China Machinery Engineering Corporation:Best overseas play on 6.5x 2016E ex-cash PE
One of the major beneficiaries of "One Belt and One Road".
We see CMEC as one of the major beneficiaries of China's "One Belt and One Road"strategy, thanks to CMEC's strong execution track record outside of China in the past30 years and revenue outside of China represents more than 80% of total in 2014.
CMEC should benefit from both more overseas infrastructure EPC contracts as well asthe acquisition of mature overseas assets (e.g. power plants). CMEC's recent acquisitionof Turkey power plants, together with GUOXIN International Investment Corporation (astate-owned asset management company), is a good example of overseas acquisition.
US$4bn new contract in 2015E, US$13bn pending to be effective.
We forecast 2015E newly effective contract to amount to US$4bn (vs. managementguidance of US$3.5bn), a 1% dip vs 2014, which includes a mega US$2.5bn railwaycontract from Argentina. We believe the time it takes for new contract to becomeeffective will be significantly reduced going forward, thanks to the Chinesegovernment's "One Belt and One Road" strategy. The financial support from China'spolicy banks as well as the newly set up Asian Infrastructure Investment Bank shouldhelp provide financing for infrastructure investments along "One Belt and One Road"covered regions. CEMC's existing signed new contracts pending to be effective reachedclose to US$13bn as of end 2014, which should pave enough room for new contractflow of more than 3 years.
Cash represents a significant part of market cap, i.e. no downside.
CMEC has net cash (incl. restricted deposits and time deposits) of Rmb21.7bn as of end2014, which represents 79% of the market cap. Even after stripping out receipts inadvance, net cash is 45% of the market cap. This not only provides downside supportfor valuation, but also provides room for the company to expand business (e.g.
overseas and domestic acquisitions) and improve ROE by leveraging up.
Valuation: maintain Buy rating, new price target of HK$9.20 (from HK$7.70).
We lift our 12m price target from HK$7.70 to HK$9.20, which is based on 11x 2016EPE (while we cut our 2015 EPS estimate by 10% to reflect failure to book profit fromthe suspended Iraq power plant project, we turn more positive from 2017E, due toChina's "One Belt and One Road" strategy). We maintain our Buy rating on the stock,and find valuation attractive at 9.5x PE in 2016E, or 6.5x PE ex-cash.
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