Tianfeng: Reassessing the value of the infrastructure industry chain. Professional engineering + overseas market momentum enhancement.

Tianfeng released a research report stating that the implementation of debt-for-equity policy is expected to drive the improvement of the fundamentals and financial statements of construction central state-owned enterprises, and local state-owned enterprises stand to benefit greatly from debt-for-equity swaps. It is recommended to pay attention to investment opportunities in the construction industry chain that are expected to fully benefit from this round of debt-for-equity policy implementation. Focus on the potential high elasticity of pro-cyclical professional engineering, as the next 5 years are expected to see a peak in investment in coal chemical industry, with investment opportunities around the coal chemical industry chain in Xinjiang. Attention is advised to be placed on the infrastructure prosperity in Southeast Asia, the Middle East, and Africa regions. Key points from Tianfeng are as follows: Layout sector opportunities along infrastructure + debt-for-equity + restructuring of net asset value Looking from top to bottom, government-led infrastructure investment is still a necessary requirement to achieve economic growth targets. It is expected that there is still a growth space of about 900 billion yuan in Q4 2024 for infrastructure investment. Infrastructure investment in 2024-2025 is expected to increase by +9.7% and 8.8% year-on-year. Looking from bottom to top, if infrastructure is divided into different industries for forecasting, it is expected that the growth rates of broad and narrow infrastructure in 2025 will be 7.0% and 2.0% respectively, with clear structural and regional characteristics. Real demand-driven water conservancy investment, major transportation projects in the railway and aviation sectors, and urban comprehensive pipe corridors have relatively high certainty. Infrastructure investment in economically developed areas still maintains high growth, focusing on regional opportunities in Sichuan, Zhejiang, Anhui, Jiangsu, and other regions. Furthermore, the implementation of the debt-for-equity policy is expected to drive the improvement of the fundamentals and financial statements of construction central state-owned enterprises, and local state-owned enterprises stand to benefit greatly from debt-for-equity swaps. It is recommended to focus on investment opportunities in the construction industry chain that are expected to fully benefit from this round of debt-for-equity policy implementation. Key recommendations include resilient local state-owned enterprises such as Sichuan Road & Bridge Group (600039.SH), Shandong Hi-Speed Road & Bridge Group (000498.SZ), Anhui Construction Engineering Group Corporation (600502.SH), Shaanxi Construction Engineering Group Corporation (600248.SH), construction central enterprises such as China Communications Construction (601800.SH), China Railway (601390.SH), China State Construction Engineering Corporation (601668.SH), China Railway Construction Corporation (601186.SH), and focus on Xinjiang Communications Construction Group (002941.SZ), Xinjiang Beixin Road & Bridge Group (002307.SZ), Long Jian Road & Bridge (600853.SH), Zhejiang Construction Investment Group (002761.SZ) which have relatively high proportion of aged accounts receivable. Focus on potential high elasticity in pro-cyclical professional engineering The next 5 years are expected to see a peak in coal chemical industry investment. According to incomplete statistics, the total potential investment in coal chemical projects nationwide is 1.0329 trillion yuan, with Xinjiang having 491.6 billion yuan and other provinces having 541.3 billion yuan. Based on a 5-year investment completion calculation, the average annual investment scale corresponds to 206.58 billion yuan, an increase of 220.6% compared to the calculated average annual investment of 64.43 billion yuan in 2021-2023. Among these, Xinjiang's annual average investment is 98.33 billion yuan and other provinces is 108.25 billion yuan. Looking at the composition of coal chemical project investments, equipment investment accounts for 55%, construction and installation projects account for 28%, and special attention should be paid to the need for increased capacity in engineering general contracting, back-end sulfur recovery units, and front-end coal gasification units. Positive outlook on investment opportunities around the coal chemical industry chain in Xinjiang, key recommendations include Shandong Sunway Chemical Group (002469.SZ) with outstanding technical capabilities in sulfur recovery equipment, Changzheng Engineering Technology (603698.SH) with a leading market share in coal gasification furnaces (coverage with mechanical), East China Engineering Science and Technology (002140.SZ) and China National Chemical Engineering (601117.SH) which highlight comprehensive advantages in coal chemical engineering field. In addition, the acceleration of penetration in steel structure cutting and welding, with prospects for cost reduction and increased efficiency, is expected in the medium to long term. The future is promising for the intelligent transformation of the steel structure industry, leading to increases in net profit per ton and capacity expansion. Key recommendations include Anhui Honglu Steel Construction (002541.SZ). Focus on overseas high-prosperity regions, with emphasis on high-quality international engineering sectors In the first 10 months of 2024, China's newly signed foreign engineering contracting contracts amounted to 177.65 billion US dollars, up 15.3% year-on-year, and the accumulated completion value of overseas contracting projects was 124.38 billion US dollars, up 2% year-on-year. According to Fitch Solutions forecasts, the actual annual growth rate of the global infrastructure industry in 2023 will be 2.5%, higher than the 0.9% in 2022. Compared with the annual year-on-year growth rate of 0.6% in developed markets, the year-on-year growth rate in emerging markets will reach 4.6%. It is recommended to focus on high-quality international engineering sectors in Southeast Asia, the Middle East, and Africa regions. High-quality overseas operations are an important strategic response for construction companies to adapt to the current complex international economic situation, and also to enhance their international competitiveness and strengthen their national.Key ways to promote international cooperation. Overall overseas projects have good repayment rates, with a relatively high profit margin. In 2023, the overseas profit margin of the international engineering sector increased by 1.54 percentage points year-on-year, higher than the domestic business profit margin. The advance payment rate for regular 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 leverage ratio decreased by 1.3 percentage points. Expanding overseas could potentially improve the cash flow of construction companies. Collaborating with high-quality overseas clients can enhance international reputation, technical strength, and consolidate core competitiveness. Recommendations include Sinoma International Engineering (600970.SH), Norinco International Cooperation (000065.SZ), Sinosteel Engineering & Technology (000928.SZ), Shanghai Geoharbour Construction Group Co., Ltd. (605598.SH), Jiangsu Libert INC. (605167.SH), and China Camc Engineering (002051.SZ).Risk warning: Infrastructure and real estate investment have fallen more than expected; progress in state-owned enterprise reform is slower than expected; water conservancy investment and major transportation infrastructure progress are below expectations; inadequate implementation of funds; risks of deterioration in the international macroeconomic environment; calculations have a certain subjectivity and may deviate from actual values.