Boyuan Construction Group Inc fka BOY

[MinnieM]

Research Capital Corporation analysts created a report on Boyuan dated 1.28.10. They merged with and J.F. Mackie & Company Ltd. and now operate under the name of Mackie Research Capital Corporation.
http://www.mackieresearch.com/index.php

Following are some highlights from the report which is 42 pages long:

Boyuan Construction Group Inc.
Building a Premier Construction Company
RECOMMENDATION: BUY

INVESTMENT HIGHLIGHTS

•Boyuan Construction Group Inc. is a China-based pure-play construction company that builds commercial, residential, and municipal infrastructure projects in China.

•China’s construction market is large and growing: China’s construction market is ranked second in the world by size and is expected to surpass the U.S. in total construction spending in the next few years. The main drivers for China’s construction industry are GDP growth, foreign direct investment, exported goods, urbanization, rising incomes, and government support. The trends for these drivers continue to look robust, which suggest a very encouraging outlook for China’s construction industry.

•Location, location, location – operating in the right areas: Boyuan’s areas of focus (Shanghai, Jiangsui, Zhejiang, Shandong, and Hainan Island) are regions that generally place a lot of investment into the construction industry, have demonstrated above-average growth in construction-generated revenue, and have strong construction activity outlooks.

•Boyuan's Contracting license and technical expertise key in a fragmented market: The company possesses a Class I general contracting license which allows it to bid on larger projects. There are approximately 62,000 construction enterprises in China and it is estimated that less than 5% have a Class I license. The company’s technical expertise and reputation for quality typically set it above its competitors.

•Backlog, cost plus model, and Make Good Provision give us comfort with our forecast: We believe that we have good sales visibility for the next 12+ months given Boyuan’s backlog, and comfort with its margins because of the cost plus model and a net profit base of $12.4 million for F2010 based on Boyuan’s Make Good Provision, whereby the founder will distribute 2.6 million of his shares to shareholders if the company does not reach its F2010 net profit target. Consequently, our EPS forecast is $0.44 for F2010, $0.54 for F2011, and $0.63 for F2012 based on strong revenue growth, offset modestly by declining margins due to product mix.

•Key risks: A potential real estate bubble, slowing construction market, and government intervention are the biggest risks to the industry. Increased competition, loss of key customers, and lack of access to capital are key risks specifically to the company.

•We are initiating with a BUY recommendation and 1-year target price of C$4.50. Our target price is derived using a forward P/E multiple of 7.5 on the company’s 2011 (calendar) EPS, which is a discount to the industry average of 9x and below the industry level of 10.5x currently. The stock appears cheap at current levels. We should note the founder owns ~60% of the shares outstanding and that there are 12 million preferred shares which have no special voting status and will eventually be converted to common shares over time.

Boyuan Construction Group Inc. (www.boyuangroup.com) is a China-based pure-play construction company that builds commercial, residential, and municipal infrastructure projects in China.

EXECUTIVE SUMMARY
China’s construction market is one of the largest in the world and it has also been one of the fastest growing markets as well. Continued positive momentum for many key drivers for the sector is expected to push the industry higher, including GDP growth, foreign direct investment, exported goods, urbanization and population growth, per capita income growth, and government support. The outlook for most of these drivers remains positive, which is very encouraging for China’s construction sector. Industry experts are suggesting that China’s construction spending will overtake the U.S. by 2018 and possibly earlier. Furthermore, China’s
construction spending is projected to grow to 10% per annum out to 2012 at least.

We believe that Boyuan Construction Group Inc. is well positioned to take advantage of this large and fast-growing construction market. The company’s Class I general contracting license, it's technical expertise along with its reputation for quality, should allow it to take advantage of a highly-fragmented construction industry (62,000 construction enterprises and 34,000 contractors), especially given that less than 5% of construction enterprises have a Class I license. Furthermore, the company’s areas of focus are regions that generally place a lot of investment into the construction industry relative to the rest of the country, have demonstrated above-average construction growth over the years, and have strong construction activity outlooks.

Financially, we believe that the company’s backlog provides good insights regarding near-term financial performance. The company’s backlog outlines its large projects in the pipeline, the construction time periods, as well as expected margins. This allows us to feel very comfortable with our sales projections. For example, the company’s backlog suggests revenue of $110 million for F2010, which represents approximately 81% of our F2010 sales estimate of $134 million with 5 months left in the fiscal year.
Similarly, the company’s backlog in addition to the cost-plus model provides margin insights to allow us to forecast our profits with good comfort as well.

The company has also employed a Make Good Provision, which we believe to be the first of its kind for a Toronto-listed company. Effectively, the founder of the company has put up approximately 2.6 million of his personal shares into an escrow account on the basis that if the company does not reach net profit targets of $12.4 million for F2010, then the shares would be distributed to shareholders via rights that were issued previously. We believe this is an excellent method to build credibility with the investment community.

Our forecast calls for EPS to grow from $0.39 in F2009 (June year-end) to $0.44 in F2010, $0.54 in 2011, and $0.63 in F2012, driven mainly by top-line growth of 23% per annum for that period, offset by a modest decline in margins due primarily to product mix (more higher-valued, but modestly lower-margin projects).

From a valuation perspective, Boyuan appears cheap on a forward P/E basis, trading at 7.8x versus its peers at 10.5x. We believe that as the company demonstrates continued solid financial performance, the stock should experience a valuation re-rating, which should push the stock price higher. We are initiating coverage with a BUY recommendation and 1-year target price of C$4.50, which corresponds to a conservative 7.5x forward P/E multiple compared to the industry historical average of 9x.

A key risk includes a potential real estate bubble. Other risks include: slowing construction market, government intervention from a macro perspective, increased competition, loss of key customers, and lack of access to capital to grow the business.

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