China Communications Construction Company Limited (HKG:1800): Can Growth Justify Its June Share Price?

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China Communications Construction Company Limited (HKG:1800) closed yesterday at HK$6.97, which left some investors asking whether the high earnings potential can still be justified at this price. Below I will be talking through a basic metric which will help answer this question.

See our latest analysis for China Communications Construction

What can we expect from China Communications Construction in the future?

According to the analysts covering the company, the following few years should bring about good growth prospects for China Communications Construction. Expectations from 16 analysts are certainly positive with earnings forecasted to rise significantly from today’s level of CN¥1.184 to CN¥1.614 over the next three years. On average, this leads to a growth rate of 11% each year, which illustrates an optimistic outlook in the near term.

Is 1800’s share price justified by its earnings growth?

China Communications Construction is trading at quite low price-to-earnings (PE) ratio of 5.18x. This tells us the stock is undervalued relative to the current HK market average of 10.99x , and undervalued based on its latest annual earnings update compared to the Construction average of 11.28x .

SEHK:1800 Price Estimation Relative to Market, June 3rd 2019
SEHK:1800 Price Estimation Relative to Market, June 3rd 2019

Given that 1800’s price-to-earnings of 5.18x lies below the industry average, this already indicates that the company could be potentially undervalued. However, to properly examine the value of a high-growth stock such as China Communications Construction, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 5.18x and expected year-on-year earnings growth of 11% give China Communications Construction an extremely low PEG ratio of 0.48x. This tells us that when we include its growth in our analysis China Communications Construction’s stock can be considered relatively cheap , based on the fundamentals.

What this means for you:

1800’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

  1. Financial Health: Are 1800’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has 1800 been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 1800’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.