CITIC SEC Infrastructure and Modern Services Investment Strategy by 2025: Reduce the Burden on Market Entities and Reverse the Vicious Cycle of Deleveraging.

CITIC SEC released a research report stating that counter-cyclical policy is increasing in intensity, and the trend of continuous depreciation of corporate assets is changing. In a situation where supply has been optimized, boosting domestic demand is crucial to stabilizing prices. Industries are greatly impacted by accounts receivable issues, but it is expected that under the background of debt restructuring, accounts receivable issues in the industry chain will be alleviated and balance sheets will improve. With the continued efforts of policies, the infrastructure and real estate sectors are expected to encounter opportunities for reversal of difficulties by 2025, as demand shows signs of stabilizing and the potential for a recovery in corporate profitability is promising. If key asset prices can stabilize in the future, many sub-industries will see opportunities for reversal of difficulties. The main points of CITIC SEC are as follows: Active policy measures to reverse the vicious cycle of contraction. Contraction is putting pressure on corporate assets, but with rigid liabilities and narrower financing channels, it leads to a phenomenon where assets are liquidated to repay debts, leading to a decrease in monetary funds and a slowdown or halt in production and operation. While contraction may also be related to some companies being too aggressive in the past and having poor asset quality, it is primarily a result of the shrinkage of real estate asset prices at the macro level and the tight credit chain of local platforms. Contraction may in turn affect both consumer and investment demand. In the fourth quarter of 2024, the counter-cyclical policy measures intensified, showing significant results. With supply already significantly optimized, boosting demand is beneficial for reversing the difficulties of some companies in the infrastructure and real estate sectors, and improving balance sheets and profit statements. Domestic demand is the main driver of demand, and stabilizing prices is key to boosting domestic demand. With increasing external uncertainties, the importance of the domestic economic cycle led by domestic demand is highlighted. The infrastructure and real estate sectors are closely related to domestic demand, and the key to boosting demand lies in avoiding continuous downward product pricing and deteriorating expectations. Specifically, The real estate development sector is facing a battle of stabilization with policy support. Previous policies have already achieved initial effects in terms of housing sales volume. The bank expects that demand-side tools such as optimizing provident fund loans, optimizing real estate taxes and fees, and relaxing purchase restrictions are still sufficient, while supply-side policies such as repurchasing land are also beneficial for market inventory digestion, easing the burden on enterprises. The bank believes that industry differentiation will become more apparent in the battle of stabilization, and industry concentration may further increase. The utilities sector has strong demand for energy, and hydropower still has room for utilization hour adjustments. Leading hydropower companies in 2025 have the flexibility in electricity performance. The market trading price for thermal power plants in 2025 may continue to decline, but the bank expects that the spot prices of thermal power coal in 2025 may decrease slightly, offsetting the drag on the performance of thermal power companies due to the decline in electricity prices. The express delivery sector has a higher and more elastic correlation with the macroeconomy. The effectiveness and intensification of policies to empower high-end express delivery demand or coming early, under the expectation of economic resilience recovery, express delivery and logistics service providers more closely related to manufacturing and the macroeconomy are expected to benefit first. The cement sector is gradually increasing prices, and the profitability of enterprises is expected to recover. Coupled with the future introduction of policies related to carbon trading and excess production capacity replacement, the cement industry is expected to accelerate the elimination of excess production capacity, optimize the supply side situation, and restore industry profitability to a reasonable level. In the consumer building materials sector, as the real estate market stabilizes, profit levels are expected to return to average. Excellent leading companies have the ability and space to maintain stable growth in performance, while significantly increasing dividend payout rates to shareholders. Debt restructuring is being vigorously promoted, and it is expected that receivables issues of enterprises will be significantly alleviated. Since 2024, the fiscal deficit has become prominent, and in November the State Council proposed increasing the limit of local government debt to swap the stock of implicit debt and it was approved. The bank believes that, on the one hand, policies can alleviate the current pressure of local debt repayment and reduce interest expenses. On the other hand, it helps to smooth the funding chain at local levels, repay some outstanding debts, relieve the pressure on business operations, and optimize the company's financial statements. In the infrastructure and real estate sectors, in the process of transitioning from old to new models, and against the backdrop of declining asset prices, many companies have accumulated significant receivables, including debts owed by the public sector and upstream and downstream debts. Policy support assists in the digestion of debt issues, laying the foundation for companies to compete lightly. The renewable energy sector faces increasing pressure from overdue subsidies. As of the end of 2023, the cumulative shortfall of subsidies from the domestic renewable energy fund has increased to approximately 640 billion RMB. At the industry level, there may be a problem of mismatch between income and expenses of the renewable energy fund, reflected at the micro level in significant amounts of receivables owed by new energy companies due to overdue national subsidies. The bank expects green debt for power generation. There are widespread government subsidies in the water supply and drainage sector, but, for example, the subsidy amount for Guangzhou Water Company in 2023 has shown a year-on-year decrease for the first time. On one hand, government debt restructuring may ease the pressure of government subsidies, while on the other hand, it is urgent to streamline industry pricing mechanisms. In the aviation sector, there is a decline in other income of some airlines, mainly due to reduced levels of local government subsidies or delays in payment, leading to a decrease in revenue from cooperative routes. The proportion of receivable route subsidies has increased, and government asset balance sheet repair may push forward the recovery of payments for route subsidies. The engineering services sector can achieve overall improvement in industry operational quality and valuation repair through historic industry debt resolution, and fiscal efforts are expected to end the contraction phase of top construction central enterprises. The real estate sector is somewhat unique, as development companies may have a small scale of receivables, but they bear significant construction and delivery obligations. The bank expects that future policies such as land swaps and project whitelists will assist in improving corporate balance sheets. Investment Strategy: In the real estate and property services sectors, the bank recommends companies benefiting from the tug-of-war situation in the real estate market; in the basic materials and engineering services sectors, companies with bottoming out profits or areas benefiting from domestic demand are recommended; in the utilities sector, companies benefiting from the construction of new power plants and improvements in hydroelectric power from improved water supply are recommended. The industry is undergoing a transformation period for green electricity, benefiting from the increasing fusion of digitalization and new electric power systems in virtual power plants, microgrids, integrated energy services, power prediction, and other new scenarios. In the logistics and travel services sectors, companies benefiting from debt restructuring of balance sheets and economic recovery are recommended.Company with high flexibility.Risk factors: For the entire industry, many companies' balance sheets are under tight pressure, with risks of future performance decline, book value of net assets higher than revalued net assets; airline fleet and base expansion falling short of expectations; rapid rise in labor costs; significant increase in oil prices; policy implementation speed too slow, real estate market unable to stabilize and rebound by 2025; some real estate companies have low inventory quality, difficulty in inventory turnover, and risk of continued decline in profits; if real estate development, infrastructure investment, etc., in our country fall short of expectations, the cement industry will face pressure; risk of consumer building materials companies not achieving expected market share growth.