Belt And Road Expansion And Tech Investment Will Boost Resilience

Key Takeaways

• CITIC's focus on international expansion and high-growth segments aims to boost global presence and future revenue streams, enhancing earnings potential.
  
• Increased dividend payouts and investments in technology and R&D are designed to improve profitability and attract income-seeking investors.
  
• Geopolitical tensions, market downturns, and real estate pressures threaten CITIC's revenue growth and profitability, while financial sector challenges could limit margins and asset quality.

Catalysts

Operates in financial services, advanced intelligent manufacturing, advanced materials, consumption, urbanization, resources and energy, and engineering contracting businesses worldwide.

• CITIC Limited plans to increase its dividend payout ratio to at least 30% by 2026, which may attract more investors seeking income through dividends and potentially drive up stock price, impacting shareholder returns and earnings.
  
• The strategic international expansion, with a focus on Belt and Road initiatives and developed economies, is expected to increase overseas revenue and solidify CITIC's position in global markets, potentially boosting revenue and earnings.
  
• Significant investment in technology and R&D, including AI and smart manufacturing, is set to enhance operational efficiencies and innovation, which may improve profitability and net margins over the long term.
  
• Expansion into high-growth segments such as advanced materials and intelligent manufacturing, combined with strategic use of CITIC’s financial services, is expected to bolster future revenue streams and gross margins.
  
• The company's risk mitigation efforts, especially in real estate and local government liabilities, should stabilize asset quality and potentially lower risk-related costs, positively affecting net margins and earnings.

CITIC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CITIC's revenue will decrease by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 8.6% in 3 years time.
• Analysts expect earnings to reach CN¥67.2 billion (and earnings per share of CN¥2.38) by about April 2028, up from CN¥57.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.7x on those 2028 earnings, up from 4.2x today. This future PE is lower than the current PE for the HK Industrials industry at 6.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

CITIC Future Earnings Per Share Growth

Risks

• Geopolitical tensions and trade protectionism may negatively impact CITIC's international operations and overseas revenue, leading to slower growth in global markets and affecting overall revenue and profitability.
  
• The downturn in the Brazilian seed market and domestic auto market price wars could continue to affect the New Consumption segment's performance, leading to reduced revenue growth in these areas.
  
• The Chinese real estate market faces significant pressures, which could result in increased risk and potential losses in the financial segment, affecting net margins and overall earnings.
  
• Although CITIC has mitigated some real estate risks, continued exposure to this sector and local government liabilities could adversely impact asset quality and increase non-performing loans, affecting net profit.
  
• Potential downward pressure on net interest margins and low-interest-rate environment could limit growth in the financial sector, impacting profit margins and overall earnings.

Valuation

• The analysts have a consensus price target of HK$11.15 for CITIC based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥786.3 billion, earnings will come to CN¥67.2 billion, and it would be trading on a PE ratio of 5.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of HK$8.84, the analyst price target of HK$11.15 is 20.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.