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Road King Infrastructure Limited (1098, HK) - Property business recovered obviously

Tuesday, August 24, 2010

14550

Road King Infrastructure Limited(1098)

Recommendation on 24 August 2010
Recommendation	Buy
Price on Recommendation Date	$6.660
Target Price	$8.200

Weekly Special - 1836 Stella International

Introduction

Road King Infrastructure Limited (Road King) is a leading listed company in Hong Kong with its core business in the investment, development, operation and management of toll roads and property projects in the PRC. Road King has invested in a toll road portfolio of more than HK$4 billion, comprising 16 toll road and bridge projects spanning over 870 kilometers in seven provinces of the PRC. Road King has also invested in a property development portfolio of more than HK$15 billion, comprising 21 major projects with a total GFA of more than 5 million sqm spanning across 12 different cities in nine provinces and municipalities in the PRC.

Summary

Interim report shows that revenue of Road King dropped by 16.42% YoY to HKD 2.06billion, net profit rose slightly by 4.07% to HKD 265million, EPS at HKD 0.36. Property business has started to support the company's performance, and toll road provides stable cash flow with rich dividend.

We expect that its net profit in 2010 will be HKD 882million, EPS will be HKD 1.19. Considering its business scale and growth in future, we give Road King “Buy” rating, 12m TP at HKD 8.2, 23% higher than current close.

Property business supported the company's performance strongly. Firstly, booked revenue declined, in 1H2010 revenue dropped by 16% YoY to 2.06billion, net profit soared by near 3times to 240million. Profit from property accounted for 72% of totals. Secondly, ASP of booked properties rose by 74% to HKD 10600, boosting property business increase significantly. Consequently, gross profit margin soared to 34%.

Thirdly, contracted sales in 1H2010 were RMB 2.504billion, GFA sold was 0.325million sq.m., and ASP rose from 6800 per sq.m. in 1H2009 to 7700 per sq.m. in 1H2010.

Revenue and profit of toll road both declined

Firstly, revenue declined by 33% to 389million, profit declined by 61% to 92million. Secondly, for the reason of selling one toll road, car flow, revenue and cash flow all decreased. Thirdly, profit decreased more sharply, reflecting high profitability of the toll road sold in 2009.

In the future the company will integrate its toll road, we expect that the performance of toll road will fluctuate.

Highlights in the future

Interim report mainly reflects two characters of the company, including recovery of property business and fluctuation of toll road. Property business supported the company's performance strongly. Firstly, booked revenue declined, in 1H2010 revenue dropped by 16% YoY to 2.06billion, net profit soared by near 3times to 240million. Profit from property accounted for 72% of totals. Secondly, ASP of booked properties rose by 74% to HKD 10600, boosting property business increase significantly. Consequently, gross profit margin soared to 34%.

Risk

Sector risk will be enlarged.

Sales in 2H will be lower than expectation.

Decreasing ASP will affect the company negatively.

Valuation

Financials

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