China Comm Cons 1H08 results

Overview:
China Communications Constructions is the largest port construction and design company in China , a leading company in road, bridge construction and design, the largest dredging company in China and the 3rd largest in the world. It is also the world's largest container crane manufacturer. Its principally engaged in the construction and design of transportation infrastructure, dredging, port machinery manufacturing and railway construction business. It has business mainly in China, and expanding in Asia, Africa and around the world.

1H08 results:
1. Total reveune up 29.1% to RMB 75.7B
- New Order drop (from RMB 35.8B in 1H07, RMB 41.6B in 2H07) to RMB 32B, increased back to RMB 40.2B in 2H08, still lower than 2007 due to economy slow down;
- Revenue growth by segment as follow:

• Infrastructure Construction up 25.3% to RMB 49.2B, will continue to rise due to RMB 4T sitmulus economic plan which highly focus on construction;
• Infrastructure Design up 14.2% to RMB 3.2B, this is just a by product/service with the 1st one;
• Dredging up 41.3% to RMB 8.7B, may go down due to lower international trade
• Port Machinery Manufacturing up 17.5% to RMB 12.0B, may go down due to lower international trade;
• Others up 498% to RMB 4.0B, that is railway construction, a new business segment for CCC, will continue to rise due to RMB 4T sitmulus economic plan which highly focus on construction;
• Elimination (RMB 1.3B)

2. Reported EPS down 17.1%

- Cost of raw material increase are the main driver of the EPS down as the commodity price rise up in 2008;

- Gross profit margin down from 11.0% to 9.8%, still the highest compare to the peers, by segment as follow:

• Infrastructure Construction down from 7.9% to 7.1%
• Infrastructure Design down from 28.0% to 24.9%
• Dredging down from 17.1% to 13.2%
• Port Machinery Manufacturing down from 14.4% to 14.6%
• Others up from 6.0% to 7.7%

3. Balance Sheet

- Total equity down 6.6% to RMB 50.4B mainly due to other reserves down by 16%. It may drop further in 2H08;

- Long term & short term borrowing up 51% & 60% to RMB 19.1B & RMB 35.0B. As interest rate down, it will reduce CCC's borrowing cost. But debt to equity looks high to me;

Risk:

- Result highly driven by cost of raw material, potential commodity price increase will have significant negative impact to gross margin and net income;

- Competition with China Railway Group (0390) and China Railway Construction (1186);

- Weak global economy and international trade will have negative impact on CC's Dredging and Port Machinery Manufacturing business;

- Highly influenced by govenment's construction policy

Comments:
Buy, with fair value of HKG $12.6.