[core view of this week] in this week’s special topic, we analyzed the positive impact of REITs raising, the significance of accelerating the issuance of REITs to the industry and enterprises, and focused on combing the situation of 15 construction enterprises with more operating assets. Recently, the exchange solicited opinions on the REITs raising rules. We believe that the implementation of the raising mechanism can simplify some procedures and processes, and is expected to further accelerate the issuance of REITs, stabilize the secondary market price and improve liquidity. At the same time, it can give full play to the professional ability of excellent managers and realize the long-term sustainable development of REITs listing platform. In addition to the raising mechanism, recently, the national development and Reform Commission, the Ministry of water resources and other ministries and commissions have also expressed their support for the issuance of infrastructure REITs. More types of projects such as water conservancy and affordable housing are included in the scope of reportable REITs. It is expected that the pace of subsequent issuance is expected to be further accelerated. The accelerated issuance of REITs is expected to revitalize some high-quality stock assets and supplement infrastructure investment funds. At the same time, it is also an important opportunity for construction enterprises to optimize statements, change business models and accelerate the revaluation of stock operating assets. We focus on: 1) at present, we have more operating assets to issue REITs and invest in and operate construction enterprises with strong professional ability in a certain field. We mainly recommend China Communications Construction Company Limited(601800) , and pay attention to Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) Sichuan Road & Bridge Co.Ltd(600039) 。 2) With the help of REITs, we can reconstruct the business model, improve the efficiency of capital turnover, improve roe and break through the limitation of balance sheet: we mainly recommend China State Construction Engineering Corporation Limited(601668) , China Railway Group Limited(601390) , China Railway Construction Corporation Limited(601186) , etc.
We continue to be optimistic about the main line of steady growth: the inflow of social finance into infrastructure in Q1 is estimated to increase by 24% at the same time, and infrastructure credit is on the way. The epidemic has impacted the supply chain and further increased the impact on manufacturing and foreign trade. Under the new situation, the steady growth policy needs to be “vigorously”, which is expected to drive the continuous expansion of the valuation of the construction sector. Focused attention and recommendations: 1) central enterprises China State Construction Engineering Corporation Limited(601668) the; 2) High growth local state-owned enterprise Shandong Hi-Speed Road&Bridge Co.Ltd(000498) (pe5.2x); 3) Infrastructure design leader China Design Group Co.Ltd(603018) (pe7x), Jsti Group(300284) (pe14x); 4) The steel structure leader benefited from the overweight of infrastructure construction and the rapid expansion of photovoltaic building demand, and is optimistic about Changjiang & Jinggong Steel Building(Group)Co.Ltd(600496) (pe11x) and Anhui Honglu Steel Construction(Group) Co.Ltd(002541) (pe16x).
With the continuous improvement of policies, REITs raising is expected to accelerate the pace of subsequent issuance. Recently, Shanghai Stock Exchange and Shenzhen Stock Exchange solicited opinions on the guidelines for newly purchased infrastructure projects, and the raising of infrastructure REITs is expected to be implemented as soon as possible. REITs raising means that the listed REITs operating entities raise funds by issuing additional shares and acquiring new infrastructure assets based on the market mechanism. It is a common practice for the overseas mature REITs market to realize the scale expansion. We believe that the implementation of the raising mechanism will have the following important impact on the development of REITs: 1) simplify some procedures and processes, which is expected to further accelerate the issuance of REITs. As the raising is the additional capital of the stock REITs platform, it saves a lot of procedures and processes when the new platform is established in the early stage, and also saves the running in time of the original equity holders, fund managers, custodians and other parties, which is expected to further accelerate the pace of REITs issuance. 2) Stabilize the secondary market price and improve liquidity. At present, due to the scarcity of REITs, the subscription is hot, the premium rate of the secondary market is high, the price fluctuates greatly and the liquidity is insufficient. Raising funds can accelerate the supply of REITs products, improve liquidity and stabilize the secondary market price. 3) It can give full play to the professional ability of excellent managers and realize the long-term sustainable development of REITs listing platform. From overseas experience, excellent REITs management and operation team plays an important role in the continuous appreciation of infrastructure. With excellent investment vision and management ability and the help of raising fund mechanism, REITs can truly realize its long-term strategic value and sustainable development ability as an “asset listing platform”. At the same time, support the well functioning REITs to become bigger and stronger through the raising mechanism and improve the positive incentive mechanism, which can form a market-oriented survival of the fittest, promote a virtuous cycle of investment and financing and improve the overall market performance of REITs. In addition to the raising mechanism, recently, the national development and Reform Commission, the Ministry of water resources and other ministries and commissions have also expressed their support for the issuance of infrastructure REITs. More types of projects such as water conservancy and affordable housing are included in the scope of reportable REITs. It is expected that the subsequent issuance of REITs is expected to be further accelerated.
