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WIKI ANALYSIS
China Architectural Engineering (RCH) is a niche company that specializes in building architectural projects out of glass, which they call "curtain wall systems".[1]. The construction company has benefited from the tailwinds of a fast-growing Chinese economy as it designs mostly public works projects such as libraries, airports, and museums; 95% of its income in 2006 came from contracts with the Chinese government.
RCH has projects planned in other burgeoning economies such as Macau—which is benefiting from a boom in gambling tourism—and the Middle East, which has generated tremendous wealth from high oil prices.
The company's business model is based on contracts which typically run two years in length. The vast majority (90%) of these contracts are based on a fixed price, which exposes RCH to changes in prices for building materials such as steel, aluminum and glass. The company benefits when these commodity prices decrease but takes a hit when prices rise. [2]
Business Financials
As seen in its Shenzhen International Airport project below, the company designs and constructs large architectural projects out of mostly glass (they call these "curtain wall systems"). The company derived about 90% of its income from fixed price contracts and 10% from cost-plus-fee contracts, for which the company is reimbursed for materials and other costs.
Fixed price contracts, which average two years in length, allow RCH to take advantage of--or be hurt by--volatile material costs.[3] Among these types of contracts, 35% of sales came from new construction projects while the remainder came from projects to add new glass "skins" to old buildings. [4]
Trends and Forces
Focus on China and other rapidly developing economies
Construction of the large public projects correlate highly with overall economic expansion; transportation infrastructure such as railroad stations, airports and cultural centers typically need to be supported by an economic boom.
Not surprisingly, China Architectural is involved in projects with burgeoning economies:
- China: This country is its main base of operations and has generated the vast majority of commercial and public works contract income over the years. [8]. As China's economic growth continues, RCH plans to expand to second and third tier cities. Meanwhile, it maintains a strong relationship with government clients to develop its reputation and track record. [9]
- Projects in Hong Kong, Macau, Vietnam, Qatar, and the Middle East]]:[10] The similarity underlying most of these regions is a booming economy. Macau, for example, has seen its casino and hotel tourism skyrocket over the last several years and is drawing a large contingent of gamblers from Asia, which is much closer to Macau than Las Vegas. High oil prices have supported a robust economy in the Middle East, where large architectural construction projects are blossoming.
Move towards energy conservation
As large public buildings face increasingly higher energy costs, the demand for efficient wall systems is also rapidly increasing. These structures include libraries, museums, exhibition halls, stadiums, planetariums,and science centers. With rising fuel costs and environmental concerns, governmental agencies and international regulators have implemented regulations to ensure that public works buildings have a low environmental impact. [11] One such undertaking by RCH is the development of a system that reduces seasonal temperature fluctuations within buildings by manipulation of light, heat, and the use of photo voltaic cells. The idea is to reduce the need for air conditioning and heating and thus decrease long term energy costs for the building, as well as help protect the environment. [12]
Government regulation
95% of total revenue came from Chinese government contracts in 2006. [13] The Chinese government reserves the right to terminate or modify contracts at will, and often award contracts to multiple bidders, thus artificially increasing competition between contractors. As a "high-tech enterprise", RCH is granted income tax reduction to a rate of 15%, compared to the standard rate of 25% as of 2006. However, there is no guarantee that this preferential tax treatment will sustain.[14]
Fluctuating materials prices
Aluminum and steel prices fluctuate rapidly, which can affect the company's margins. Between December 15 2005 and 2006, prices ranged from $1.00 to $1.40 per pound for aluminum, and between 3,332RMB to 4,688RMB for steel plates.[15] RCH has no long-term materials contracts, and it has no influence on the steel or aluminum prices it pays. About 90% of China Architectural's contracts are fixed price, meaning that the company absorbs any net gain or loss due to the price of materials it uses. The remaining 10% of its contract income is variable, allowing the company to pass the cost of materials to its clients.
No Direct Competition
Given the ultra-specialized niche China Architectural Engineering occupies, the company has few direct competitors. It is the only company of its kind listed on North American exchanges.
However, the overall construction industry in China--where the company makes the vast majority of its revenue--is large and scattered across myriad small and large companies, both public and private.[16] The company may work with or compete against these construction companies in vying for projects funded by the Chinese national government, which drove 95% of contract income in 2006.
China Architectural has first class certification in Curtain Wall Standard and second class certification for Light Steel Structure Standard, the two standards defined by the Chinese Ministry of Construction (a complete list of other companies is not available). [17]
Notable projects
Click on an image to see the full size version.
References
- ↑ RCH 2006 10-k, item 1, p 3
- ↑ RCH 2006 10-k, item 1, p 11
- ↑ RCH 2006 10-k, item 1, p 6
- ↑ RCH 2006 10-k, item 1, p 3
- ↑ RCH 2007 S-1
- ↑ RCH 2006 10-k, financial statements, F-5
- ↑ RCH 2006 10-k, financial statements, F-5
- ↑ RCH 2006 10-k item 1, p 2
- ↑ RCH 2006 10-k, item 1, p 2
- ↑ RCH 2006 10-k, item 1, p 5
- ↑ RCH 2006 10-k, item 1, p 2
- ↑ RCH 2006 10-k, item 1, p 10
- ↑ RCH 2006 10-k, item 1A, p 12
- ↑ RCH 2006 10-k, item 1A, p 16
- ↑ RCH 2006 10-k, item 1A, p 14
- ↑ RCH 2006 10-k, item 1, p 11
- ↑ RCH 2006 10-k, item 1, p 11
- ↑ RCH 2007 S-1
- ↑ RCH 2007 S-1
- ↑ RCH 2007 S-1
- ↑ RCH 2007 S-1
- ↑ RCH 2007 S-1
- ↑ RCH 2007 S-1
- ↑ RCH 2007 S-1
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