[core view of this week] we believe that the current main line of steady growth will continue: 1) policy space: in the face of the more complex macro situation, the management is still firm in achieving steady economic growth throughout the year. It not only urges the early-stage policies to be implemented solidly and quickly, but also requires the follow-up policies to speed up the reserve and continuous implementation. When the GDP growth rate deviates from the annual target since the beginning of the year, It is expected that stronger measures will be introduced in the second quarter to promote the economy to return to the track of stable development. 2) Source of funds: this week, the central bank’s marginal statement on the financing platform is loosening, which is expected to dredge one of the main blocking points of infrastructure wide credit. At the same time, the accelerated issuance and use of special bonds and the expansion of pilot projects of infrastructure REITs are expected to provide incremental funds for infrastructure acceleration. 3) Project resources: as of mid April, the national development and Reform Commission has approved a total investment of 520 billion yuan in fixed investment projects during the year, which has reached 67% of the total investment of last year. 20 provinces and cities plan to increase the investment of key projects by about 8% this year. Executable projects continue to be abundant, contributing to the steady growth of follow-up infrastructure. 4) Boom trend: if the epidemic situation is controlled in the future, it is expected that the local energy will return to protecting the economy, the bidding of infrastructure projects is expected to speed up significantly, and the orders of construction enterprises are expected to accelerate the growth; After the recovery of logistics and site personnel, construction enterprises are expected to enter the post epidemic rush stage to accelerate the formation of physical workload. At the same time, considering that the base number of last year is high and low, the profits of construction enterprises are expected to accelerate in the second half of the year. 5) Valuation level: combined with the past stable growth market and the current market style, the blue chip valuation of central enterprises still has great room for repair. Key recommendations: 1) undervalued construction central enterprises China State Construction Engineering Corporation Limited(601668) (infrastructure + core benefit target of steady real estate growth, pe4.4x), China Railway Group Limited(601390) (pe5.2x), China Communications Construction Company Limited(601800) (pe7.0x, key benefit REITs issuance speed up), Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) (pe10x), etc; 2) High growth local state-owned enterprises Shandong Hi-Speed Road&Bridge Co.Ltd(000498) (pe4.9x), Sichuan Road & Bridge Co.Ltd(600039) (pe6.4x); 3) The steel structure leader benefits from the capital construction overweight and the rapid and large-scale demand for photovoltaic buildings, and is optimistic about Anhui Honglu Steel Construction(Group) Co.Ltd(002541) (pe15x) and Changjiang & Jinggong Steel Building(Group)Co.Ltd(600496) (pe9x); 4) Infrastructure design leader China Design Group Co.Ltd(603018) (pe7x), Jsti Group(300284) (pe15x).
Policy space: uncertainties are increasing, and stronger measures to stabilize growth are expected. In March, the epidemic situation in China rebounded significantly, impacted the supply chain, further increased the impact on manufacturing and foreign trade, and continued to face great pressure on economic growth in the second quarter. In view of the new situation encountered by the economy, the recent national Standing Committee has successively proposed to “stick to the goal and do not relax, put stable growth in a more prominent position, and put forward policies to stabilize the economy early and quickly, and do not put forward measures that are not conducive to stabilizing market expectations”, “all departments should focus on the overall situation and take the main action”, “timely introduce measures conducive to the stability of market expectations”; The China Banking and Insurance Regulatory Commission also said recently that “it will make greater efforts to study new policies and make new plans, and the regulatory policies will be strengthened in a timely manner”. In the face of the current more complex macro situation, the management is still firm in its attitude towards achieving steady economic growth throughout the year, and further improve its requirements for steady growth. It not only urges the early-stage policies to be implemented solidly and quickly, but also requires the follow-up policies to speed up the reserve and continuous implementation. When the GDP growth rate deviates from the annual target since the beginning of the year, it is expected to introduce stronger policies and measures in the second quarter, Promote the economy to return to the track of steady development.
Source of funds: financing platform, special bonds, REITs and other channels to speed up infrastructure and broaden credit. 1) Financing platform: this week, the central bank and the safe issued 23 measures to do a good job in epidemic prevention and control and financial services for economic and social development. They have focused on supporting financing platforms, special bonds, policy finance, PPP and other infrastructure financing channels, especially the expression of financing platforms exceeded expectations, The document points out that “guarantee the reasonable financing needs of financing platform companies according to the market-oriented principle, and do not blindly withdraw, suppress or stop loans, so as to ensure the smooth implementation of projects under construction”. The financing platform is one of the most important sources of infrastructure financing. It has been strictly restricted by the debt supervision of local governments since 2018. This document clearly defines its reasonable financing support, which is expected to dredge one of the main blocking points of infrastructure credit and promote the improvement of infrastructure financing. 2) Special bonds. So far this year, a total of 1.35 trillion new special bonds have been issued, and the issuance of the amount approved in advance has been basically completed. According to our statistics, more than 3 / 4 of them have been invested in the field of infrastructure. According to the securities times, the Ministry of Finance recently requested to speed up the issuance of new special bonds. Most of the issuance of new special bonds this year should be completed by the end of June, and the outstanding issuance of the remaining amount should be completed in the third quarter. The issuance from May to June is expected to accelerate significantly. In combination with this week’s CBRC’s emphasis on “further strengthening and improving financing supply” and “cooperating with the issuance of special bonds of local governments and supporting financing of projects, and supporting the acceleration of major project projects and urban and rural infrastructure construction”, the issuance and use of follow-up special bonds are expected to further accelerate, create a more abundant capital environment for infrastructure construction and speed up the formation of physical workload. 3) Infrastructure REITs. Recently, the exchange, the national development and Reform Commission, the Ministry of water resources and other ministries and commissions have continued to promote the expansion of infrastructure REITs pilot and the construction of raising mechanism. We believe that the accelerated development of China’s REITs is expected to help local governments and urban investment companies revitalize some of their stock assets and supplement the sources of steady growth funds.
