THE construction sector has long been shunned, as over-competition coincided with the perpetual postponement of local infrastructural developments. But one company in the sector has remained on a strong growth track and announced excellent interim results, justifying serious attention. K. Wah International is part construction materials company and part property developer, and both operations are performing strongly. Net profit at the interim stage was $62 million, up from $29 million a year earlier, and the final results for the year to March should also impress. S.G. Warburg Securities is forecasting 53 per cent growth in net profit to $162 million for 1992-93, putting the shares on a price-earnings ratio of 5.7. In addition, the company should pay a full-year dividend of 14 cents, putting it on an extremely attractive yield of 7.8 per cent. The market rating suggests that this level of earnings is not sustainable, but that is not the case. On the property development side, the company has an exciting schedule, with a mix of local and mainland developments, which will provide exceptional profits growth up to March 1995. Its construction materials business has been a steady performer, but it will be a major beneficiary when expenditure on Metro-Plan and the Port and Airport Development gets into full swing. The company controls 20 per cent of the aggregates market in Hongkong, which will put it in a very strong position in the latter stages of the airport project, when demand for cement will surge. In addition, it owns 75 per cent of International Pipe, which shares a duopoly of the local reinforced concrete pipe market, and will see a strong increase in demand from Metro Plan, and the proposed Government expenditure on improvements to the seweragesystem. But in the short-term it is property development that will be the engine for profits growth. The company has sold a residential development in Fanling and started sales of units in a Tokwawan project, which will boost profits for the 12 months to March this year. In the current year, K. Wah will receive a contribution from its sizeable project in Dongfeng Road in Guangzhou. The project is slightly behind schedule, but is expected to contribute profits of up to $400 million. Warburg is forecasting 65 per cent earnings growth to $267 million in 1994, putting the shares on a prospective p/e of 4.6, while the booking of 75 per cent of the Guangzhou project in 1995 will bring in a net profit figure of $333 million. Clearly, there are negative factors as well. The quality of earnings is poor, and the management record far from perfect - it has a history of asset purchase from the major shareholder, including the bizarre and highly unprofitable diversification into arestaurant in Japan. However, the current market rating is pathetically low, and the shares look to offer significant up-side potential in the lead-up to the announcement of an excellent set of results for 1992-93.
