Zhejiang United Investment Holdings Group Limited (SEHK:8366), a HKDHK$892.80M small-cap, is a engineering and construction (E&C) company operating in an industry which is expected to benefit from higher gross domestic product, high consumer confidence, and upbeat private sector investments. Along with these positive signals is the potential for significant infrastructure plans and public-private partnerships to fund them. Capital goods analysts are forecasting for the entire industry, a positive double-digit growth of 17.69% in the upcoming year . An interesting question to explore is whether we can we benefit from entering into the E&C sector right now. Today, I will analyse the industry outlook, as well as evaluate whether Zhejiang United Investment Holdings Group is lagging or leading its competitors in the industry. View our latest analysis for Zhejiang United Investment Holdings Group
What’s the catalyst for Zhejiang United Investment Holdings Group’s sector growth?
The E&C industry in Hong Kong faces growing competition from players in China, Korea and India. Firms in rapidly growing economies have spent the past decade focusing on their home markets, gradually building up cash positions and internal expertise. Now, as growth eases in their home markets, they are expanding outward and seeking to compete against established global players. In the past year, the industry delivered negative growth of -7.18%, underperforming the Hong Kong market growth of 11.29%. Zhejiang United Investment Holdings Group lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its E&C peers. As the company trails the rest of the industry in terms of growth, Zhejiang United Investment Holdings Group may also be a cheaper stock relative to its peers.
Is Zhejiang United Investment Holdings Group and the sector relatively cheap?
The E&C industry is trading at a PE ratio of 9x, in-line with the Hong Kong stock market PE of 14x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 14.90% compared to the market’s 10.07%, potentially illustrative of past tailwinds. Since Zhejiang United Investment Holdings Group’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Zhejiang United Investment Holdings Group’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Zhejiang United Investment Holdings Group has been an E&C industry laggard in the past year. If your initial investment thesis is around the growth prospects of Zhejiang United Investment Holdings Group, there are other E&C companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how Zhejiang United Investment Holdings Group fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If Zhejiang United Investment Holdings Group has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its E&C peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at Zhejiang United Investment Holdings Group’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Zhejiang United Investment Holdings Group’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other capital goods stocks instead? Use our free playform to see my list of over 100 other E&C companies trading on the market.