1Q25 results in line with our expectations

China State Construction Engineering announced its 1Q25 results: Revenue rose 1.1% YoY to Rmb555.34bn and net profit attributable to shareholders grew 0.6% YoY to Rmb15.01bn, in line with our expectations.

Housing construction business under pressure; structure of new

contracts improving: In 1Q25, revenue from the housing construction business fell 0.2% YoY to Rmb364.9bn, and gross margin remained largely flat YoY at 6.1%. New contracts for the housing construction business fell 3.3% YoY to Rmb779.9bn, of which new contracts for industrial plants rose 7.5% YoY to about Rmb231.8bn.

Infrastructure construction business stable; market expansion

accelerating: In 1Q25, revenue from the infrastructure construction business rose 0.5% YoY to Rmb128.3bn, and gross margin rose 0.4ppt YoY to 8.1%. New contracts for the infrastructure construction business rose 40.0% YoY to Rmb420.6bn, with those for energy engineering, water & environmental protection, and water conservancy and water transport up 96.6%, 31.2%, and 29.3% YoY.

Real estate business growing steadily; adhering to targeted

investment: In 1Q25, contracted sales of the real estate business rose 15.5% YoY to Rmb53.7bn, with gross margin falling 2.3ppt YoY to 16.9%.

The firm added 1.95mn sqm of land reserves in 1Q25 with a focus on core areas in core cities.

Rapid growth of overseas business: In 1Q25, the firm's new overseas

contracts rose 178.5% YoY to Rmb67.4bn, and its revenue grew 8.5% YoY to Rmb23.9bn.

Expense ratios improving slightly and operating efficiency

enhanced: In 1Q25, selling, G&A, R&D, and financial expense ratios were 0.4%, 1.5%, 1.1%, and 0.8%, with the combined expense ratio at around 3.6% (-0.1ppt YoY).

Net operating cash flow still under pressure: In 1Q25, the firm's net

operating cash outflow was Rmb95.85bn, narrowing 0.8% YoY.

Trends to watch Structural fine-tuning underway; high-quality growth ahead. The firm

continued to improve its new contract structure. For the housing construction business, the proportion of industrial factory contracts in total new contracts rose to 29.7% in 1Q25. For the infrastructure construction business, the proportion of energy, water & environmental protection, and water conservancy and water transportation contracts in total contracts increased to 57.6%.

We believe the firm's efforts to advance structural adjustments may gradually pay off, and we are upbeat on the boost from its expansion in industrial plant, energy engineering, and water conservancy and water transport markets to high-quality earnings growth.

Financials and valuation

We keep our 2025e and 2026e attributable net profit unchanged at Rmb50.14bn and Rmb52.82bn. The stock is trading at 4.5x 2025e and 4.3x 2026e P/E. We maintain an OUTPERFORM rating and target price of Rmb7.0, implying 5.8x 2025e and 5.5x 2026e P/E and offering 27.0% upside.

Risks

Disappointing profit margin and/or recovery in demand.