Smart Finance and Economics App learned that Guotou Securities released a research report stating that since the beginning of this year, China's policy towards corporate bond conversion has been continuously strengthened. In November 2024, the Ministry of Finance announced a 10 trillion yuan corporate bond policy, the largest effort in recent years, holding the promise of significantly reducing the financial pressure on local governments. Previously, affected by the financial pressure on local governments, some regions had slowed down or halted the progress of infrastructure projects, resulting in a decline in infrastructure investment growth, which put pressure on the performance, profits, and cash flow indicators of construction and infrastructure enterprises. This corporate bond issuance will promote the implementation and repayment acceleration of existing projects, the recovery of infrastructure sector performance is expected, while freeing up funds for new projects.

In addition, in 2025, the fiscal policy is set to be proactive. After Trump's election, there is a chance for domestic efforts to boost domestic demand and stabilize growth to hedge against potential export pressures. The government's investment in new projects may gradually increase, driving the marginal recovery of local infrastructure investment demand, providing support for the medium and long-term development of construction engineering companies from the demand side.

Key points from Guotou Securities are as follows:

Market cap management guidelines are being implemented to drive the value appreciation of undervalued construction central enterprises.

The official implementation of the 'Listed Company Supervision Guidelines No. 10 - Market Value Management' clarifies the definition and implementation tools of market value management, while making specific requirements for the market value management of major index constituents and long-term undervalued companies. The implementation of market value management guidelines will aid in pushing undervalued central state-owned enterprises back to fair valuations, enhancing the value of state-owned assets, and aligning the valuation levels, sector contributions, and economic pillar statuses of undervalued companies. Many leading construction enterprises among central state-owned enterprises have been undervalued for years. In addition to assessing internal operational quality, the market value management tools are diverse and have supporting policies covering various market-oriented tools such as mergers and acquisitions reorganizations, dividends, and share buybacks. With the background of undervalued central enterprises issuing corporate bonds, the combination of internal operations and market-oriented tools, coupled with subsequent market value management measures, is expected to continuously boost the overall valuation of the sector.

The leading position of central construction enterprises in the construction industry is stable, and the recovery of operational performance is expected to continue.

Traditional infrastructure central enterprises' new order signings maintained a year-on-year growth from 2021 to 2023, facing significant pressure in 2024, but still maintaining a high market share. Their leading position in the industry remains stable. The stable growth trend in 2025 is expected to drive the recovery of infrastructure investment. With the background of reduced debt pressure and the expectation of a warmed-up new project bidding volume, it will boost the growth rate of top infrastructure central enterprises' orders. In terms of revenue and performance, the infrastructure central enterprises sector also maintained steady growth from 2021 to 2023. However, influenced by local financial pressures, traditional infrastructure central enterprises have seen an increase in the proportion of impairment provision in the first three quarters of 2023 and 2024. Revenue, performance, and operating cash flow are somewhat affected.

With the implementation of reduced debt, undervalued construction central enterprises have a significant financial statement repair space. Expectations for profit enhancement, accelerated performance growth, and improved operating cash flow are worth waiting for, boosting both EPS and valuation performance simultaneously. The current reduced debt scheme has a relatively long implementation period, and its effects are expected to be further demonstrated in 2025. Improvement in project repayments and operating cash flow in 2025 may be more pronounced. Infrastructure design is at the forefront of the industry chain, benefiting first from improved funding and demand. The infrastructure design sector saw consecutive year-on-year decline in performance in the third quarter of 2023 and 2024, mainly due to project implementation slowing down and increased impairment provisions.

Against the backdrop of reduced debt, all aspects of infrastructure engineering operation are expected to benefit. Design companies are at the forefront of the industry chain. Compared to infrastructure engineering contracting orders, design orders usually have a shorter implementation period and smaller scale, therefore, their repayment and performance improvement may be realized more quickly. The performance improvement elasticity is greater, and in addition, the funding and resource support for new infrastructure projects in 2025 provides opportunities for the design enterprises. Design companies are the first to benefit from the release of demand for new projects, gradually reflected in the order end and future performance realization.

In terms of business models, design enterprises exhibit obvious characteristics of being asset-light with high gross profit margins, minimal financing pressures, and overall profitability, cash flow, and debt ratios are better than the industry average. Large and medium-sized state-owned infrastructure design enterprises with a national layout or engaged in high-barrier businesses benefit more from the implementation of reduced debt and have outstanding advantages in long-term stable operations and shareholder empowerment.

Expanding into overseas markets holds strategic significance, with the quality international engineering sector experiencing improved operations.

With the confirmation of the US election results, Sino-US relations may face renewed pressures. From a strategic perspective, domestic companies are expected to increase their business layout in countries along the Belt and Road Initiative, strengthening relationships with countries along the route. Meanwhile, overseas markets serve as important support for the long-term development of Chinese construction companies.

The construction sector with a relatively high proportion of overseas business is specialized in the field of international engineering enterprises, primarily focusing on project contracting in a specific field, with strong specialization in specific areas such as metallurgy, chemicals, and cement engineering. Single project scales are relatively small compared to infrastructure projects, with a relatively higher proportion of overseas business revenue, and overall profitability and repayments from overseas business are better than domestic operations. The rapid growth in the amount of newly signed contracts for high-quality overseas targets, along with the implementation of overseas projects, is expected to continuously increase the proportion of overseas revenue, further driving profitability improvement. The implementation of domestic traditional industry low-carbon emission policies is likely to be enforced, driving the release of demand for technical upgrades in industries such as cement and metallurgy domestically.

Investment advice:

(1) Undervalued infrastructure construction central enterprises: The heavy release of debt-to-equity policy, expected performance recovery, comprehensive market cap management, helping to enhance the valuation of central enterprises trading below book value. It is recommended to pay attention to: China State Construction Engineering Corporation (601668.SH), China Communications Construction (601800.SH), China Railway Construction Corporation (601186.SH), China Railway (601390.SH), Metallurgical Corporation of China (601618.SH).

(2) Infrastructure design central SOEs: At the forefront of the infrastructure industry chain, centrally-owned design companies operate steadily, adopting a light-asset high-profit margin model. They mainly focus on nationwide business layout or specialize in high barriers to entry design services. They expand the industry chain around their main business. It is recommended to pay attention to: China Merchants Design & Research Institute (600720.SH), Guangzhou Metro Design & Research Institute (003013.SZ).

(3) Leading quality companies expanding overseas: With the domestic infrastructure growth stabilizing, overseas companies are expected to create new support points for long-term business growth. The 'belt and road initiative concept' layout holds strategic significance. It is recommended to focus on international engineering service providers with a high proportion of overseas business, continuous growth in overseas orders, and outstanding competitiveness in overseas niche areas: Sinoma International Engineering (600970.SH), Sinosteel Engineering & Technology (000928.SZ).

Risk warning: Decline in infrastructure investment, slower implementation of local debt policies, lower-than-expected demand, slower-than-expected company receivables, slower-than-expected market cap management progress, intensified industry competition, tense international political relations, etc.