For the infrastructure industry, the accelerated issuance of REITs is expected to revitalize some stock assets and supplement the source of funds.
China has experienced rapid development in the past few decades and has accumulated millions of billions of stock infrastructure assets. These assets widely exist in the hands of local governments, urban investment companies and social capital. Due to the lack of an effective exit channel and long-term continuous investment, the debt pressure of infrastructure investors increases year by year, the capital is limited and the investment capacity decreases. On the other hand, there is China’s growing wealth of residents and the demand of institutional investors for financial products with long-term stable returns. The accelerated issuance of infrastructure REITs will become a sharp tool to revitalize some high-quality stock infrastructure assets in China, which is expected to promote local governments and relevant investors to reduce leverage, increase new sources of infrastructure funds and open up new space for infrastructure development. At the same time, it is also expected to gradually form a large asset market with a trillion magnitude, so as to promote the healthy development of China’s capital market.
The accelerated issuance of REITs also has an important positive impact on construction companies: 1) optimize statements, obtain investment income and reduce asset liability ratio. For enterprises with more operating assets and high interest bearing debt ratio, after the issuance of REITs, they can obtain the investment income of asset appreciation, thicken the net assets and repay some interest bearing debts, which can effectively reduce the debt ratio and optimize the statements in the short term. 2) Restructure the business model, improve the efficiency of capital turnover and improve roe. For construction enterprises that continue to participate in investment driven construction projects, the issuance of REITs provides an exit channel for investment projects, sustainably revitalizes stock assets, constructs a complete closed-loop operation mode of “investment construction withdrawal investment”, greatly improves the capital turnover efficiency, and thus improves the roe. 3) The value of operating assets is expected to be revalued. For enterprises that already hold a large number of mature and high-quality operation projects, REITs issuance improves the potential liquidity of operating assets, can give relatively higher pricing to infrastructure, and the value of operating assets on hand is expected to be revalued. 4) Build a professional infrastructure management platform to fully enlarge the income. For enterprises with professional investment and operation ability in an infrastructure field, with the maturity of REITs market, optimize the management of its operating assets, explore the value of infrastructure assets through investment, operation cultivation and transaction, obtain additional investment income, build a professional infrastructure asset management platform, and fully enlarge the income of investment, transaction and construction.
Based on the above analysis, we are optimistic about: 1) at present, we have more operating assets and can issue REITs. For construction enterprises with strong professional ability to invest and operate in a certain field, we mainly recommend China Communications Construction Company Limited(601800) , and pay attention to Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) , Sichuan Road & Bridge Co.Ltd(600039) .
2) Reconstruction of business model with REITs, improvement of capital turnover efficiency, improvement of roe and breakthrough of balance sheet limit: recommend China State Construction Engineering Corporation Limited(601668) , China Railway Group Limited(601390) , China Railway Construction Corporation Limited(601186) , etc.
The assets of the construction company are being sorted out. According to our statistics, there are 15 listed construction companies with operating assets (see the table below for details), and the main operating assets are highways, electricity, water and other fields. Expressway, water and other projects are mainly represented by franchise rights in the statement, and the power field is mainly represented by franchise rights, fixed assets and other subjects in the statement. The top five companies with the largest book value of franchise assets are China Communications Construction Company Limited(601800) , Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) , China Railway Group Limited(601390) , China Railway Construction Corporation Limited(601186) , China Energy Engineering Corporation Limited(601868) , which are 2314, 1908, 1086, 60 and 56.6 billion yuan respectively. The top five companies with the highest proportion of franchise assets in total assets are Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) , Sichuan Road & Bridge Co.Ltd(600039) , China Communications Construction Company Limited(601800) , Xinjiang Beixin Road & Bridge Group Co.Ltd(002307) , Inner Mongolia M-Grass Ecology And Environment (Group) Co.Ltd(300355) , which are 21.5%, 21.5%, 16.6%, 13.3% and 11.1% respectively.
