中国建筑业2018展望：盘整之年（英文版）.pdf
<p>M i F I D I I R esea r c hI s y o u r a c c e s s a g r e e d ?C ON T ACT u s t o d a yDisclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: research.hsbc THIS CONTENT MAY NOT BE DISTRIBUTED TO THE PEOPLE'S REPUBLIC OF CHINA (THE "PRC") (EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAO) Uncertainty on domestic new contract growth could persist in 1H18 due to regulatory scrutiny of PPP projects Companies with earnings improvement due to project execution and overseas business development should fare better We prefer CSCI (3311 HK) and upgrade CCCC (1800 HK) to Buy from Hold; downgrade CRG (390 HK) to Hold from Buy We are resuming coverage on both the A-share and H-share of China Communications Construction Company after being restricted since July 2015. Sector de-rating largely priced in: We think public-private partnership (PPP) regulatory scrutiny may continue to pose headwinds for the Chinese construction sectors share prices in 1H18. A major review of the existing PPP project database, which should be completed in March 2018, could result in a reduction in planned investment in PPPs from the current size of RMB17.8trn. This poses a risk to weak domestic new contract growth in 2018. We think the policy headwinds will gradually ease in 2H18. A high level of order backlog to revenue coverage at over 3x could ensure 2018 earnings growth despite regulatory uncertainty for new contract growth. The sector is trading at below historical average PER and we think the negatives are largely priced in. Catalysts may emerge in 2Q18 after the completion of PPP project review and project financing improves. More focus on project quality rather than quantity: Over the long term, we believe PPP financing will remain a major source of funding for Chinese infrastructure development, especially in lower tier cities. However, PPP project quality, asset turnover, and cash flow generation could become more important than new contract growth in 2018 for stock selection. CSCI (3311 HK, Buy, TP HKD16.50) is our preferred pick amid policy headwinds. We believe the company can deliver double-digit new contract and earnings growth due to its exposure to the Chinese social housing development theme, which is less impacted than infrastructure by regulatory scrutiny. We upgrade CCCC (1800 HK, Buy, TP HKD12.20) to Buy from Hold as we are resuming coverage after being restricted since July 2015. We downgrade CRG (390 HK, Hold, TP HKD7.10) to Hold from Buy due to a decline in railway investment and a potential decline in total new contracts for 2018. Key changes to ratings and estimates Current _ TP _ _ Rating _ Upside/ Mkt. cap 6m Turnover PER (x) PBV (x) ROE Company Ticker Currency price Old New Old New downside (USDm) (USDm) 2018e 2018e 2018e CSCI 3311 HK HKD 11.58 16.5 16.5 Buy Buy 42.5% 7,479 13.2 7.7 1.4 18.4% CRG-H 390 HK HKD 6.15 7.8 7.1 Buy Hold 15.4% 28,631 15.4 6.8 0.7 10.8% CRG-A 601390 CH RMB 8.73 7.2 6.0 Reduce Reduce -31.3% 28,631 56.5 11.8 1.2 10.8% CRCC-H 1186 HK HKD 9.58 14.4 12.9 Buy Buy 34.7% 24,028 12.3 5.9 0.7 12.2% CRCC-A 601186 CH RMB 12.00 13.3 11.0 Hold Hold -8.3% 24,028 71.2 8.9 1.0 12.2% CCCC-H 1800 HK HKD 9.45 14.3 12.2 Hold Buy 29.1% 31,825 28.0 6.1 0.7 10.3% CCCC-A 601800 CH RMB 14.48 13.4 10.3 Reduce Reduce -28.9% 31,825 44.0 11.5 1.2 10.3% Source: HSBC estimates. Note: Priced as of market close on 18 January 2018. 23 January 2018 Anderson Chow* Global Co-Head of Industrials Research The Hongkong and Shanghai Banking Corporation Limited andersonchowhsbc.hk +852 2996 6669 Lesley Liu* Analyst, Infrastructure & Industrials Research The Hongkong and Shanghai Banking Corporation Limited lesleylliuhsbc.hk +852 2822 4524 Pratik Gothi* Associate Bangalore *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations. China construction sector EQUITIES INDUSTRIALS China 2018 outlook: A year of consolidation EQUITIES INDUSTRIALS 23 January 2018 2 Weakening domestic order growth 3 China State Construction International 3311 HK 12 China Communications Construction 1800 HK 16 China Railway Construction Corp 1186 HK 23 China Railway Group 390 HK 28 Disclosure appendix 41 Disclaimer 44 Contents 3 EQUITIES INDUSTRIALS 23 January 2018 Tighter regulations for PPP projects Fewer new orders over the near term, but construction progress could improve During November 2017, Chinas Ministry of Finance (MoF) and State Asset Supervision and Administration Commission (SASAC) issued two policy statements on improving the structure of public-private partnership (PPP) projects, the financial leverage of PPP projects, as well as setting financial guidelines for SOE construction companies. Around 80% of Chinese government investment projects are financed through PPPs