The financing for the Malaysia East Coast Rail Link EPC Project (Phase I) has been secured and construction will commence soon. The contract value is approximately 72.8 billion yuan, with a construction period of seven years. The project was signed on November 1, 2016 by China Communications Construction Company (CCCC) and Malaysia Rail Link Sdn Bhd. In addition, the Phase II project was also officially signed on May 13 this year.
Another landmark project in Malaysia, progress faster than expected
The Phase I contract value of the Malaysia East Coast Rail Link project is approximately 46 billion ringgit (equivalent to 72.8 billion yuan), and the Phase II contract is approximately 9 billion ringgit (equivalent to 14.2 billion yuan), totaling approximately 87 billion yuan, accounting for 20.15% of the company's 2016 operating revenue. This project is the largest engineering project currently signed and performed overseas by a Chinese enterprise, and also the largest economic and trade cooperation project between China and Malaysia to date. It will become another landmark project symbolizing the friendship between China and Malaysia, following the Second Penang Bridge. Since the Phase I contract was signed in November last year, project financing has been secured and construction will commence soon, with progress faster than expected. The construction period is seven years, with 60% of the settlement in RMB, locking in most exchange rate risks.
Railway infrastructure boosts land construction, overseas railway business grows rapidly. While maintaining its leading position in port and marine engineering, road and bridge construction, the company is actively entering the railway infrastructure market, especially the overseas railway market. The performance of the Malaysia East Coast Rail Link project is an important manifestation of CCCC's active participation in the railway "going global" initiative, and also the largest single design-build railway EPC project the company has undertaken after the successful implementation of the US$3.8 billion Mombasa-Nairobi Railway project in Kenya. In 2016, the company signed new domestic railway construction contracts worth 24.326 billion yuan, a year-on-year decrease of 10.11%; new overseas railway construction contracts amounted to approximately 59.7 billion yuan, 2.09 times that of 2015, and their proportion in the total value of new overseas engineering contracts rose significantly from 21% to 29%. It is expected that with the promotion of the "Belt and Road" strategy, the overseas railway market will continue to maintain rapid growth. Panama port expansion project starts, port dredging business rapidly recovers.
According to the company's official website, the Panama Colon Container Port Project (PCCP), invested and EPC-contracted by CCCC Dredging and Shandong Landbridge Group, commenced on June 7 in Colon, Panama. The contract value is US$316 million, with a construction period of 34 months. It is the first overseas project signed under the "CCCC Dredging" brand, and also the largest Chinese investment project in Panama's history. Today, China and Panama announced the establishment of formal diplomatic relations, and we expect the company to continue benefiting in terms of engineering construction, financing, and payment collection. In Q1 2017, the company signed new contracts worth 151.307 billion yuan, a year-on-year increase of 40.25%, of which dredging/port business contracts were 15.9/7.3 billion yuan, up 80%/159% year-on-year respectively, reversing the 4%/40% decline in the full year of 2016, with significant growth in port dredging business.
Sufficient orders on hand, optimistic about domestic PPP and overseas engineering development, maintain "Overweight" rating
As of the end of 2016, the company's contracts on hand amounted to 1,099.6 billion yuan, a year-on-year increase of 26.80%. The target for new contracts in 2017 is 900 billion yuan, ensuring future performance growth. Considering the company's full order backlog, rapid overseas business growth, and overall profitability in the first quarter better than expected, we estimate the company's EPS for 2017-19 to be 1.18/1.37/1.56 yuan, maintain a reasonable price range of 21.24-23.60 yuan (corresponding to 18-20 xPE for 2017), and maintain the "Overweight" rating.
Risk warnings: Overseas order implementation slower than expected, geopolitical risks, declining profitability of PPP projects, etc.