[core view of this week] the meeting between the central financial and Economic Commission and the Political Bureau set the tone to comprehensively strengthen infrastructure. The positioning of infrastructure has risen from “a tool for underpinning the economy” to a new strategic height of national development and national security. The short-term, medium and long-term space of the industry is expected to be further opened. It is expected that all ministries and commissions will step up the introduction of supporting measures, and the infrastructure policies will continue to be strengthened. On the other hand, the current epidemic has disturbed the pace of bidding and construction. It is expected that after the epidemic is controlled, the focus of local government work will return to “steady growth”, orders are expected to be released faster, and construction enterprises will also speed up work, so as to accelerate the recovery of industry prosperity in the second half of the year. Under the continuous strengthening of policies and the accelerating upward trend of industry fundamentals, the main line of steady growth is expected to continue to strengthen, and key recommendations continue to be made: 1) undervalued construction central enterprises China State Construction Engineering Corporation Limited(601668) (the performance of 21 and 22q1 continued to exceed expectations, the core benefit of stable growth of infrastructure + real estate, the high-quality dragon head of CNOOC real estate needs to be revalued, pe4.7x), China Railway Group Limited(601390) (pe5.6x), China Communications Construction Company Limited(601800) (the promotion of core beneficiary infrastructure REITs, pe8.3x), China Railway Construction Corporation Limited(601186) (pe4.1x) Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) (pe11x), etc; 2) High growth local state-owned enterprises Shandong Hi-Speed Road&Bridge Co.Ltd(000498) (pe6.0x), Sichuan Road & Bridge Co.Ltd(600039) (pe7.1x); 3) Infrastructure design leader China Design Group Co.Ltd(603018) (pe8x), Jsti Group(300284) (pe18x). In addition, under the impact of the early epidemic, the valuation of some high-growth and high-quality leaders has been very attractive. It is recommended to focus on the construction support equipment leader Zhejiang Huatie Emergency Equipment Science & Technology Co.Ltd(603300) (pe15x), microgrid leader Acrel Co.Ltd(300286) (pe17x), distribution network EPCO leader Suwen Electric Energy Technology Co.Ltd(300982) (pe14x), and heating energy-saving transformation leader Runa Smart Equipment Co.Ltd(301129) (pe15x).
The central government has set the tone of “comprehensively strengthening infrastructure”, the infrastructure has risen to a new strategic height, and the space for policy reinforcement has been opened.
The 11th meeting of the central financial and Economic Commission last week stressed that comprehensively strengthening infrastructure construction and building a modern infrastructure system are of great significance to ensuring national security, unblocking China’s great cycle, promoting China’s international double cycle, expanding domestic demand and promoting high-quality development. On April 29, the Politburo meeting again mentioned: “give play to the key role of effective investment, strengthen the guarantee of land, energy use and environmental assessment, and comprehensively strengthen infrastructure construction.” Judging from the recent statement of the central government, the strategic positioning of infrastructure construction has been significantly adjusted, rising from the “tool for underpinning the economy” to a new height of national development and national security, and the space for short-term, medium and long-term development of infrastructure has been further opened. At present, China’s economy is facing the “triple pressure” of shrinking demand, insufficient supply and weakening expectations. The recent spread of the epidemic has formed a further impact, and the downward pressure on the economy has increased. In the face of the current situation, the Politburo meeting proposed that “we should strengthen macro policy regulation, stabilize the economy, and strive to achieve the expected objectives of economic and social development throughout the year. We should speed up the implementation of the determined policies, step up the planning of incremental policy tools, and strengthen contingent regulation.” It can be seen that the central government is determined to stabilize growth. It is expected that after the important meeting sets the tone of “comprehensively strengthening infrastructure construction” and unifies the idea, all ministries and commissions and local governments will step up the introduction and implementation of policies to promote further overweight of infrastructure policies and strengthen investment in stabilizing growth.
The policy requires to strengthen the guarantee of funds, resources and other elements, and focus on the marginal change of financing platform policy.
