China State Construction (3311 HK, HK$1.41) – Taking a step towards the RMB4,000b

Newsflow. CSCI announced that on 2 Apr, they had entered into a sub-construction engagement agreement whereby: 1) the company may engage the parent’s CSCECL as construction sub-contractor and/or project management contractor in the PRC and UAE and 2) CSCECL may engage CSCI as construction sub-contractor in the PRC, upon successful tender of a construction project for a 3-year term commencing 1 Jul 2009 and ending 30 Jun 2012.

Our view. We think that “item 2” of the sub-construction engagement agreement is a major milestone for the CSCI as the ability to become CSCECL’s sub-contractor in the PRC opens the door for the company to participate in China’s civil construction sector and potentially tap Chinese government’s infrastructure investment that is part of the RMB4,000b fiscal stimulus package. The caps for CSCI to be CSCECL’s sub-contractor under the agreement is HK$4,000m (1 Jul 2009-31 Dec 2009), HK$4,000m (for each of the financial years ending 31 Dec 2010 and 2011) and HK$2,000m (1 Jan 2012-30 Jun 2012). As a reference, the cap of HK$4,000m represents 39.5% of CSCI’s FY12/08A overall construction revenues (ex. infrastructure investment and toll road operations). Also, the relatively large cap of HK$4,000m set for 2H FY12/09 suggests that CSCECL may be currently in the process of securing civil construction projects in China, which may lead to some contract win announcements for CSCI in 2H FY12/09. The counter is trading at 5.7x FY12/09F and 4.8x FY12/10F on consensus. We have a Trading BUY call on the counter as we think this announcement would lead to the counter’s gradual re-rating as more announcements relating to its China project wins come to light.