CITIC SEC: Structural differentiation of engineering service demand under pressure, focusing on incremental growth in niche markets.

CITIC SEC released a research report stating that in the first half of 2024, the overall growth in the scale of the construction industry was limited. State-owned enterprises in the construction sector showed more stable performance. CITIC SEC believes that infrastructure investment remains a driving force for economic growth, and new infrastructure projects will become the main direction of future domestic infrastructure growth. Investment opportunities in specific sectors are worth paying attention to. Mega projects in hotspots such as Southeast Asia and the Middle East have been successively launched, bringing historic development opportunities for infrastructure projects going overseas. With the implementation of large projects, specialized ground treatment companies are expected to expand market share by leveraging their technical advantages. With the continuous increase in mineral reserves and production and industry consolidation, top companies in the explosives industry are facing development opportunities. Review: Stable growth in infrastructure investment, but funding is slower. Since the beginning of the year, the overall scale of the construction industry has seen a decline, with a more pronounced stability in performance among state-owned enterprises in the construction sector. CITIC SEC conducted a comprehensive analysis on listed construction companies under three sectors: state-owned enterprises, state-owned enterprises, and private enterprises. From the perspective of new signed contracts, state-owned enterprises maintained their overall scale, while private enterprises experienced a significant decline. Various indicators such as revenue, net profit attributable to shareholders, and cash flow all showed a year-on-year slowdown in growth across the sectors, but state-owned enterprises in the construction sector showed more stable performance. Outlook: Potential improvement in funding, sufficient project reserves. The current rate of project funding is still at a low level, particularly in the housing construction sector. The decline in overall fiscal funding has had a significant impact on project funding, but overall project reserves are still adequate. Considering the slow progress in the issuance of special bonds and special national bonds, CITIC SEC believes that the overall project funding may improve with the continuous issuance of national bonds. Investment: Focus on development opportunities in specific sectors. While the industry faces short-term pressure in demand, investment opportunities in specific sectors are worth noting: 1) Mega projects successively launched in hotspots like Southeast Asia and the Middle East bring historic development opportunities for infrastructure projects overseas. 2) With the implementation of large projects, specialized ground treatment companies are expected to expand market share through technical advantages. 3) With continuous increase in mineral reserves and production and industry encouragement for consolidation, top companies in the explosives industry are facing development opportunities. 4) With the acceleration of low-altitude economic policies, related engineering design companies are expected to benefit first. Risk factors: Real estate credit risks leading to impairment losses; slower-than-expected growth in real estate and infrastructure investment; significant increase in raw material prices; lower-than-expected penetration rate of BIPV; macroeconomic cycle fluctuations; lower-than-expected downstream demand; slower-than-expected realization of overseas orders; political instability in overseas countries; slower-than-expected progress in major projects; significant exchange rate fluctuations; decline in gross profit margin due to low-price competition; slower-than-expected conversion of order income into revenues; longer accounts receivable cycles. Investment strategy: Since the beginning of this year, the overall construction industry has faced pressure, but infrastructure investment plays an important role in economic growth. Stay governments' special projects and the subsequent issuance of medium and long-term special national bonds may alleviate industry pressure. Looking ahead, CITIC SEC believes that domestic infrastructure investment will remain a major driving force for economic growth, state-owned enterprises in the construction sector are more stable, and development opportunities for some specific sectors are prominent. The building market overseas, represented by the Middle East and Southeast Asia, is expected to continue to achieve rapid growth. Overall, CITIC SEC recommends focusing on: 1) Stable state-owned construction companies with solid fundamentals and high dividend yields; 2) Quality private enterprises specialized in overseas projects and international engineering companies; 3) Leading ground treatment companies with advanced technology; 4) Top explosive companies benefiting from increased reserves and industry consolidation; 5) Engineering design companies involved in low-altitude economic projects.