China Securities Co., Ltd.: End-of-year construction industry PMI rebounds, with positive policy expressions.

China Securities Co., Ltd. released a research report stating that in December, China's construction industry PMI recorded 53.2%, an increase of 3.5 percentage points from November, returning above the boom-bust line. Among the sub-indices, business activity expectations and new orders index increased by 1.5/7.9 percentage points from the previous month. The year-end peak of seasonal orders and financial support are expected to boost industry growth, and this trend is expected to continue into the new year. During the week of December 30, 2024, to January 5, 2025, central ministries and commissions expressed positive views on counter-cyclical policies, with the National Development and Reform Commission stating that it will increase the issuance size of ultra-long-term government bonds in 2025 and expand support for dual construction. The central bank also emphasized increasing counter-cyclical adjustment efforts in the fourth quarter, and industry sentiment is expected to remain high. Key points from China Securities Co., Ltd.: Market review: During the week of December 30, 2024, to January 5, 2025, the CICC Construction Index fell by 7.7%, the CSI 300 fell by 5.2%, with the sector underperforming the broader market by 2.5 percentage points. Among the construction sub-sectors, residential construction performed the best, underperforming the broad market by 1.0 percentage points. The top three companies with the highest growth during the week were ST Huawang (+21.6%), Baoli Technology (+21.2%), and Shanghai Geoharbour Construction Group Co., Ltd. (+7.7%). Financing situation: 1) Special bonds: During the week of December 30, 2024, to January 5, 2025, the total amount of local government special bonds financing was 0 billion yuan, with 17 billion yuan of local government special bonds maturing and a net issuance of -17 billion yuan. The total amount of new special bond issuances in 2024 reached 400.32 billion yuan, with a progress rate of 102.6%. 2) Local government bonds: The total amount of local government bond financing during the week of December 30, 2024, to January 5, 2025, was 37.5 billion yuan, with a net increase of 64 billion yuan compared to the previous week. 3) Land transfer fees: The total amount of land transactions in the top 100 cities during the week of December 30, 2024, to January 5, 2025, was 130 billion yuan, a 21% year-on-year decrease. Industry news: 1) Ministry of Industry and Information Technology: The establishment of the Artificial Intelligence Standardization Technical Committee; guiding financial institutions and industrial investment funds to provide financial support for eligible "5G + Industrial Internet," 5G factory projects; (Caifeng Society) 2) Central Bank: held a quarterly meeting, pointing out the need to implement a moderately loose monetary policy, strengthen counter-cyclical adjustment, better utilize the dual functions of total and structural monetary policy tools, increase coordination between monetary and fiscal policies, and maintain overall stability in the economy and consumer prices; (Caifeng Society) 3) Ministry of Industry and Information Technology: Accelerate the moderate advance development of information infrastructure. (Caifeng Society) 4) State Council: proposed to accelerate the renovation of old urban neighborhoods, blocks, factory areas, and villages, strengthen the construction and renovation of urban infrastructure, and improve urban functions. (Caifeng Society) Industry insights: Recent positive developments in new infrastructure and the optimization of special bond management mechanisms have led to an increase in government investment. After implementing negative list management and increasing the proportion of capital used for capital, fiscal support levels and scope have expanded, the construction industry PMI rebounded in December and is expected to continue to rise. Positive results from foreign diplomacy continue to show Chinese companies going global, improving their profitability and competitiveness. Risk factors: 1) Construction progress is greatly affected by funding availability and natural conditions, which may lead to delays affecting revenue recognition; overseas construction progress is also influenced by local political and security environments. 2) Continued weakness in the real estate market may have various adverse effects on construction companies. The impact of the real estate market on construction companies mainly includes: 1) the current stagnation in the land market leading to a significant decline in local government land transfer income, negatively affecting infrastructure funding sources; 2) continued weakness in the real estate market, large declines in sales and construction starts of commercial housing, affecting the new orders of construction companies, as well as declining completion area, affecting the orders of decoration and renovation companies, resulting in adverse effects on the business development of related construction sub-sectors; 3) defaults by real estate enterprises, bringing impairment pressure to construction companies holding receivables from real estate enterprises and inventory from real estate development projects. 3) Expansion of new energy business may not meet expectations. Some traditional construction companies are expanding into new areas such as new energy consulting, engineering, and operations, but this field relies heavily on government resources and their own professional capabilities, which may entail the risk of failed expansion.