The meeting between the central financial and Economic Commission and the Political Bureau also stressed the need to strengthen infrastructure support, and policy support is expected to increase and be implemented. It pointed out that it is necessary to establish a coordination mechanism for major infrastructure construction, make overall coordination, and strengthen the guarantee of resource elements such as land, sea and energy use. In terms of funds, it is required to broaden the long-term financing channels of infrastructure (expected to be REITs, policy finance and other instruments), increase financial investment, and better focus on ensuring the capital needs of national major infrastructure. It should be noted that, compared with the previous two Politburo meetings, this meeting did not mention “implementing the financial and financial risk disposal mechanism responsible for the main leaders of local party and government”. In combination with the recent 23 financial measures of the central bank, it is required to “ensure the reasonable financing needs of financing platform companies, not blindly withdraw loans, suppress loans or stop loans, and ensure the smooth implementation of projects under construction”. The probability of financing platform policies began to loosen. Financing platform is one of the most important sources of capital for infrastructure construction (we estimate that it accounts for about 40% – 50%). It has been strictly restricted by local government debt supervision since 2018. If the margin is relaxed, it is expected to dredge one of the main blocking points of infrastructure wide credit, which will significantly improve infrastructure financing.
From the perspective of policy support, new and old infrastructure is expected to work together to stabilize growth (with combing of relevant benefit targets). 1) In terms of traditional infrastructure, the meeting of the finance and Economics Committee emphasized strengthening network infrastructure such as transportation, energy and water conservancy: in terms of transportation, accelerate the national comprehensive three-dimensional transportation network; In terms of energy, develop distributed smart grid, green energy base and oil and gas pipeline network; In terms of water conservancy, accelerate the construction of the main framework of the national water network. 2) In terms of new infrastructure construction, it is required to strengthen the infrastructure construction of industrial upgrading such as information technology and logistics, and promote the layout of major scientific and technological infrastructure. 3) In terms of urban construction, it is emphasized to strengthen the construction of urban infrastructure, promote the traffic integration of urban agglomeration, underground pipe gallery, flood control and drainage, sewage and garbage disaster prevention and reduction, public health emergency, intelligent infrastructure, etc. In addition, it also emphasizes strengthening rural infrastructure construction. The benefit targets of relevant infrastructure important subdivisions are shown in Figure 4.
In April, the PMI showed that the impact of the epidemic was fully apparent, the PMI of the construction industry decreased, but it still maintained expansion, and the infrastructure boom was relatively high. In April 2022, the manufacturing PMI was 47.4% (the previous value was 49.5%); The PMI of non manufacturing industry was 41.9% (the previous value was 48.4%), and the PMI of manufacturing industry and non manufacturing industry fell sharply, indicating that the impact of the epidemic has been fully revealed. Construction pmi52.5 in April 7%, down 5.4 PCT from the previous value and still in the expansion range. It is expected that the main reasons are as follows: 1) PMI is a month on month prosperity analysis. In April, with the temperature rising, the commencement of some projects in cold areas in the North increased; 2) The infrastructure industry has a high outlook under the escort of the steady growth policy. The PMI of civil engineering construction industry is 61.0%, which has been in the high boom range for two consecutive months. However, considering the impact of the epidemic, it is expected that the year-on-year growth rate of construction in April will be significantly slower than that in March. The PMI new order index of the construction industry was 45.3%, falling below the boom and bust line, indicating that in April, affected by the epidemic and other factors, the demand of the industry was released (the bidding slowed down), and the newly signed orders shrank compared with March. Looking forward to the second half of the year, it is expected that with the epidemic under control, the focus of local government work will return to “steady growth”, the release of backlog projects will be accelerated, the signing of construction enterprises will be accelerated, at the same time, after the improvement of logistics, the supply of raw materials will be more timely, the construction enterprises will speed up the work, and the prosperity of the industry is expected to continue to rise.
Q1 fund’s position in construction continued to increase, and China State Construction Engineering Corporation Limited(601668) and other central enterprises were greatly allocated by the fund. At the end of 2022q1, the Fund (active + index) held 1.06% of its heavy positions in the construction sector, which was significantly increased by 0.37 PCT compared with the end of Q4 last year. Among them: 1) the proportion of active funds (including common stock funds, partial stock mixed funds and flexible allocation funds) in the construction sector was 0.89%, an increase of 0.29 PCT compared with the end of Q4. In terms of individual stocks with key positions, the top three net holdings of active funds are China State Construction Engineering Corporation Limited(601668) (3.2 billion), China Communications Construction Company Limited(601800) (700 million), China Railway Group Limited(601390) (700 million). Driven by the main line of steady growth and the market style of undervalued value, the holdings of active funds are mainly concentrated in the central enterprise sector; The top three net holdings reduction of active funds are Anhui Honglu Steel Construction(Group) Co.Ltd(002541) (1.1 billion), Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) (1 billion) and Sinoma International Engineering Co.Ltd(600970) (400 million), mainly assembled and carbon neutral related targets.
