SHANGHAI TUNNEL ENGINEERING(600820)：REVENUE AND PROFIT GROW RAPIDLY;UPBEAT ON GROWTH RECOVERY IN 4Q22

3Q22 results in line with our expectations

    Shanghai Tunnel Engineering announced 1-3Q22 results: Revenue fell 7.9% YoY to Rmb38.12bn and attributable net profit edged up 0.7% YoY to Rmb1.36bn. In 3Q22, revenue grew 16.7% YoY to Rmb17.96bn and attributable net profit increased 44.0% YoY to Rmb819mn. Its results are in line with our expectations.

    GM fell 1.8ppt YoY to 12.0% in 3Q22. Overall expense ratio fell 0.8ppt YoY to 8.8% in 3Q22. Specifically, selling and R&D expense ratios edged up 0ppt and 0.1ppt YoY, and G&A and financial expense ratios dropped 0.3ppt and 0.7ppt YoY. Write-back of provisions for asset and credit impairment losses declined 71.8% YoY to Rmb12.8mn in total, as asset impairment losses narrowed but write-back of provisions for credit impairment losses dropped. Investment income turned positive to Rmb374mn. In 3Q22, the firm’s net profit margin rose 0.9ppt YoY to 4.6%, and net operating cash inflow dropped Rmb3.89bn YoY to Rmb710mn. Investment cash inflow increased Rmb4.31bn YoY to Rmb1.08bn in 3Q22, as cash from investment project increased.

    Trends to watch

    Construction business: Projects in Shanghai improved marginally; upbeat on growth recovery in 4Q22. In 3Q22, the firm’s revenue increased 16.7% YoY (vs. -43.4% YoY in 2Q22). We attribute the significant improvement to the greater number of construction projects in Shanghai after the impact of COVID-19 weakened. In 3Q22, new orders from clients in Shanghai grew 2.4% YoY to Rmb8.45bn (vs. -21.0% YoY in 2Q22). Over 1-3Q22, the firm’s new construction contracts rose 2.9% YoY to Rmb46.21bn. New contracts dropped 8.3% YoY from clients in Shanghai and increased 30.4% YoY from clients outside Shanghai. We believe that the firm has ample orders at present, and demand for rush installation remains strong. We are upbeat on the recovery of its earnings from the construction business in 4Q22.

    Investment operation business: Solid investment income in 3Q22; keep an eye on future recovery. In 3Q22, the firm’s investment income stood at Rmb374mn, turning positive from the losses in 3Q22. In 1Q22 and 2Q22, the firm reports gains of Rmb1.38mn and losses of Rmb3.13mn. Therefore, its investment income increased in 3Q22 compared with 1Q22 and 2Q22. We attribute the increase of investment income to a recovery in transportation operation projects amid containment of COVID-19. Over 1-3Q22, the firm’s new orders for the operation business increased 18.9% YoY to Rmb4.13bn. In 3Q22, new orders rose 98.2% YoY to Rmb634mn. In our opinion, the firm’s order growth is stable at present. As more projects commence operation and the firm’s operation of assets turns stable, we believe its investment income will continue to recover, bolstering revenue and earnings growth.

    Financials and valuation

    We keep our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 6.3x 2022e and 5.6x 2023e P/E. We maintain OUTPERFORM and our TP of Rmb6.90, implying 8.4x 2022e and 7.6x 2023e P/E with 34.2% upside.

    Risks

    Lingering COVID-19; new order growth disappoints.