Introduction: in our previous report, the asset security of central construction enterprises is high, and the price comparison advantage is gradually emerging (published on September 16, 2021), we discussed the asset security of central construction enterprises and the safety margin of asset valuation. This report mainly discusses the market share improvement trend of central construction enterprises and the certainty of future revenue growth from the perspective of orders and revenue.
The construction industry has strong resilience
In the context of the relatively slow growth of infrastructure and real estate investment, the growth of new orders and gross output value in the construction industry showed strong resilience. The main reason is that the downstream related to the construction industry is not only limited to the direction of real estate and infrastructure, but also new investment in manufacturing, public investment in education and health, as well as diversified needs such as urban renewal, environmental governance and production line transformation. For 14 years,
Chinese construction contractors have gradually moved overseas, effectively hedging the fluctuation of Chinese demand.
The market share of newly signed orders of central enterprises has reached 40%, and the increasing trend of concentration is irreversible. The market share of newly signed orders of central enterprises has increased rapidly: the market share of newly signed contracts of engineering business of 8 construction central enterprises has increased from 23.8% in 2011 to 40.1% in H1 in 2021, and CR8 has increased by 16 percentage points in 10 years; And the recent increase in market share has an accelerating trend. In 2020, the total amount of newly signed contracts for the engineering business of eight central construction enterprises reached 11.17 trillion yuan, breaking the 10 trillion mark for the first time, with a year-on-year growth rate of 19.2%.
The increasing trend of concentration is irreversible. Company level thinking: 1) the financing cost of central construction enterprises is better than that of other enterprises. The construction industry is a capital intensive industry, and the competitive advantage brought by low financing cost is more significant. 2) The improvement of operation efficiency brought by the national reform and the reform of incentive mechanism have brought attraction to excellent talents. 3) The engineering qualification, technical strength and project management experience of central enterprises are ahead of their peers. Thinking at the industry level: 1) the construction industry is promoted in compliance and regional barriers are gradually broken, which is conducive to the business layout of national enterprises. 2) The large-scale project and the transformation of project management to EPC mode are conducive to the concentration of the project to large-scale leading enterprises.
The market share of central enterprises’ income is still low, and the certainty of subsequent income growth is high
The increase of revenue share is slower than that of orders, but it has accelerated recently. The market share of Engineering revenue of 8 central construction enterprises increased from 17.0% in 2011 to 22.2% in 2021h1, and CR8 increased slightly by 5pcts. From 2011 to 2018, the income growth rate of central construction enterprises was close to the average growth rate of the construction industry, but since 2019, the income of central construction enterprises has increased significantly, mainly due to: 1) it takes several years for the newly signed single transmission to the engineering business income, and the transmission time has been further prolonged after the project is large-scale; 2) Project management relies on experienced managers (corresponding to the concept of production capacity). With the improvement of management mechanism and the enhancement of talent attraction, the number of employees in central enterprises has increased significantly after 18 years.
High order guarantee ratio and high certainty of subsequent income growth. The market share of central enterprises’ income is about 22.2%, which is about 18pcs lower than the order. In recent years, the lag period of order revenue has been extended, and the order guarantee ratio of central enterprises has increased from 1.39 times at the end of 2011 to 2.14 times at the end of 2020. Considering that most of the newly signed orders will be converted into physical workload, assuming that the total output value of the construction industry remains unchanged for five years, the total revenue of the eight central construction enterprises is expected to double in 2025 (compared with 2020), and the corresponding average annual compound growth rate is about 13%.
Investment suggestion: the increasing trend of concentration is irresistible, and the income growth of central enterprises is uncertain. The asset security of central construction enterprises is high; The certainty of future income growth will affect the upward elasticity of the valuation of central construction enterprises. From the perspective of orders, the revenue growth of central enterprises is highly deterministic. Considering the reform of the construction industry and the continuous strengthening of the competitive advantages of central enterprises, it is judged that the trend of increasing industry concentration in the future will be irreversible. It is recommended to pay attention to China State Construction Engineering Corporation Limited(601668) (A shares, Pb = 0.7x), China Communications Construction Company Limited(601800) (A shares, Pb = 0.7x), China National Chemical Engineering Co.Ltd(601117) (A shares, Pb = 1.4x), China Railway Group Limited(601390) (A shares, Pb = 0.7x), China Railway Construction Corporation Limited(601186) (A shares, Pb = 0.6x), China energy construction (H shares, Pb = 0.5x), Power Construction Corporation Of China Ltd(Powerchina Ltd)(601669) (A shares, Pb = 1.4x), Metallurgical Corporation Of China Ltd(601618) (A shares, Pb = 1.0x). (pb-mrq is the closing data as of January 24, 2022)
Risk analysis: the risk of declining growth rate of infrastructure investment, the risk of declining demand for housing construction, the risk of slowing down newly signed orders, the risk of exceeding the expected impact of the epidemic, and the risk of rapid decline in real estate sales.
