The Zhitong Finance app learned that Dongwu Securities released a research report saying that the infrastructure real estate chain boom continues to solidify, and 23Q3 revenue growth has accelerated year over year, yet profitability is still fluctuating at the bottom. The bank believes that the signal of the 1 trillion special treasury bonds is obvious. The slope of economic recovery in 2024 is expected to rise. With phased easing between China and the US and China's technological breakthroughs, the mid-term bottom has already appeared. Stock selection ideas should also shift from stock value to growth, and actively lay out opportunities for medium-term fundamental growth, such as the Belt and Road direction of the export chain, the growth track of non-real estate chains, and leading stocks in the decoration and building materials industry.

Incident: The 2023 three-quarter reports of A-share listed companies in the infrastructure real estate chain have been basically disclosed. The bank selected 137 A-share listed companies as samples for analysis, including 83 construction companies and 54 building materials companies. Among the segmented industries, the building materials industry includes 8 cement sub-industries, 9 glass fiber sub-industries, 26 decoration and building materials sub-industries, 11 other materials sub-industries, and the construction industry includes 26 design consulting sub-industries, 13 decoration sub-industries, 15 infrastructure and housing construction sub-industries, 4 international engineering sub-industries, and 25 professional engineering sub-industries.

The main views of Dongwu Securities are as follows:

The boom in the industrial chain is still under pressure.

The prosperity of the infrastructure real estate chain continues to solidify. The year-on-year growth rate of 23Q3 revenue has accelerated, but profitability is still fluctuating at the bottom. The slight increase in revenue growth is mainly due to a decrease in the base for the same period last year. However, on the one hand, due to continued pressure on total demand for infrastructure and real estate, on the other hand, downstream cash flow is still tightening, and revenue expansion/leverage growth is facing hidden constraints. Profitability is hovering at the bottom, mainly due to fluctuations in raw fuel costs and increased competition in some industries. The increase in the year-on-year growth rate of overall revenue in 23Q3 was mainly driven by sub-industries such as international engineering and infrastructure rooms, and decoration materials were still growing at a slow pace. Judging from ROE (TTM), the ROE (TTM) of 23Q3 for infrastructure construction, international engineering, and professional engineering has continued to be above the center for the past three years, and the cement, glass and glass fiber, and design consulting sub-sectors have deteriorated compared to Q2.

Profit statement: The overall revenue growth rate has accelerated under a low base, and profitability continues to build.

1) The overall revenue growth rate of the 23Q3 infrastructure real estate chain accelerated year-on-year. Thanks to a decrease in the base for the same period last year, the construction and building materials industries all accelerated slightly by industry. Among them, sub-industries showing an accelerated trend include: glass fiber (glass price recovery and incremental epitaxial release), international engineering (overseas exhibition industry resumed after the pandemic), and infrastructure housing construction (implementation of physical infrastructure workload, order carry-over). The main sub-industries showing a deceleration trend include: design consulting, decoration and decoration.

2) The gross margin of the 23Q3 infrastructure real estate chain declined slightly month-on-month and remained the same year-on-year, mainly as a drag on the building materials industry. Among them, the sub-industries where gross margin improved month-on-month and year-over-year were mainly international engineering (compression of overseas project expenditure after the pandemic, exchange rate factors); the sub-industries where gross margin deteriorated month-on-month were mainly cement (declining real estate demand, increased industry competition) and design consulting.

3) The low ROE (TTM) level of the 23Q3 infrastructure real estate chain was stable, and the building materials industry weakened month-on-month, with a month-on-month decline of 0.7 pct, mainly dragged down by the cement, glass and glass fiber sub-industries. The 23Q3 ROE (TTM) of infrastructure construction, international engineering, and professional engineering continued to be at the center of the past three years. The cement, glass and glass fiber, and design consulting subsectors deteriorated compared to Q2. Decoration materials rebounded month-on-month.

