China's Construction Industry Outlook 2025: Steady Progress

China Gold released a research report stating that real estate investment may continue to be under pressure by 2025, and manufacturing investment may also experience a slowdown. The fundamentals of the construction sector may continue to experience differentiation. We recommend a prudent stock selection strategy, focusing on fundamentally stable companies that benefit from the debt-to-equity swap and new regulations on market value management in state-owned construction enterprises; as well as international engineering companies that benefit from ample orders in the overseas infrastructure market and are currently undervalued. Key points from China Gold: - Signs of increased fiscal support in the infrastructure sector have already been seen in the second half of 2024, such as the acceleration of special bond issuances and the issuance of specific refinancing bonds by local governments at the year-end. Looking ahead to 2025, it is expected that infrastructure investment will achieve a slight growth under the impetus of fiscal support and debt-to-equity swap, with the growth rate expected to rise to around 10%. However, real estate investment in 2025 may still face pressure, and manufacturing investment may experience a slowdown, leading to further differentiation in the construction sector. - State-owned construction enterprises: benefiting from debt-to-equity swap and market value management regulations It is expected that the fiscal policy will be strengthened in 2025, which may lead to an increase in the physical work volume of infrastructure projects and improvement in the quality of project payments, benefiting the profit and cash flow of state-owned construction enterprises. This may also leave more room for policy improvements in dividends and share buybacks for state-owned construction enterprises. The issuance of the "Market Value Management Opinions" at the end of 2024 further clarified the importance of market value management, addressing the long-term issue of being below par as a key annual focus and including market value management in the performance appraisal of state-owned enterprise leaders, which is expected to further promote the valuation recovery of state-owned construction enterprises. - International engineering enterprises: expanding overseas markets, favorable cyclical market China State Construction Engineering Corporation actively expands overseas, with the new contract value of foreign contracting projects continuing to grow in 2024. Leading state-owned construction enterprises have shown outstanding performance in overseas orders, with a forecast for further steady growth in overseas orders in 2025. With expectations of cyclically favorable market trends and the Belt and Road Initiative, companies with global capabilities in cement engineering and operation services are recommended. - Continuous progress in the western development, regional enterprises seize opportunities Sichuan Province, as an important strategic hinterland for the western development, is expected to see further growth in infrastructure and emerging industry investments, with strong demand in urban renewal, water conservancy facilities, and other areas. In addition, it is expected that the explosives and coal chemical EPC industry in Xinjiang will enter a golden window period driven by increased coal production and external transportation, while the development of hydropower and copper mines in Tibet will accelerate, with promising order growth for explosives companies. - Professional engineering enterprises: differentiation in business conditions, focus on efficiency improvement in leading companies In 2025, it is expected that the growth rate of manufacturing investment will remain at around 8%, but there is a clear differentiation in internal structure: 1) The demand for the steel structure industry is under pressure, and leading companies are expected to expand their cost advantages through intelligent transformation. 2) The explosives industry has a positive supply and demand pattern, and leading companies can enhance their bargaining power through mergers and acquisitions and the extension of the industrial chain. Risk warning: Risks of policy deviations from expectations, and risks of rising raw material prices.