20180119-中国银河国际证券-Sector_Report_14页_766kb

China Construction Sector Report Summary (January 19, 2018)

Core Content

The China construction sector report outlines the outlook for infrastructure investment and the performance of major construction companies in the context of economic and regulatory changes. The report highlights that China's real GDP growth is expected to slow from 6.7–6.9% in 2016 and 2017 to 6.5% in 2018E. The central government is prioritizing growth quality and efficiency over speed, with a focus on sustainable infrastructure development that meets people's expectations of a better life.

Main Views

• Infrastructure Investment Trends:

  • Overall Fixed Asset Investment (FAI) is expected to decelerate in 2018 due to tightened liquidity and stricter regulations.
  • Infrastructure FAI growth is anticipated to remain stable at 15.7% YoY in 2018, slightly below the 15.8% and 15.6% of 2016 and 2017, respectively.
  • Small-scale infrastructure in public transportation, new energy, smart grid, and environment protection is expected to offset the slowdown in large-scale projects like railways, highways, and waterways.

• PPP Regulation Impact:

  • The government has tightened regulations on Public-Private Partnership (PPP) projects to mitigate debt risk and prevent misuse of fiscal funds.
  • This is expected to dampen infrastructure investment in the short term, especially in the first half of 2018.
  • The review of existing PPP projects by the Ministry of Finance is expected to delay project starts and limit new additions until the end of Q1 2018.
  • Infrastructure investment growth is expected to recover in 2H18 after the PPP review is completed.

• Overseas Expansion:

  • The Belt and Road Initiative (BRI) is expected to play a significant role in offsetting domestic growth slowdown.
  • Infrastructure investment in emerging markets under BRI is projected to accelerate, with Asia being the main destination.
  • The Asian Development Bank (ADB) estimates that infrastructure investment needs in developing Asian countries will reach US$26tn from 2016–2030, or US$1.7tn annually.
  • The ADB plans to work closely with the China-backed Asia Infrastructure Investment Bank (AIIB) to support more projects in 2018.

Key Companies and Ratings

Key Information

• CCC (China Communications Construction Company) is highlighted as the top pick due to its strong position as an industry leader and its potential to benefit from stricter PPP regulations.
• The report suggests that CCC's share price is largely reflective of market expectations, with limited downside risk.
• The target price for CCC is based on a PBR multiple of 0.81x, consistent with its historical average.
• CRCC (China Railway Construction Corporation) is expected to maintain a Hold rating, with a target price of HK$10.62 based on a PBR multiple of 0.75x.
• CRG (China Road and Bridge Corporation) is also rated Hold, with a target price of HK$6.29 based on a PBR multiple of 0.72x.
• CSCI (China State Construction Engineering Corporation) is rated Hold, with a target price of HK$12.70 based on a forward PER of 10x.

Valuation Metrics

Summary of Investment Outlook

• The construction sector has underperformed the market in 2017 due to regulatory and liquidity pressures.
• The sector is expected to remain cautious in the short term, with infrastructure investment growth potentially recovering in the second half of 2018.
• Companies with exposure to small-scale infrastructure and overseas markets may benefit more from the sector's evolution.
• CCC is the most recommended stock due to its leadership position and expected resilience in the evolving regulatory environment.
• CSCI is expected to outperform peers due to its focus on social housing and innovation efforts.