Strong core earnings rebound: CSCI 1H17 reported NPAT increased 10.7% y-o-yto HKD2,493m, but core earnings increased 60.8% y-o-y to HKD2,092m whichexcluded the revaluation gains. This should be better than market expectation. Grossprofit margin improved to 14.2% in 1H17 versus 12.2% in 1H16 due to faster ChinesePPP (public private partnership) project execution and these projects have highermargins than Hong Kong and Macau. The operating cash flow was negative in 1H17as the PPP project execution increases. The company increased its total newcontract target materially to at least HKD100bn for FY17 versus HKD90bn previously.As at the end of July 2017, order backlog was HKD181bn which covers our FY17erevenue by 3.3 years.
Spooked by unexpected equity raising: The market was spooked by the 1 for 8equity rights issue announced alongside the 1H17 results, and share price declined7.2% y-o-y on heavy turnover. The subscription price is HKD11.33 per share andwould cause about 12.5% dilution to existing issued share capital. The use ofproceeds would be used to finance the growing China PPP projects and thecompany mentioned that they are negotiating on around Rmb100bn worth of newprojects. Since the company indicated in 2H16 that it would be unlikely to requirefresh new equity, this sudden announcement of rights issue caused panic amonginvestors. We think the strong pipeline of PPP projects should have been evident forthe last two to three years and therefore we suspect there could be other interestinginvestment opportunities that have emerged in recent months to cause the suddenchange in equity requirement.
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