Guotou Securities: CSRC Actively Promotes Market Value Enhancement Plan, Continues to Have Optimistic View on Undervalued Construction State-Owned Enterprises Performance

Guotou Securities released a research report stating that, in order to further guide listed companies to pay attention to their own investment value and effectively enhance investor returns, the China Securities Regulatory Commission (CSRC) is drafting the "Listed Companies Supervision Guideline No. 10 - Market Value Management (Consultation Draft)". At the beginning of the year, the State-owned Assets Supervision and Administration Commission proposed to include market value management as a performance indicator for central enterprises. Currently, many traditional construction central enterprises have a low PB ratio. With the release and subsequent implementation of the draft market value management guidelines for listed companies, the valuation repair and market returns of high-quality undervalued construction central enterprises are expected to improve. Starting from Q3, the issuance of special bonds has accelerated, boosting the steady growth of infrastructure investment for the whole year. Overseas orders have seen a high increase, combined with the positive progress in market value management, it is anticipated that the fundamentals and valuation of construction central enterprises will improve in Q4. Guotou Securities' main points are as follows: The CSRC actively promotes the plan to increase market value and is optimistic about the market returns of high-quality construction central enterprises. To further guide listed companies to pay attention to their own investment value and enhance investor returns, the CSRC is drafting the "Listed Companies Supervision Guideline No. 10 - Market Value Management (Consultation Draft)". It requires listed companies to improve their quality as the basis, enhance operational efficiency and profitability, and promote the increase of investment value of listed companies through methods such as mergers and acquisitions, equity incentives, cash dividends, and share repurchases. For long-term companies with low market value, they should establish and disclose a plan to increase the market value of the listed company, including goals, deadlines, specific measures, and evaluate and disclose the effectiveness of the market value enhancement plan at least once a year. At the beginning of the year, the State-owned Assets Supervision and Administration Commission proposed to include market value management as a performance indicator for central enterprises, aiming to improve the quality of central enterprises controlling listed companies. Currently, many traditional construction central enterprises have a low PB ratio. With the release and subsequent implementation of the draft market value management guidelines for listed companies, the valuation repair and market returns of high-quality undervalued construction central enterprises are expected. Starting from Q3, the issuance of special bonds has accelerated, supporting the steady growth of infrastructure investment for the whole year, and the interest rate cut by the Federal Reserve is expected to boost overseas construction demand. From January to August 2024, investment in infrastructure maintained steady growth, with narrow and broad investment in infrastructure completion increasing by 4.40% and 7.87% respectively year-on-year. From the funding side, the issuance of special bonds accelerated significantly in Q3, with the scale of new special bonds issued in August reaching 796.89 billion yuan, an increase of 182.97% month-on-month and 33.96% year-on-year. As of September 22, the total issuance of new special bonds reached 2.93 trillion yuan, accounting for 75% of the annual limit for new special bonds (3.9 trillion yuan). There is still 0.97 trillion yuan of issuance waiting, and with the continued acceleration of the issuance of special bonds in Q4, the physical workload of infrastructure is expected to be formed as soon as possible to ensure the stability of infrastructure investment for the whole year. Earlier, the Federal Reserve cut interest rates by 50 basis points, and the subsequent acceleration of overseas project construction is expected to create overseas demand for infrastructure. Currently, the concentration of the construction industry continues to increase, with the proportion of new signed contracts by the eight major central enterprises in the construction industry increasing from 29% in 2017 to 53% in the first half of 2024, showing a trend of the "strong getting stronger" among leading central enterprises. In the first half of 2024, the operation of construction central enterprises was under pressure, and it is expected to improve in the second half. In 2023, the overall revenue/performance of eight central enterprises remained stable, and the dividend payout ratios of many central enterprises increased, such as China Railway Construction Corporation (14.27% in 2022, 18.21% in 2023), China Communications Construction (20.00% in 2022, 18.37% in 2023), Metallurgical Corporation of China (16.74% in 2022, 17.21% in 2023). Since the beginning of the year, due to factors such as tight local government funds and slow disbursement of infrastructure funds, the performance and operational indicators of most construction central enterprises were under pressure in Q2. In the first half of 2024, the new signed orders of construction central enterprises remained steady, with a total of 854.8 billion yuan in new overseas contracts, a year-on-year increase of 27%. With the continuous progress of local government bond issuance, effective implementation of special bonds, conversion of overseas orders, and the landing of central enterprise market value management guidelines, construction central enterprises are expected to see improvements in fundamentals and valuation, and are optimistic about the future enhancement of intrinsic value and market performance of construction central enterprises. Recommended targets to pay attention to: China State Construction Engineering Corporation (601668.SH), China Communications Construction (601800.SH), China Railway (601390.SH), and China Railway Construction Corporation (601186.SH). Risk warnings: Policies are not implemented as expected, infrastructure investment falls short of expectations, special bond issuances fall short of expectations, project execution falls short of expectations, and intensified competition in overseas markets, among others.