1H25 results in line with our expectations

China State Construction Engineering announced its 1H25 results: Revenue fell 3.2% YoY to Rmb1,108.3bn, and net profit attributable to shareholders grew 3.2% YoY to Rmb30.4bn. In 2Q25, revenue fell 7.1% YoY to Rmb553bn and net profit attributable to shareholders grew 5.9% YoY to Rmb15.4bn. The firm’s 1H25 results were in line with our expectations.

1) Profitability of housing construction business recovered; orders for industrial factories expanded steadily. In 1H25, revenue from the housing construction business fell 7.1% YoY to Rmb696.4bn, and gross margin rose 0.4ppt YoY to 7.3%. New contracts for the housing construction business fell 2.3% YoY to Rmb1,496.4bn, of which new contracts for industrial plants rose 16.2% YoY to Rmb452.2bn, and its share of the total contract value increased to 30.2%.

2) Infrastructure construction business remained stable; order structure optimized and upgraded. In 1H25, revenue of the infrastructure construction business rose 1.5% YoY to Rmb273.4bn, and gross margin stayed flat YoY at 10.2%. New contracts for the infrastructure construction business rose 10.0% YoY to Rmb823.7bn, with new contracts for energy engineering, municipal engineering, and water conservancy & water transport up 34.2%, 43.8%, and 31.4% YoY to Rmb350.1bn, Rmb158.0bn, and Rmb36.5bn.

3) Real estate business progressed steadily; land acquisition concentrated in core cities and regions. In 1H25, revenue from the real estate business rose 13.3% YoY to Rmb131.9bn, contracted sales fell 8.9% YoY to Rmb174.5bn, and gross margin fell 3.4ppt YoY to 16.0%. The firm added 5.2mn sqm of land reserves in 1H25 and all new land reserves were located in tier-1 and tier-2 cities as well as provincial capital cities, further optimizing the structure of its land reserves.

4) Expenses were reduced but not effectively diluted. In 1H25, the firm’s four expense ratios rose 0.04ppt YoY to 4.3%, with selling, G&A, R&D, and financial expense ratios at 0.4%, 1.5%, 1.6%, and 0.8%. Except for selling expenses, all expenses declined in absolute terms, but they were not effectively diluted due to YoY revenue decline.

5) Net operating cash outflow pressure declined. In 1H25, net　operating cash saw a net outflow of Rmb82.83bn, narrowing 23.8% YoY.

Trends to watch

The firm continued to optimize and upgrade its order structure. In 1H25, the firm’s housing construction orders for industrial factories continued to expand, and its infrastructure construction business expanded to energy engineering, municipal engineering, and water conservancy & water transport. In the medium and long term, we believe the firm can leverage its leading advantages to effectively increase its market share during the industry downturn. In addition, the firm has launched a special internal management campaign to improve operating quality and efficiency. We expect the quality of its financial statements to continue to improve thanks to increased fiscal spending and steady progress in local government bond issuance.

Financials and valuation

We keep our 2025 and 2026 attributable net profit unchanged at Rmb50.14bn and Rmb52.81bn. The stock is trading at 4.6x 2025e and 4.4x 2026e P/E. We maintain an OUTPERFORM rating and our target price of Rmb7.0, implying 5.8x 2025e and 5.5x 2026e P/E, offering 25.2% upside.

Risks

Disappointing cash collection and/or profit margin of projects due to intensifying competition.