National construction: Why is it important to focus on investment opportunities in the "Belt and Road" initiative currently?

Why should we pay attention to investment opportunities in the "Belt and Road" initiative? The "Belt and Road" initiative is related to national security. With Trump's election, there is hope for further advancement in the context of increased competition between China and the United States. The "Belt and Road" initiative was proposed by the highest leadership in 2013 and was written into the party's charter in 2017, highlighting its significance. Looking ahead to next year, after Trump's election as President of the United States, he may take a series of restrictive measures against China, including imposing tariffs and blocking exports in high-tech fields. The competition between China and the United States may intensify further. In the new global political and economic environment, the "Belt and Road" initiative is closely related to safeguarding national security, and it is beneficial for our country to strengthen and consolidate cooperation with neighboring countries, maintain geopolitical stability, enhance influence, and better promote the implementation of the dual circulation of domestic and international economies. The strategic significance in the new era is expected to significantly increase, and efforts are expected to continue to advance. The upcoming new "Belt and Road" summit forum may be held next year, potentially catalyzing the sector. China hosted the first and second "Belt and Road" summit forums in 2017 and 2019 respectively, but due to special macro factors, the forum was temporarily suspended. It resumed last year with the third summit forum. If it follows the pattern of being held every two years, the fourth summit forum may be held next year. Based on previous arrangements, the relevant announcement of the summit forum is usually made at the end of the previous year or the beginning of the current year, potentially providing a catalyst for the sector. Looking back at history, there have been significant excess returns in the sector before each summit forum. Around the strategic release and the three summit forums, the construction of the "Belt and Road" sector had four major market rallies: 1) March 2014 to May 2015: the strategic proposal and roadmap release, combined with a super bull market, with the sector's highest increase of 421% and an excess return of 293% relative to the CSI 300. Important construction companies led the way with an average increase of 505%, and international engineering companies had an average increase of 125%. 2) January 2017 to April 2017: Market rally of the first "Belt and Road" summit forum in 2017, with the sector's highest increase of around 19% and an excess return of about 14% relative to the CSI 300. The four major international engineering companies led the way with an average increase of 39%. 3) November 2018 to April 2019: Market rally of the second "Belt and Road" summit forum in 2019, with a leading increase of 58% by four major international engineering companies, and a significant excess return relative to the CSI 300. 4) November 2022 to May 2023: The market rally of the third "Belt and Road" summit forum in 2023 overlapped with the "China special estimate", with the sector's highest increase of about 57% and an excess return of about 46% relative to the CSI 300. The eight major state-owned enterprises/four major international engineering companies had average increases of 52%/91%, respectively. From a fundamental perspective, the urbanization and industrialization of emerging countries are accelerating, with great potential for leading companies to go abroad and increase their overseas income as a percentage of total revenue. On the demand side: the economies of emerging countries are currently in a period of rapid development, with urbanization and industrialization making significant progress, which is expected to lead to rapid growth in demand for cement, steel, chemicals, metals, energy and power, machinery and equipment, and other products, as well as strong demand for related professional engineering services. In addition, there is overcapacity in traditional manufacturing industries in China, and supply-side reforms limit capacity expansion. Leading companies in China are accelerating their overseas capacity layout, which is expected to further drive demand for professional engineering services overseas. From the supply side perspective: China's leading companies in professional engineering have fully benefited from the dividend of domestic engineers and rich project application scenarios. Compared to overseas competitors, they have more core technology processes and have significant competitive advantages such as shorter construction periods, higher efficiency, and lower costs. In the future, they will assist China's advantaged manufacturing industries in going global, with great potential for development. From 2023 onwards, the growth rate of overseas income for construction state-owned enterprises and international engineering companies has consistently exceeded domestic income, and the percentage has continued to increase. Overseas projects of similar nature overall have better profit margins, require less initial capital investment, and the increase in the proportion of overseas business is expected to drive continued upward momentum in gross profit margins and cash flows. Additionally, some leading professional engineering companies are actively expanding into upstream and downstream industries such as equipment and operation and maintenance. Their business models are expected to be further optimized in the future. Investment recommendation Since October, the technology sector related to national security has been leading in terms of price increases. As an industry closely related to national security, the "Belt and Road" sector is currently under-owned by institutions and has significantly underperformed. According to the normal schedule in the past, the "Belt and Road" summit is held every two years, and it is expected that a new summit will be held next year. It is expected that the relevant announcement will be made by the end of this year, potentially providing significant catalyst for the sector. Key recommendations include focusing on leading international engineering companies such as China National Chemical Engineering (PB-LF 0.86X, 24PE 9.1X), Sinoma International Engineering (24PE 8.5X, 24E dividend yield 4.3%), Sinosteel Engineering & Technology (24PE 11X, 24E dividend yield 4.4%), Norinco International Cooperation (24PE 11X), China Camc Engineering (24PE 29X), China Haisum Engineering, China Aluminum International Engineering Corporation, etc. As well as leading state-owned construction companies China Communications Construction A+H (PB-LF 0.63, 24E dividend yield 2.7%), Power Construction Corporation of China, Ltd (PB-LF 0.74, 24PE 8.0X), China Energy Engineering Corporation A+H (24PE 11X), China State Construction Engineering Corporation (PB-LF 0.56, 24E dividend yield 4...)0.2%), China Railway A+H (pb-lf 0.55, 24E dividend yield 2.8%), China Railway Construction Corporation A+H (pb-lf 0.49, 24E dividend yield 3.2%), Metallurgical Corporation of China A+H (pb-lf 0.69, 24PE 9.2X); leading private company going abroad, Shanghai Geoharbour Construction Group Co., Ltd. (24PE 23X).Risk Warning Risks include the "Belt and Road" strategy not progressing as expected, uncertainty regarding the timing of the summit, overseas business acceptance and execution not meeting expectations, and exchange rate fluctuations. This article is reprinted from the WeChat public account "Architecture Double Diamond Team". Edited by GMTEight: Liu Xuan.