2024 earnings slightly missed our expectation

Sinoma International Engineering announced its 2024 results: Revenue rose 0.7% YoY to Rmb46.13bn, net profit attributable to shareholders grew 2.2% YoY to Rmb2.98bn, and recurring net profit attributable to shareholders rose 1.6% YoY to Rmb2.72bn. In 4Q24, the firm’s revenue grew 1% YoY to Rmb14.4bn and net profit rose 1% YoY to Rmb923mn. The firm’s 2024 earnings slightly missed our expectation, mainly due to slower-than-expected growth of the engineering service business.

Revenue from equipment business under pressure; growth of overseas and operation & maintenance businesses robust. In 2024, the firm's revenue grew 0.7% YoY to about Rmb46.13bn: Revenue from engineering and technological service business grew 1.73% YoY to Rmb27.125bn, revenue from equipment business fell 18.42% YoY to Rmb6.214bn, revenue from production, operation and maintenance service business grew 21.88% to Rmb12.92bn. The firm’s operation and maintenance business recorded robust growth. By region, the firm’s revenue from domestic businesses fell 7% YoY to Rmb23.6bn and revenue from overseas businesses grew 11% YoY to Rmb22.3bn.

Overall gross margin improved. In 2024, the firm's overall gross margin (GM) rose 0.2ppt YoY to 19.63%: GM of the engineering and technological service business, the equipment business, and the operation and maintenance business were 15.7% (+0.24ppt YoY), 22.8% (-1.18ppt YoY), and 17.6% (+2.08ppt YoY). GM of the firm’s domestic businesses and overseas businesses were 16% (-1.8ppt YoY) and 23% (+1.9ppt YoY).

Expense ratios rose slightly: In 2024, the firm's selling expense ratio and G&A expense ratio were 1.2% (-0.03ppt YoY) and 5.2% (+0.42ppt YoY). Its financial expense ratio rose 0.04ppt YoY to 0.6%.

Operating cash flow declined due to sluggishness of domestic cement industry: In 2024, the firm's operating cash flow fell 35% YoY to Rmb2.29bn, which we attribute to pressure on earnings of the domestic cement industry in 2024, resulting in YoY increases of Rmb3.4bn in the firm’s contract assets and Rmb2.65bn in the firm’s accounts payable.

High-quality balance sheet and attractive dividend yield: The firm’s debt-to-asset ratio fell 1.2ppt YoY to 61.3% in 2024, and its dividend　payout ratio for 2024 is about 40%, implying a dividend yield of 4.5%.

Trends to watch

Domestic demand from technological upgrades to recover in 2025; solid uptrend expected in overseas markets. In 2024, the firm's newly signed contracts grew 3% YoY to Rmb63.4bn, with newly signed overseas contracts rising 9% YoY to Rmb36.2bn and newly signed domestic contracts falling 4% YoY to Rmb27.2bn. Domestic business faced some pressure. We expect the physical workload of infrastructure construction to be higher than expected during the peak season in 2025, the overall performance of cement companies to improve in 1H25, and carbon trading to drive a new round of steady growth in companies’ spending on technological upgrades.

We expect demand from overseas markets such as Africa and the Middle East to remain strong. Europe has clearly stepped up efforts in fiscal spending for infrastructure construction since March 2025. As a global leader in cement EPC, equipment, and operation and maintenance services, we think the firm is poised to benefit from a possible uptrend in domestic and overseas markets. The firm is our top pick in the construction sector.

Financials and valuation

Given pressure on the domestic engineering business, we lower our 2025 earnings forecast by 15.4% to Rmb3,298mn. We introduce our 2026 attributable net profit forecast of Rmb3,644mn. The stock is trading at 7.8x 2025e and 7.1x 2026e P/E. We maintain an OUTPERFORM rating and cut our TP by 15.0% to Rmb12.5, implying 10.0x 2025e and 9.1x 2026e P/E, offering 28% upside.

Risks

Disappointing growth of equipment and operation & maintenance businesses; slower-than-expected progress in fulfilling contracts.