China Communications Construction Company Limited(601800) : the company has a large scale of operating assets, mainly expressway. By the end of the 21st century, 27 expressway projects had entered the operation period (another 19 joint-stock projects), with a total investment of about 185.2 billion yuan. In the 21st year, the operating income was 7.765 billion yuan, an increase of 50.5% year-on-year, and the net loss was 1.736 billion yuan. According to the announcement, Huaxia China Communications Construction Company Limited(601800) reit will be officially sold on April 7, with the sale price of fund units of 9.399 yuan / share. The total scale of the fund-raising is expected to be 9.399 billion yuan (an increase of 6.2% over the cumulative investment amount of the project), making it the largest public offering REITs in the Chinese market. If it is screened on the basis of charging for four years or more and the ratio of income to investment exceeds 4%, the company is expected to declare a total of 8 REITs projects in the short term, with a total investment of about 75.1 billion yuan. In the future, if the company’s high-quality and high-speed assets are continuously injected into the REITs platform through raising, it will help to accelerate the revitalization of stock assets and build a complete closed-loop operation mode of “investment construction withdrawal investment”. In addition, relying on the company’s professional operation ability in the infrastructure market, the company can optimize the management of its Expressway and other assets, fully enlarge the value of infrastructure assets and obtain additional investment income.
Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) : the company has a large scale of operating assets. In 2020, the franchise assets were 190.8 billion yuan, accounting for 21.5% of the total assets, ranking first among the central construction enterprises. Its operating assets are mainly power stations and highways. In terms of power operation: by the end of 2020, the total capacity of grid connected installed capacity controlled by the company had reached 16.14 million KW, an increase of 6.2% at the same time. In 2020, the revenue of the company’s power investment and operation sector was 18.9 billion yuan, an increase of 11% at the same time; The net profit was 2.5 billion yuan, an increase of 46% at the same time. According to the annual report, the total assets of these power generation projects are 151.6 billion yuan, the total liabilities are 101.7 billion yuan and the net assets are 49.9 billion yuan. Recently, the Ministry of water resources has promoted the REITs pilot in the field of water conservancy, encouraging and guiding social capital to participate in the construction and operation of water conservancy projects. The company is operating hydropower with an installed capacity of 6.4gw, which is expected to benefit from the accelerated promotion of REITs pilot in the field of water conservancy.
China Railway Group Limited(601390) : the book value of the company’s franchise assets is 108.6 billion yuan, accounting for 8% of the company’s total assets. The infrastructure projects in operation include rail transit, expressway, water affairs and environmental protection, municipal roads, industrial parks, underground pipe corridors and other types, and the operation period is between 8 and 40 years. By the end of the reporting period, the company had 36 operating items on the balance sheet. Among them, there are 2 rail transit projects with an operating mileage of about 45km; 2 expressway projects, with an operating mileage of about 74km; One underground pipe gallery project, with an operation mileage of about 32km; 12 water environmental protection projects; 19 municipal and other projects. The revenue from infrastructure operation business was RMB 1.617 billion, with a year-on-year increase of 120.51%, which was mainly due to the company’s sale of 11 Expressway assets at the end of 2019, resulting in a sharp decline in revenue in 2020.
Sichuan Road & Bridge Co.Ltd(600039) : the book franchise assets of the company at the end of 2021 were 29.4 billion yuan, accounting for 21.5% of the total assets, making it one of the enterprises with the highest proportion in the construction sector. The main operating assets are the five expressways in Chengdu Deyang Mianyang, Chengdu Zigong Luzhou, neiwei Rongji, Zigong and jiangxigu. In 2021, the operating revenue of five expressways reached 1.373 billion yuan, a year-on-year increase of 14.23%. In addition, the company also has hydropower operation assets, with an operating revenue of 186 million yuan in 2021.
Investment suggestion: we continue to be optimistic about the main line of steady growth. It is estimated that the inflow of social finance into infrastructure in Q1 will increase by 24% at the same time, and infrastructure credit is on the way. The epidemic has impacted the supply chain and further increased the impact on manufacturing and foreign trade. Under the new situation, the steady growth policy needs to be “vigorously”, which is expected to drive the continuous expansion of the valuation of the construction sector. Key concerns and recommendations: 1) undervalued construction central enterprises China State Construction Engineering Corporation Limited(601668) , China Railway Group Limited(601390) , China Communications Construction Company Limited(601800) , Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) , China Railway Construction Corporation Limited(601186) , etc; 2) High growth local state-owned enterprises Shandong Hi-Speed Road&Bridge Co.Ltd(000498) ; 3) Capital construction design leaders China Design Group Co.Ltd(603018) , Jsti Group(300284) ; 4) The steel structure leader benefits from the overweight of infrastructure construction and the rapid and large-scale demand for photovoltaic buildings, and is optimistic about Changjiang & Jinggong Steel Building(Group)Co.Ltd(600496) , Anhui Honglu Steel Construction(Group) Co.Ltd(002541) .
Risk tips: the risk that the steady growth policy fails to meet expectations, the risk of impairment of accounts receivable, the risk of repeated epidemic, the risk of sharp rise in raw material prices, etc.
