| China Communications Construction ("CCC") is a leading transportation infrastructure company in China, primarily engaged in the infrastructure construction, infrastructure design, dredging and port machinery manufacturing business. In terms of its infrastructure construction business, which contributed 60.4% of total revenue last year, CCC is the largest port construction company, seizing almost 90% of domestic market share. Due to fierce competition, its road, bridge and railway construction business accounts for 10% of domestic market share, since this part of market was opened earlier to all competitors. As to infrastructure design business, CCC is the leading port, road and bridge design company in China in terms of design revenue, running 10 top-tier design institutes. Few competitors of the comparable scale and strengths exist in China. This part of business accounted for approximately 5% of its turnover. CCC is the largest dredging company in China and was ranked the third largest globally in terms of dredging capacity. It has been involved itself in up to 80% of the dredging projects domestically, and also contributed 9% of its turnover last year. CCC is the largest manufacturer of container cranes in the world. It operates its port machinery manufacturing business mainly through its two subsidiaries: wholly-owned SPMP, and ZPMC with controlling equity interest of 43.3%. The latter is an internationally well-known port machinery manufacturer that accounted for 74% and 50% of global market share of quayside container cranes and Gantry container cranes, respectively. This part of business is the second largest contributor of total turnover.
Key beneficiary of "11-5 Plan" So far, China's infrastructure is still relatively lacking compared with developed countries. According to the Eleventh Five-year plan, China government plans a budget of RMB 6.8 trillion for transportation-infrastructure projects, among which RMB 2.9tn (up 51% vs 2000-2005) and RMB 1.5tn will be invested in road and railway construction. The government aims to lift the length of road and railway within "11-5 Plan" by 45% and 26%, respectively. During 11-5, China will spend RMB507bn (up 207% vs. 10-5) in building ports (389bn) and dredging waterway (118bn). This sector, while is not large in absolute size compared with road and railway construction, embraces the most significant growth potential. The container port construction is still a main focus, meanwhile the demand for increasing bulk and oil port capacity is also robust for China's great demand for raw material and energy and continually incremental exports. CCC will unquestionably be the key beneficiary from the vast demand of this two market. Especially for port equipment this niche sector with high entry barrier, we see ZPMC's significant advantage in both leading technology and cost, which will further solidify its global dominance. Construction/design also has relatively high barrier to enter in China. The top 5 players account for 52% market share already. Moreover, there are many license requirements to embark on the construction projects of each fragment. CCC was granted the license railway construction when the market was still an oligopoly, and the only 3 top licenses of port construction. Overall, CCC is the key beneficiary of "11-5 Plan". Overseas market share further increase Not only China, the rest part of Asian, south and eastern Asia specially, is experiencing a vast demand of infrastructure construction over the next 5-6 years. Asia will spend around US$1.5tn over the next few years in infrastructure, where China will contribute a leading share of 76%. Reviewing CCC's backlog, overseas contracts only representing 10% of its backlog. The company has just begun to tap the overseas markets, aiming at reach 25% of its business over 2-3 years and targeting Africa, SE Asia and other developing countries. Stable business growth during 1H07; margin hike further The company targets a 30% growth of new contracts in terms of contract value. As revealed by the company itself, the status was optimistic on the whole by 1H07. Specifically, the dredging business and heavy equipment manufacture business was above its expectation; overseas contracts outpaced; while infrastructure construction business lagged a little bit. Historically, the construction business in China experience significant seasonality, with higher revenue is recorded in 2nd half year due to the effect of winter months and the effect of Lunar New Year. So that we still expect acceleration from both signing new contracts and the progress of projects under construction. For the next few years, we expect the company's stable growth rate ought to be in line with the pace of China's infrastructure construction, which is at 27% CAGR by our estimation. For this year, the management is aiming at further enhancing profitability through centralized purchasing, stringent control of costs. Large part of its proceeds obtained from its H share IPO last year was also spent in purchase and upgrade of equipment, which lifted its economies scales and improve the internal efficiency. We therefore expect the margin to hike further. As the company address 2007 as the "Year of Efficient Management", this would be another key driver for the company. | |
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