3Q25 results missing our expectations

The firm announced its 1–3Q25 results: Revenue fell 4.2% YoYto Rmb1.56trn, and net profit attributable to shareholders fell3.8% YoY to Rmb38.2bn. In 3Q25, revenue fell 6.6% YoY toRmb449.9bn, and net profit attributable to shareholders fell24.1% YoY to Rmb7.8bn. We attribute the pressure on 3Q25earnings to weak demand in the construction industry anddelays in project commencement.

1) Housing construction business shrinking; industrialplant orders expanding. In 1–3Q25, revenue from thehousing construction business fell 5.3% YoY toRmb988.6bn, and gross margin rose 0.1ppt YoY to 7.1%.New contracts for the housing construction business rose0.7% YoY to Rmb2,014.6bn, of which new contracts forindustrial plants rose 23.0% YoY to Rmb640.5bn, accountingfor 31.8%.

2) The infrastructure construction business remainsstable, and sub-segments grow rapidly. In 1–3Q25,revenue of the infrastructure construction business fell 3.6%YoY to Rmb370.6bn, and gross margin rose 0.4ppt YoY to9.5%. New contracts for the infrastructure constructionbusiness rose 3.9% YoY to Rmb1,014.4bn, with newcontracts for energy engineering, municipal engineering, andwater conservancy and transport increasing 31.2%, 27.8%,and 15.3% YoY to Rmb441.9bn, Rmb190.3bn, andRmb46.1bn.

3) Real estate business growing steadily; land acquisitionfocusing on core cities and regions. In 1–3Q25, revenuefrom the real estate business rose 0.6% YoY toRmb177.1bn. Contracted sales fell 2.0% YoY toRmb255.3bn, and gross margin fell 3.2ppt YoY to 14.2%. In1–3Q25, the firm added 6.95mn sqm of land reserves, all ofwhich are located in tier-1/2 cities and provincial capitals.

4) Pressure on net operating cash flow lingers. In 1–3Q25,the firm's net operating cash flow dropped 58.0% YoY toRmb13.35bn.

Trends to watch

In 1–3Q25, the firm's overseas new contracts rose 2.0% YoY toRmb168.4bn, and its overseas revenue grew 8.8% YoY toRmb91.9bn. We are upbeat about its business transformationgiven its strong presence in urban renewal. In addition, the firmincreased efforts to revitalize existing assets, and we expect thequality of its financial statements to improve.

Financials and valuation

Given weak industry demand, we lower our 2025 and 2026attributable net profit forecasts 7.3% and 9.9% to Rmb46.50bnand Rmb47.58bn. The stock is trading at 5.0x 2025e and 4.9x2026e P/E. We maintain an OUTPERFORM rating. Givenrecovering market confidence in the sector amid expectationsfor fiscal expansion, we maintain our TP of Rmb7 (6.2x 2025eand 6.1x 2026e P/E), offering 23.7% upside.

Risks

Disappointing cash collection and/or execution of backlogorders.