Tianfeng Securities: Infrastructure industry chain value reassessment, professional engineering + overseas market momentum enhancement

According to the Zhitong Finance APP, Tianfeng Securities released a research report stating that the implementation of debt-for-equity swap policies is expected to drive improvements in the fundamentals and financial statements of central and state-owned construction enterprises, with local state-owned enterprises benefiting relatively more from the debt-for-equity swaps. It is recommended to pay attention to infrastructure industry chain-related targets that are likely to fully benefit from the implementation of this round of debt-for-equity swap policies. Focus on the potential high elasticity of cyclical professional engineering, as a peak in coal chemical investment is expected in the next five years, and investment opportunities around the Xinjiang coal chemical industry chain are promising. It is suggested to pay close attention to the infrastructure prosperity in Southeast Asia, the Middle East, and Africa.

The main points of Tianfeng Securities are as follows:

Layout opportunities along infrastructure + debt-for-equity swaps + net asset value enhancement

From a top-down perspective, government-led infrastructure investment remains a necessary requirement to achieve economic growth targets. It is expected that there is still about 900 billion yuan of growth space for infrastructure investment in Q4 2024, with infrastructure investment in 2024-2025 expected to grow by 9.7% and 8.8% year-on-year, respectively. From a bottom-up perspective, if the infrastructure sector is subdivided for forecasting, the growth rates for broad and narrow infrastructure in 2025 are expected to be 7.0% and 2.0%, respectively, with significant structural and regional characteristics. The real demand-driven investments in water conservancy, major transportation fields such as railways and aviation, and the construction of urban comprehensive utility tunnels have relatively high certainty, and infrastructure in economically developed regions continues to maintain high growth, with a focus on regional opportunities in Sichuan, Zhejiang, Anhui, and Jiangsu.

In addition, the implementation of debt-for-equity swap policies is expected to drive improvements in the fundamentals and financial statements of central and state-owned construction enterprises, with local state-owned enterprises benefiting relatively more from the debt-for-equity swaps. It is recommended to pay attention to infrastructure industry chain-related targets that are likely to fully benefit from this round of debt-for-equity swap policies, with a focus on highly prosperous elastic local state-owned enterprises such as Sichuan Road and Bridge (600039.SH), Shandong Road and Bridge (000498.SZ), Anhui Construction Engineering (600502.SH), and Shaanxi Construction (600248.SH), as well as central construction enterprises like China Communications Construction (601800.SH), China Railway (601390.SH), China State Construction (601668.SH), and China Railway Construction (601186.SH). It is suggested to pay attention to Xinjiang Communications Construction (002941.SZ), Beixin Road and Bridge (002307.SZ), Longjian Co., Ltd. (600853.SH), and Zhejiang Construction Investment (002761.SZ), which have relatively high proportions of long-term accounts receivable.

Focus on the potential high elasticity of cyclical professional engineering

A peak in coal chemical investment is expected in the next five years. According to incomplete statistics, the total potential investment in coal chemical projects nationwide reaches 1,032.9 billion yuan, with Xinjiang accounting for 491.6 billion yuan and other provinces 541.3 billion yuan. Based on a five-year investment completion estimate, the corresponding average annual investment scale reaches 206.58 billion yuan, an increase of 220.6% compared to the estimated average annual investment of 64.43 billion yuan from 2021 to 2023. Among them, the average annual investment in Xinjiang is 98.33 billion yuan, while other provinces are 108.25 billion yuan. In terms of the composition of coal chemical project investments, equipment investment accounts for 55%, and construction and installation projects account for 28%. Focus on the demand expansion for general contracting, backend sulfur recovery devices, and frontend pulverized coal gasification devices Optimistic about the investment opportunities surrounding the Xinjiang coal chemical industry chain, we particularly recommend Sanwei Chemical (002469.SZ) with strong technical capabilities in sulfur recovery devices, Aerospace Engineering (603698.SH) which leads in the market share of coal gasification furnaces (covered jointly with machinery), as well as Donghua Technology (002140.SZ) and China Chemical (601117.SH) which demonstrate comprehensive advantages in the coal chemical engineering field. Additionally, the accelerated penetration of steel structure cutting and welding presents promising prospects for cost reduction and efficiency enhancement. In the medium to long term, we are optimistic about the intelligent transformation of the steel structure industry driving an increase in net profit per ton and capacity expansion, with a focus on Honglu Steel Structure (002541.SZ).

Focusing on overseas high prosperity regions, with a key emphasis on high-quality international engineering sectors

In the first ten months of 2024, China's newly signed foreign engineering contracting contracts amounted to USD 177.65 billion, a year-on-year increase of 15.3%, while the cumulative completion amount for foreign contracted projects reached USD 124.38 billion, a year-on-year increase of 2%. According to Fitch Solutions' forecast, the global infrastructure industry is expected to have a real annual growth rate of 2.5% in 2023, up from 0.9% in 2022. Compared to the developed market's year-on-year growth rate of 0.6%, emerging markets are expected to achieve a year-on-year growth rate of 4.6%. It is recommended to focus on the infrastructure prosperity in Southeast Asia, the Middle East, and Africa.

High-quality overseas expansion is an important strategy for construction companies to adapt to the current complex international economic situation, and it is also a key way for companies to enhance their international competitiveness and strengthen international cooperation. Overall, overseas project cash flow is good, with a relatively high gross profit margin. In 2023, the gross profit margin of the international engineering sector's overseas business increased by 1.54 percentage points year-on-year, higher than that of domestic business. The prepayment ratio for conventional overseas EPC projects is 10%-15% of the contract amount. In 2023, the average proportion of overseas business in the international engineering sector increased by 5 percentage points, while the financing leverage decreased by 1.3 percentage points. The overseas expansion of construction companies may drive improvements in their cash flow. Collaborating with high-quality overseas owners helps enhance overseas visibility, strengthen technical capabilities, and solidify core competitiveness. We recommend China National Materials Group (600970.SH), Northern International (000065.SZ), China Steel International (000928.SZ), Shanghai Port and Wharf (605598.SH), and Liebherr (605167.SH), and suggest paying attention to China National Machinery International (002051.SZ).

Risk Warning: Infrastructure & real estate investment may decline beyond expectations; the progress of state-owned enterprise reform may fall short of expectations; water conservancy investment and major transportation infrastructure progress may not meet expectations; funding may not be secured; risks of deteriorating international macro environment; calculations have a certain subjectivity and may deviate from actual values