In July, the newly started contract amount was CNY 1817.3 billion, a year-on-year decrease of 13.9% and an increase of 164.5% on a monthly basis. It is expected that the total amount of new infrastructure construction and investment completion in the whole year will face great pressure, and the revenue and profits of traditional infrastructure central enterprises and local construction companies are expected to be generally under pressure.
According to the research report released by Guosen Securities on the Smart Finance app, based on the data from Mysteel statistics, the total investment in new projects in various parts of the country from January to July 2024 was CNY 22.22 trillion, a year-on-year decrease of 34.7%. The newly started contract amount in July was CNY 1817.3 billion, a year-on-year decrease of 13.9% and an increase of 164.5% on a monthly basis. It is expected that the total amount of new infrastructure construction and investment completion in the whole year will face great pressure, and the revenue and profits of traditional infrastructure central enterprises and local construction companies are expected to be generally under pressure, requiring strengthened control over project quality, stronger cash flow, gradual digestion of accumulated impairment pressure in the past, and thus realization of gradual repair of balance sheets and valuations.
Currently, we recommend focusing on "hidden champions" with relatively little influence from the decline in real estate and infrastructure orders, good order prosperity and high collection, and abundant cash flow in segmented tracks, including L&K Engineering (603929.SH), Wuxi Taiji Industry (600667.SH), and China Haisum Engineering (002116.SZ), and suggest paying attention to construction central enterprises, such as China State Construction Engineering Corporation (601668.SH), China Railway Construction Corporation (601186.SH), and China Railway, which have cash flow improvement expectations and relative prudence in heavy asset investment.
The pace of starting construction this year is significantly behind that of the previous two years, with a large increase in monthly newly started contract amount in July, but still slightly lower than that of the previous two years, and the sustainability of the recovery in construction needs to be observed. From January to July 2024, the nationwide new special bonds added up to CNY 1.77 trillion, a year-on-year decrease of 28.9%. The newly added special bonds in July were CNY 281.47 billion, a year-on-year increase of 43.4% and a month-on-month decrease of 15.4%. High-quality projects for special bonds are gradually decreasing, and the problem of "funds and projects" is severe. Investment prosperity in fields supported by central finance, such as water conservancy and railroads, is relatively high, while the investment growth rate of municipal utilities and road construction, which are key to local finance, has significantly declined.
The overall new order of the industry is declining, and the advantages of central enterprises are continuing to increase. The national new contract amount for the construction industry reached CNY 1.491 billion in H1 2024, a decrease of 3.4% year-on-year. The new construction contract amount of the eight construction central enterprises in H1 2024 totaled CNY 0.789 billion, a decrease of 0.5% year-on-year, significantly higher than the overall growth rate of -3.4%, and the market share measured by the new contract amount has increased rapidly from 35.4% in 2020 to 52.9%. The financing scale of the eight construction central enterprises accounts for 80% of all listed construction companies, and their financing costs are significantly lower than those of other construction companies, with the difference in financing costs expanding continuously in the past three years. Benefitting from stronger financing capability and lower financing cost, construction central enterprises are more advantageous in obtaining major engineering projects, and are expected to perform better than the industry as a whole in terms of orders and revenue.
The growth model driven by PPP is difficult to sustain, and the cash flow pressure in the industry chain is increasing. After the new PPP policy landed at the end of 2023, the mode of investment driving engineering revenue may be difficult to continue, which may result in overall pressure on the revenue and profits of construction enterprises. The cash-to-payment ratio of the construction industry is synchronously declining, reflecting the lengthening of payment periods for construction companies. Although the stable difference between the two guarantees positive cash inflows, the payment ratio is relatively more rigid, and future construction companies may face greater cash flow pressure.
Risk warning: downside risk in macroeconomic downturn; risk of less than expected policy support for infrastructure; risk of approval and implementation of major projects falling behind expectations.