Cash flow and balance sheet: Downstream cash flow continues to be tight, but the leverage ratio of listed companies is stable, and the operating capacity is showing signs of improvement.

1) The operating cash flow of the 23Q3 infrastructure and real estate chain fluctuated, mainly affected by the infrastructure and housing construction sub-industry, reflecting the continued tight cash flow of the downstream infrastructure and real estate industries. Furthermore, the operating cash flow performance of the international engineering subsector was relatively good. Judging from the revenue ratio, the revenue ratio of the decoration, infrastructure and building materials sub-industries in 2023Q3 decreased by 9.4/4.6/2.8pct year-on-year, respectively, while the earnings ratio of the cement and other materials sub-industries increased 3.8/3.7 pct year-on-year respectively.

2) The balance ratio of the infrastructure real estate chain as of 23Q3 was basically flat month-on-month, and the leverage ratio was relatively stable. The glass, glass fiber, professional engineering, and cement sub-industries increased slightly month-on-month, while the decoration materials and international engineering sub-industries declined slightly month-on-month.

3) As of 23Q3, the number of days of turnover of accounts receivable and notes in the infrastructure real estate chain (TTM) has stabilized, reflecting the gradual control of receivables pressure on enterprises after strengthening cash flow and account management, but the stock of receivables has not yet been fully resolved. Among them, the sub-industries where the number of days of turnover of accounts receivable and bills (TTM) increased significantly from month to month were mainly decoration, etc., and the number of turnover days (TTM) of accounts receivable and notes for international projects was better controlled, and there was little overall fluctuation in other sub-industries. Based on coping and inventory cycle control, the business cycle of decoration materials decreased month-on-month.

Investment advice:The significance of the 1 trillion special treasury bond is obvious. The slope of economic recovery in 2024 is expected to rise. With phased easing between China and the US and China's technological breakthroughs, the bank believes that a mid-term bottom has appeared, and that stock selection ideas should also shift from stock value to growth, and actively lay out opportunities for medium-term fundamental growth, such as the Belt and Road direction of the export chain, the growth track of non-real estate chains, and leading stocks in the decoration and building materials industry.

1) The medium- to long-term increase in global demand comes from the industrialization and subsequent urbanization of the Belt and Road and RCEP regions. Stock selection in two dimensions, the proportion of revenue from the Belt and Road and RCEP regions to total revenue, and the ability to localize. Companies that accounted for more than 70% of overseas revenue in 2022 include Miao Exhibition, Shanghai Port, etc., and companies that accounted for more than 30% to 70% of total revenue include Sinoma International, China Industrial International, China Steel International, and North China International, etc., and below 30%, there are eight major construction state-owned enterprises. Based on the localization situation, we recommend Miao Exhibition (300795.SZ), Sinoma International (600970.SH), China Communications Construction (601800.SH), and Shanghai Port (). 605598.SH

2) In the non-real estate chain, long-term investment needs for industrial upgrading or energy saving and carbon reduction are optimistic. At present, the semiconductor localization process is accelerating, and the supply of cleanroom projects continues to be tight. We recommend Shenghui Integration (603163.SH) and Zaisheng Technology (603601.SH), and recommend paying attention to Baicheng Co., Ltd. (). 601133.SH

3) Under the influence of strong policies, the downward spiral of domestic real estate is bound to be stopped. The bank expects the real estate investment side and the main credit side to stabilize next year. As far as the real estate chain is concerned, there is still room for improvement in the concentration of most industry segments. The pattern improvements on some tracks have begun to be reflected and exceeded expectations, such as tiles, doors and windows, etc. At the moment, excellent companies that are willing to increase leverage deserve even more attention. We recommend Beixin Building Materials (000786.SZ), Dongpeng Holdings (003012.SZ), Mona Lisa (002918.SZ), etc., and it is recommended to focus on Jiangshan Oupai (603208.SH) and Mori Eagle Windows (301227.SZ).

Risk warning:There is a risk that real estate credit risk is out of control and that real estate relaxation policies fall short of expectations.