Aug. 23 (Bloomberg) -- China Communications Construction Co. builds 90 percent of the ports in the world's fastest-growing major economy. That virtual monopoly is one reason investors bid the shares up faster than any of the 87 companies in the MSCI China Index from their December debut to July 31, when they peaked.

The stock has tumbled 13 percent since then on concern that government efforts to curb infrastructure investment will force the Beijing-based company to spend more drumming up business overseas. Since July 8, at least five of 15 analysts covering the company have lowered their ratings.

China Communications isn't the only local company feeling the squeeze as the country tries to cool its economy. China Coal Energy Co., the second-largest coal producer by sales, has slid 11 percent since July 23, while China Merchants Bank Co. said profit growth may slow in the second half. China Communications is looking beyond its home country to take up the slack in domestic spending. That may not prove as lucrative.

``Its overseas business is at an early stage, so it may have a low profit margin compared to its local business,'' said Sunny Chan of CSC Securities HK Ltd. in Hong Kong, who cut his rating to ``sell'' from ``buy'' on July 20.

At the beginning of the year, China Communications decided to accelerate international growth, Liu Wensheng, the company's chief economist and board secretary, said in an Aug. 16 interview in Beijing.

Looking Abroad

``Getting into overseas projects is a strategic consideration for us,'' Liu said. ``When the domestic market dries up, you need to be able to look abroad for other opportunities.''

Orders outside China increased 150 percent in the first half from the same period a year earlier, he said. That compares with growth of more than 30 percent in the domestic market.

The company is laying out more cash to secure projects such as Southeast Asia's longest bridge, a planned $1 billion project to connect the island of Penang to mainland Malaysia.

Capital spending rose 59 percent last year as the builder grabbed more orders for ports, roads and railways in emerging markets from South America to the Middle East, where competitors include France's Vinci SA, the world's biggest construction company, and Bouygues SA, the second-biggest.

Manop Sangiambut, deputy head of China research at CLSA Ltd., cut his rating to ``underperform'' from ``buy'' on July 8 after China Communications more than tripled following a December initial public offering. The reason: reduced cash flow as the company takes on more so-called build-operate-transfer projects that require it to spend money to manage roads or ports for a fixed period before handing them over to customers.

Overpaying

``The share price can double overnight,'' Jun He, a Hong Kong-based Citigroup Inc. analyst, said in an Aug. 16 phone interview. ``The earnings cannot. So eventually you'll find that you're paying too much for a good thing. And you can always pay too much for a good thing.''

The stock is priced at 52.5 times earnings, twice the price-to-earnings ratio for the Hang Seng China Enterprises Index, which tracks mainland China companies listed in Hong Kong. It's also higher than the price-to-earnings ratio of 51.6 for the CSI 300 Index, the benchmark for the mainland stock market, which is one of the world's most expensive. Vinci is priced at 17.6 times earnings.

China Communications is 70-percent owned by the China Communications Construction Group. The group, controlled by the central government's State-Owned Assets Supervision and Administration Commission, was created Oct. 8, 2006, with the merger of state-owned China Harbour Engineering Co. and China Road and Bridge Corp.

The company controls more than 70 percent of the overseas road-and-port-building market for Chinese enterprises, Liu said. Control of most of the domestic port-building market has made China Communications the world's biggest port contractor, he said.

Unrivaled Opportunity

China's economy expanded at the fastest pace in 12 years in the second quarter, driven by investment in fixed assets such as ports, roads and bridges, the National Bureau of Statistics said on June 19.

``No other company has this kind of opportunity,'' Liu said. The abundance of those opportunities may dwindle as government moves to curb investment start to take hold.

First-half investment in China's roads and ports slowed this year, gaining 9.6 percent, compared with 15 percent growth in each of the two preceding years, according to the Ministry of Communications, the country's transportation regulator.

China Communications plunged 13 percent from Aug. 1 to Aug. 3, their sharpest three-day decline, after Citigroup told investors to sell. Slowing investment in China's roads and ports threatens to crimp orders, Citigroup said. The drop was greater than the slide triggered by the credit crunch in the U.S.

`Big and Fast'

The company's capital spending has swelled 230 percent since 2003 as it has expanded to keep pace with demand. Capital expenditure, or capex, last year was used to buy dredging equipment and build new factories for port cranes, the company said April 10.

``The capex to fund expansion in coming years will be huge,'' said Chan of CSC Securities.

The country plans 639 new deep-water berths in the five years through 2010, doubling its coastal port capacity to keep pace with rising cargo volumes.

The company must spend to fully tap surging demand, Liu said.

``In the past two years, our expansion plans have been big and fast,'' Liu said. ``They have to be, because business volume has been expanding rapidly. Solving our capacity shortage is important.''

Slowing Orders

The company's main overseas markets are Africa, Southeast Asia and the Middle East. Contracts in many regions have increased because of Chinese government aid, which creates more profit at less risk, Liu said.

In Chinese foreign-aid projects, competitors are generally other Chinese government-controlled construction groups. In commercial projects, China Communications bids against international rivals including Vinci and Bouygues, Liu said.

``Order flow, particularly in the road and bridge segment, has lagged expectations so far this year, and the risk of slower growth in the port-related market cannot be ruled out in the second half,'' said Citigroup's He in a July 31 report in which he downgraded his rating on the company to ``sell/high risk'' from ``buy/high risk.''

To be sure, the company's position as China's biggest port builder will allow it to capitalize on continued infrastructure spending, and it will probably keep winning contracts for foreign-aid projects overseas.

Building Bridges

The company also dominates China's dredging market, with an 80 percent share, Liu said. It controls more than 70 percent of the world trade in port container cranes through its Shanghai Zhenhua Port Machinery Co. unit.

At the end of last year, China Communications had 110 billion yuan ($14.5 billion) of contracts to design and build infrastructure projects, according to its annual report. That includes sections of the Hangzhou Bay Sea Bridge, which will be the world's largest oversea span, according to a Feb. 15 report by UBS AG.

The company is helping China build specialized berths for oil, natural gas and mineral carriers as the country expands capacity for shipping and receiving. In September 2005, it completed the first phase of two 250,000-ton mineral terminals at the Caofeidian deepwater port under construction in the northern Bohai Bay. Investment in terminals at the port will reach 21 billion yuan, according to the UBS report.

China Communications is on track to at least double its overseas contracts to $4 billion and is well-positioned to become the main contractor for a planned 60 billion-yuan bridge connecting Hong Kong with Zhuhai city in mainland China, said Jack Xu, an analyst at SinoPac Securities in Shanghai.

``Given its dominant size, long industry expertise and access to capital, the company is on strong momentum to sign more contracts,'' Xu wrote in a June 11 report. ``These overseas contracts could offer higher gross margins, which would drive up overall gross margin.''

To contact the reporter on this story: Lee Spears in Beijing at lspears2@bloomberg.net.

Last Updated: August 22, 2007 12:10 EDT