20161222-招商证券-Infrastructure_and_Machinery_Industry_2017_Outlook_28页_1mb_1mb

Infrastructure and Machinery Industry 2017 Outlook Summary

Core Content

The 2017 outlook for the Infrastructure and Machinery Industry highlights the growing role of Public-Private Partnership (PPP) in driving infrastructure investment, particularly in urban rail transit and urban upgrading. The report also emphasizes the recovery in the construction machinery sector, focusing on value investing opportunities and stock recommendations.

Main Investment Themes

• PPP Growth:

  • PPP has been a key driver of infrastructure investment in China, especially in urban rail transit and urban upgrading.
  • The marginal impact of PPP on infrastructure investment turned positive in 2H16E, and it is expected to significantly accelerate in 2017E.
  • Infrastructure investment growth is projected to be between 15-20% in 2017E.
  • While PPP helps reduce government capital investment and delay payments, it cannot solve long-term issues such as declining returns and lack of quality projects.
  • The inflection point for infrastructure investment is expected within the next 3-5 years.

• Construction Machinery Recovery:

  • The construction machinery industry is showing signs of recovery, with excavator sales improving rapidly in the second half of 2016.
  • Equipment utilization hours increased by 10-20% YoY, indicating a rebound in demand.
  • The report suggests a moderate recovery in 2017E, with construction machinery sales expected to rise by 10% YoY.
  • The overseas market (especially via the Belt & Road Initiative) provides some hope, but its impact is expected to be limited due to the current lack of substantial capital and the dominance of foreign manufacturers.

Key Companies and Investment Opportunities

• CSCI (3311 HK):

  • Recommended as a BUY, with a target price of HKD15.28.
  • Strong growth in domestic PPP projects, with 2015 and 9M16 domestic project backlogs growing by 77% and 34% YoY, respectively.
  • High gross margin in mainland business (24%) compared to HK and Macau (6%).
  • Expected to maintain rapid revenue and profit growth in 2017E and beyond.

• CRSC (3969 HK):

  • Recommended as a BUY, with a target price of HKD7.58.
  • Strong growth in urban rail transit, with expected revenue growth of 16.7% YoY in 2016E and 11.4% CAGR for 2016-18E.
  • Has a significant share in inter-city rail communication systems (50% for CBTC and 60% for CTCS2).
  • Expected to see a 30% growth in urban rail transit over the next two years.

• Zoomlion (1157 HK):

  • Recommended as a BUY, with a target price of HKD3.87.
  • Excavator sales rose by 44.9% in August and 71.4% in September, showing strong recovery.
  • Equipment utilization hours increased by 10-20% YoY, indicating improved demand.
  • Net profit turned positive in 3Q16, the first since 2012, and is expected to grow by 21.2% YoY in 2017E.
  • The A/H shares discount is above 41%, and the launch of Stock Connect is expected to narrow this gap.

• CCCC (1800 HK):

  • Recommended as a BUY, with a target price of HKD12.01.
  • Has the highest proportion of overseas business among peers, giving it a first-mover advantage.
  • A/H shares discount is above 49%, and its PEG of 0.71x is significantly lower than its peers.
  • Expected to maintain growth over the long term, with revenue growth of 9.4% YoY in 2016E and 10.3% YoY in 2015.

Risks and Considerations

• Long-Term Challenges:

  • Infrastructure investment returns are slowing, and the marginal impact on GDP is diminishing.
  • The industry may face an inflection point in the next 3-5 years, which could affect future growth.

• Uncertainty in US Policy:

  • Trump's governance is unpredictable, and his policies may introduce uncertainty in the global market.
  • While his pro-infrastructure stance is positive, the uncertainty surrounding his policies could affect market stability.

• Overseas Market Limitations:

  • Despite the Belt & Road Initiative, the overseas market is unlikely to have a substantial impact due to lack of capital, competition from foreign manufacturers, and limited growth margins.

Investment Recommendations

• Stocks to Buy:

  • CSCI (3311 HK): Expected to benefit from PPP growth in urban construction.
  • CRSC (3969 HK): Strong growth in urban rail transit, with a high potential for expansion.
  • Zoomlion (1157 HK): Undervalued with a significant discount and potential for recovery.
  • CCCC (1800 HK): Most attractive valuation among large-scale infrastructure plays.

• Stocks to Watch:

  • CRCC (1186 HK) and CRRC (1766 HK) are rated NEUTRAL, indicating potential for moderate growth.
  • Lonking (3339 HK) and Sany (631 HK) are rated NEUTRAL as well, but they face challenges in profitability and growth.

Industry Outlook

• Infrastructure Investment:

  • The infrastructure investment/GDP ratio in China has been significantly higher than the global average.
  • The industry is expected to see a six-fold growth in PPP project pipelines over the next two years.
  • The real estate bubble is expanding, but the government is focusing on infrastructure as a growth driver.

• Market Volatility:

  • The report suggests that the market may become more volatile with Trump's policies.
  • Defensive plays such as CSCI and CCCC are recommended for short-term stability.

Analyst and Regulatory Notes

• The report is prepared by China Merchants Securities (HK) Co., Limited (CMS HK).
• The analysts certify that the views in the report reflect their personal opinions.
• The report is for informational purposes only and should not be construed as investment advice.
• Investors are advised to make their own decisions and seek independent financial and tax advice.

Conclusion

The Infrastructure and Machinery Industry in China is expected to grow significantly in 2017E, driven by PPP and urban rail transit. While there are short-term opportunities, the industry faces long-term challenges such as declining returns and a potential inflection point. The report recommends several stocks for investment, with a focus on those with strong fundamentals and undervalued positions.