Project resources: central + local project reserves continue to be abundant. At the central level, according to the official website of the national development and Reform Commission, as of April 15, 2022, the national development and Reform Commission had approved a total investment of 520 billion yuan in fixed asset investment projects, a significant increase over previous years (67% of last year’s investment), mainly in transportation, water conservancy, energy, high technology and other industries. At the local level, according to the public information statistics of provincial and municipal governments, up to now, most provinces and cities have issued investment plans for key projects in 2022. The total investment of 11 provinces and cities is planned to be 28.7 trillion, with a comparable growth rate of about 7%; 20 provinces and cities plan to complete 10.0 trillion investment in key projects this year, with a comparable growth rate of about 8%, and infrastructure projects account for a relatively high proportion (for example, infrastructure projects account for 48% / 66% of the investment in key projects in Anhui Province / Zhejiang Province). Both at the central and local levels, the resources for major projects that can be implemented this year will continue to be abundant, helping the steady growth of follow-up infrastructure.
Boom trend: orders and profits of construction enterprises are expected to accelerate upward in the second half of the year. Affected by the current epidemic situation in China, on the one hand, governments in many places mainly focus on epidemic prevention and control, and the approval, establishment and bidding of infrastructure projects slow down; On the other hand, when the logistics of construction enterprises is blocked and the requirements for epidemic prevention on the construction site are improved, the mobilization time of various building materials and equipment is delayed, the number of construction personnel is reduced, and the overall construction rhythm is slow. However, in the future, if the epidemic situation is significantly controlled in the second quarter, it is expected that the energy of local governments will return to protecting the economy, the bidding of infrastructure projects is expected to be significantly accelerated, and the orders of construction enterprises are expected to accelerate the growth; After the recovery of logistics and site personnel, the procurement and admission of raw materials will be smoother. Construction enterprises are expected to enter the post epidemic rush stage to accelerate the formation of physical workload. At the same time, considering the high base of last year and the low base of last year, the profits of construction enterprises are expected to accelerate in the second half of this year.
Valuation level and market style: there is still room to repair the valuation and focus on benefiting from the current market style. Up to now, the overall PE of the eight central construction enterprises is 6.6 times, which is the same as the 1 / 4 quantile of the historical valuation fluctuation range; Pb is 0.64 times, 15% lower than the quartile, and the overall valuation is still in the bottom range. Referring to the steady growth market in the past few rounds, PE and Pb of the eight central construction enterprises have mostly been repaired to above the historical median (the median PE is 8.8 times and Pb is 1.00 times), 34% / 56% higher than the current PE and Pb respectively; Among the steady growth market from 2014q4 to 2016, the highest PE and Pb of the eight central construction enterprises reached 27.5/3.26 times respectively. Therefore, from the perspective of valuation, there is still a large repair space for the central enterprises in this round of steady growth market. In addition, since this year, the Fed’s expectation of raising interest rates has continued to improve, and the market style has changed from overvalued long-term growth stocks to undervalued short-term blue chips. The valuation of construction central enterprises is low and the safety margin is high, which is expected to significantly benefit from this year’s market style, and the valuation is expected to continue to expand.
Investment suggestion: at present, the management actively adopts the reserve policy, the financing channels for infrastructure construction continue to be dredged, the resources of central + local key projects are abundant, the rush to work after the epidemic has accelerated the upward trend of the industry boom, and the valuation of the sector is still low. Based on this, we believe that the main line of steady growth will continue. Key recommendations and concerns: 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) , etc; 2) High growth local state-owned enterprises Shandong Hi-Speed Road&Bridge Co.Ltd(000498) , Sichuan Road & Bridge Co.Ltd(600039) ; 3) The steel structure leader benefited from the capital construction overweight and the rapid and large-scale demand for photovoltaic buildings, and is optimistic about Anhui Honglu Steel Construction(Group) Co.Ltd(002541) , Changjiang & Jinggong Steel Building(Group)Co.Ltd(600496) ; 4) Capital construction design leaders China Design Group Co.Ltd(603018) , Jsti Group(300284) .
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.
