buildings, China Construction Societe Generale handed over a more eye-catching "report card" in the first half of the year. Behind the above performance, the company moves forward in the continuous exploration of traditional industries and traditional models, and gradually deepens the transformation and upgrading, which is the optimization of the business model by "long-term to short-term". It is the upgrading of the competitiveness of the "core" by "science and technology empowerment".

It is this quiet "qualitative change" that makes the "growth" of China Construction International more sustained and healthier. It is precisely this more sustained and healthier growth, the company's future valuation center continues to rise, with a solid foundation.

This point can also be seen from the research reports of Daxing. After the release of the results, Credit Suisse, CICC, Citic and other brokerage institutions have issued optimistic suggestions. Among them, Credit Suisse released a research report that maintained China Construction International's "outperform" rating, raising its earnings per share forecast for 2021-23 by 3% to 4%. Based on this year's earnings forecast of about 6 times, the target price was raised from HK $8.09 to HK $8.3.

Compared with China Construction International's current share price of less than HK $6, this will also mean that its share price still has nearly 40% room to rise.

And China Construction International performance stock price can harvest the above significant rising space? It all needs time to prove.