SINOPEC ENGINEERING(2386.HK)：LOOKS ATTRACTIVE AGAIN AFTER RECENT PULL BACK-格隆汇

机构：中银国际
研究员：Lawrence LAU/Rainey DAI

　　While the earnings of Sinopec Engineering (SEG) grew 6% YoY in 2024, the decline in gross margin aroused concerns among investors. Although the negative impact from conclusion of delayed overseas projects is likely to be one-off, it takes time for investors to regain confidence. At the very least, the company should be able to show flat earnings in 2025. To be conservative, we trim our 2025-26 earnings forecasts by 13-15% assuming lower margins. After the 7% fall in share price on Monday, the company’s shares look attractive as they offer 7% or more dividend yield for the coming three years. We reiterate our BUY call with target price reduced to HK$6.43.
　　Key Factors for Rating
　　SEG’s net profit grew 6% YoY to RMB2,466m in 2024, 3% below our forecast. More importantly, its gross margin dropped from 10.0% in 2023 to 8.3% in 2024, the lowest level since its listing. Its gross profit actually dropped 5% YoY. Had it not been the booking of RMB154m other gains (mostly one-off disposal gains), the company should have seen earnings decline.
　　The main drivers for the decline in gross margin were the margin decline at EPC contracting segment (from 8.4% in 2023 to 7.2% in 2024) and construction segment (from 8.6% to 6.0%). The key reason for the decline in margin at the construction segment was the negative impact from the conclusion of some overseas projects which have been delayed by COVID. While we believe this is likely to be one-off, we do not have sufficient data to quantify the impact.
　　We expect the company to see margin improvement for the construction segment in 2025. The company should have the flexibility to ensure that its earnings will at least be flat in 2025.
　　The price of the company’s H shares dropped 7% on Monday after the results. At current level, the company’s H shares look attractive by offering 7% or more dividend yield in the coming three years.
　　Key Risks for Rating
　　Lower-than-expected gross margin.
　　Unexpected other expenses.
　　Valuation
　　We reduce our target price from HK$6.88 to HK$6.43 to reflect the cuts in our earnings forecasts. Our target valuation is still 6.5% forecast dividend yield for coming three years (rolled over from 2024-26E to 2025-27E). Our new target price is equal to 10.7% 2025E P/E.