Construction Sector in China

Recommendation: MARKET WEIGHT
Top Pick: China State Construction Engineering Corporation (CSCEC) (601668 CH)
CSCEC Share Price: Rmb4.77
Target Price: Rmb6.09
Upside: +27.7%

China’s construction sector continues to struggle amid weak fixed asset investment (FAI) growth and sluggish real estate investment:

• Fixed Asset Investment (FAI): FAI grew by 3.4% year-on-year in August 2024, a slight decline from July’s growth. Infrastructure investment increased by 4.4%, supported by projects in water conservancy (+32.6%), air transportation (+20.3%), and railway transportation (+16.1%). Real estate investment, however, fell by 10.2%.
• Top Construction Companies: The top eight central SOE construction companies delivered mixed results in 1H24. New orders increased by 1.7% on average, with CSCEC posting a 13.7% increase in new orders. However, revenues fell by 2.6% on average, and operating cash flow was negative across the board. CSCEC management expects improvements in cash collection in 4Q24, with a goal to achieve positive operating cash flow for the full year.
• Valuation/Recommendation:
  • Maintain MARKET WEIGHT on the construction sector. CSCEC remains the top pick due to its strong performance in new orders and a dividend yield of 6.2%, nearing its historical high. The sector is awaiting fiscal stimulus measures, with expectations of moderate fiscal easing in 2H24.