and, although we believe that the regulations are becoming tighter, it does not necessarily mean that the PPP model will be discontinued. There is, however, a risk that some existing PPP projects will not meet the new regulatory requirements and so could be cancelled, or have their contracts restructured, but we think this is likely to represent a small portion of the total number of PPPs. As at September 2017, there were 14,220 PPP projects listed in the MoF PPP Center database with a total investment value RMB17.8trn. The real private enterprise participation in PPP projects actually declined in 2017 vs. 2016. According to the MoF PPP Center, the number of PPP projects taken up by private enterprises made up 34.7% in 2017 compared to around 39% in 2016. Private enterprise involvement in PPPs based on investment was c25% in 2016. The main participants in PPP projects are the major SOE construction companies and local government controlled contractors and entities. Weakening domestic order growth Tighter China PPP regulations could hold back new contract growth in 1H18 Chinese construction sector de-rating could persist in 2018; valuation multiples could remain at below-average level Prefer companies with potential earnings upside and business restructuring for better profitability EQUITIES INDUSTRIALS 23 January 2018 4 The PPP Center is currently undertaking a review of all the PPP projects in the database to ensure the RMB17.8trn worth of projects meet certain key criteria: 1. They have to be projects that will provide public services which is the responsibility of government. 2. Sufficient preparation work has to have been carried out to ensure financial viability of a PPP project and the local government needs to have a proven repayment capability. A PPP project also needs to pass a “value for money” assessment. 3. Proper assessment and estimate of project cost has to have been carried out. The project payment system needs to be linked to the performance of an underlying project. Government payment (if involved) cannot be smoothed to result in a sharp increase in fiscal payment at a future date. 4. If a project does not receive any tangible interest after being included in the PPP project database for over 1 year, there is a risk of it being removed from the database. Local governments also need to adhere to the requirement that a maximum of 10% of fiscal budget can be used to finance PPP projects. The 10% limit applies to the total for existing and proposed PPP projects repayment requirements. 5. Build-Transfer projects are prohibited and PPP agreements cannot contain discriminatory procurement clauses for social capital. Local Government Financing Vehicles cannot be used as a social capital partner. 6. There can be no government guaranteed return or guaranteed repayment of invested capital for PPP projects. 7. Information transparency is required for all PPP projects. PPP projects that do not meet the above criteria could be removed from the database. This government exercise is expected to be completed by March 2018. We think the tendering of PPP projects will remain slow during 1H18 with a potential recovery likely in 2H18 or 1H19. The quantity of PPP projects may reduce but we are hopeful that the quality of PPP projects will improve, which could help construction companies cash flow and project returns. The current PPP project repayment (or revenue method) during the operation period is 70-75% government payment and the government subsidises user pay. Only about 25-30% of PPP projects have a user pay system. The significant increase in new PPP projects tendered in 2016 and 2017 means that a few western provinces may have reached the 10% of government fiscal account limit. As at the end of October 2017, the five provinces that have the highest total investment requirement for PPP projects were Inner Mongolia, Guizhou, Yunan, Hunan, and Henan provinces. In aggregate, these five provinces have about 36% of total PPP projects in the MoF PPP project database in terms of investment. Fig 1: Total MOF PPP project database (RMBbn) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Total project investment 8,770 10,600 12,460 13,500 14,610 16,350 17,800 Project amount under 识别阶段 identification stage 6,060 6,520 6,530 6,710 6,910 7,550 7,700 Project amount under 准备阶段 preparatory stage 1,750 2,230 2,950 3,040 3,200 3,600 2,900 Project amount under 采购阶段 procurement stage 450 790 1,420 1,520 1,600 1,900 3,100 Project amount under 执行阶段 execution stage 510 1,060 1,560 2,230 2,900 3,300 4,100 % of PPP projects at execution stage 5.8% 10.0% 12.5% 16.5% 19.8% 20.2% 23.0% Source: MOF PPP Center, HSBC 5 EQUITIES INDUSTRIALS 23 January 2018 More affluent provinces and cities rely less