By the end of Q1, central enterprises / steel structures / professional engineering were the most important sub sectors of construction active positions, accounting for 42% / 24% / 18% respectively. 2) Index funds (including passive index funds and enhanced index funds) accounted for 1.70% of the positions in the construction sector, a significant increase of 0.62 PCT compared with the end of Q4. In terms of key positions in individual stocks, index funds mainly increased their holdings of eight Central Enterprises + leading local state-owned enterprises, of which China State Construction Engineering Corporation Limited(601668) , China Railway Group Limited(601390) , China Communications Construction Company Limited(601800) , China Railway Construction Corporation Limited(601186) increased their holdings by more, with a net increase of RMB 1.6/5/3/2 billion respectively. At present, under the background of increasing downward pressure on the economy, a series of policies for steady growth have been issued. As the core of the industry leader, the construction central state-owned enterprises have benefited, the recognition of institutions has been strengthened, and the valuation is still at the bottom of history, with high allocation cost performance. It is expected to continue to be allocated by institutions in the future.
Huaxia CCCC REITs project is listed and pays attention to the important impact of infrastructure REITs on the construction industry. The REITs of Huaxia CCCC expressway was listed and traded on April 28, becoming the first order for listed construction companies to issue infrastructure REITs, which is a milestone. Last week, we issued a special report on the industry “the impact and reconstruction of REITs on Construction Enterprises – Taking expressway projects as an example”, which analyzed in detail the impact of infrastructure REITs on construction enterprises in four aspects: 1) optimize the balance sheet and improve the refinancing ability; 2) Promote the revaluation of high-quality stock operating assets; 3) Accelerate capital turnover and improve the ability of reinvestment; 4) Restructure the business model and promote the formation of infrastructure asset management platform. Taking China Communications Construction Company Limited(601800) as an example, the company is the largest expressway construction and investor in China. By the end of the 21st century, the company had 27 expressways in operation, with a cumulative investment of 185.1 billion yuan. It is estimated that there are 8 short-term REITs projects, with a total investment of 75.1 billion yuan. We estimate that the REITs of Huaxia CCCC / short-term issuable projects / all highway projects can reduce the company’s asset liability ratio by 0.2/1.8/4.6 PCT and revitalize the capital by 9 / 19.3/48 billion yuan. If calculated according to 20% of the capital, it can drive the investment in new projects by 4.5/96/240 billion yuan. In addition, relying on the company’s professional highway investment and operation capacity, the value of the project in hand is expected to be revalued, and there is great potential to build an infrastructure asset management platform with the help of REITs. 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 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 China Pacific Insurance (Group) Co.Ltd(601601) 601ə China Pacific Insurance (Group) Co.Ltd(601601) əə601əəəəəəəəəəə601əəəəəəə.
Investment suggestions: under the current policy continues to strengthen and the industry fundamentals accelerate the upward trend, the main line of steady growth is expected to continue to strengthen, and continue to focus on recommendations: 1) undervalued construction central enterprises China State Construction Engineering Corporation Limited(601668) , China Railway Group Limited(601390) , China Communications Construction Company Limited(601800) , China Railway Construction Corporation Limited(601186) , 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) Capital construction design leaders China Design Group Co.Ltd(603018) , Jsti Group(300284) . In addition, under the impact of the early epidemic, the valuation of some high-growth and high-quality leaders has been very attractive. It is recommended to focus on the construction support equipment leader Zhejiang Huatie Emergency Equipment Science & Technology Co.Ltd(603300) , microgrid leader Acrel Co.Ltd(300286) , distribution network EPCO leader Suwen Electric Energy Technology Co.Ltd(300982) , and heating energy-saving transformation leader Runa Smart Equipment Co.Ltd(301129) .
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.