on the PPP project financing method. The regulatory scrutiny of PPP projects should ensure that the level of debt in provinces that have lower fiscal capability is controlled. This should be a long-term positive for the accounts receivable quality for construction companies. Quality is more important than quantity We think tighter PPP regulations could help the construction sector over the long term and potentially improve the project returns for participants. The significant number of contracts accumulated in 2016 and 2017 led to an existing order backlog representing a high level of revenue at 3.4x to 4.3x years, as shown in Figure 2. We think an improvement in project execution, which was an issue in 2016 and 2017 (i.e. new contract growth significantly outpaced revenue growth), could help the sector avoid any further de-rating. Fig 2: Total order backlog/total revenue ratio (years) Company Stock code 2014a 2015a 2016a 2017e 2018e 2019e CRCC 1186 HK 3.0x 3.0x 3.1x 3.7x 4.1x 4.6x CRG 390 HK 3.1x 3.0x 3.2x 4.3x 4.7x 5.1x CSCI 3311 HK 2.7x 3.3x 3.3x 3.4x 3.8x 4.1x CCCC 1800 HK 2.2x 2.1x 2.6x 3.3x 3.8x 4.0x Source: Company data, HSBC estimates HSBC Chief Economist of Greater China, Qu Hongbin, stated in China in 2018 five key macro themes, dated 7 December 2017 that an expansionary fiscal policy in 2018 would continue to be supported by nominal GDP growth of around 10% y-o-y. HSBC China Economists believe that the regulatory scrutiny may have a near-term impact on infrastructure investment in 4Q17 and 1H18. The higher entry requirement may delay the inclusion of new projects in the PPP project database but the impact should be minimal given robust applications for new projects. HSBC China Economists believe the tightened scrutiny is unlikely to impact the enthusiasm of the government and social capital for getting involved or meaningfully reduce the importance of this funding method. HSBC China Economists expect infrastructure investment (in a broad sense, not limited to transport infrastructure) to grow 15% in 2018e, down slightly from 16% in 2017. 2018 railway investment to decline but industry reform could help rail PPP projects China Railway Corporation (CRC) in its annual working conference held on 2 January 2018 outlined a reduction in its 2018 infrastructure investment budget to RMB732bn vs. RMB801bn in 2017. While the railway sector has very few PPP projects thus far, the cautious stance on growing fixed asset investment echoes the regulatory scrutiny associated with PPP projects. CRC also intends to increase the use of PPP financing for railway projects in the future but we think ongoing railway industry reform is required to entice social capital to participate in railway PPP projects. The most important message, conveyed in the opening remarks of the conference, is that CRC has added a major goal in 2018, which is to focus on efficiency and profitability improvement by speeding up rail industry reform. We think the following are likely to see material progress over the next 12 months: 1. Deregulation of passenger rail tariff would result in a material increase in profitability. We have priced in a 10% increase in passenger tariffs in 2018 earnings for Guangshen Railway (525 HK, HKD5.71, Buy, TP HKD6.80) and believe there is upside risk to the adjustments. 2. “Rail plus property” development for existing land owned by CRC and a comprehensive urban development plan for future rail projects. This could provide significant non-ticket income for a rail PPP project. 3. Develop other non-ticket income sources for railway operations such as advertising (in station and on board a train), retail kiosks at stations, etc. EQUITIES INDUSTRIALS 23 January 2018 6 The key targets for CRC in 2018 and achievement in 2017 is summarised in Figure 3. Fig 3: CRC targets and completion 2017 and 2018 FY17 target FY17 completion FY18 target Fixed asset investment (RMBbn) 800 801 732 Total new length in operation (km) 2,100 3,038 4,000 New HSR length in operation (km) 1,300 2,000-3,000 3,500 Passengers despatched (m) 3,025 3,039 3,250 Freight volume (m ton) 2,750 2,918 3,020 Source: CRC Freight and passenger volumes are forecast to grow 3.5% and 7%, respectively, in 2018 according to the CRC. We think the large transport volume and rail industry reforms could make future rail PPP projects attractive to social capital. Over the near term, we expect rail industry reforms to benefit rail operators, limiting their impact for construction companies. A sustainable improvement in CRCs financial situation should help the payment frequency of rail projects in the future. We also think the rail plus property development could also be of interest to CRCC (1186 HK, HKD9.58, Buy, TP HKD12.90) and CR</p>
