The Zhitong Finance App learned that Everbright Securities released a research report saying that construction industry funds held 0.6% of stocks at the end of 23Q4, which had fallen back to the level before the launch of the 23Q1 “mid-term special valuation” market. As of 2024.1.26, the PE/PB valuation quantiles for the construction industry were 7%/1.2% respectively (within the valuation range since listing), and the PB valuation quantiles of major construction central enterprises have declined significantly from the high “medium special valuation” market. At present, I am optimistic about the investment opportunities brought about by the increase in the valuations of central construction companies, and recommend China Construction (601668.SH), China Railway (601390.SH), and China Railway Construction (601186.SH).

▍ The main views of Everbright Securities are as follows:

In the new round of “national reform,” market value management is included in the assessment.

On January 24, the Information Office of the State Council held a press conference. Xie Xiaobing, head of the State Council's State-owned Assets Administration Bureau, said that further research will be carried out to incorporate market value management into the performance assessment of central enterprise heads, guide central enterprise leaders to pay more attention to the market performance of listed companies they control, promptly convey confidence and stabilize expectations through the application of market-based holdings and repurchases, increase cash dividends, and better return to investors.

Earlier, the State Assets Administration Commission established a “one profit and five rate” target management system for central enterprises, which highlights the assessment of profit indicators and fully reflects the ability of enterprises to create value for society; the “five rate” includes return on net assets, labor productivity of all employees, intensity of investment in R&D, operating cash ratio, and balance ratio. The proposed inclusion of market value management in the performance assessment of central enterprise heads is a new assessment requirement.

Central construction enterprises are supported by many favorable factors.

In terms of growth, since 2011, the concentration of new orders signed by central construction enterprises has continued to increase, and the continuous growth of new orders has provided the foundation for an increase in the scale of their revenue performance. Furthermore, with the “Belt and Road” going overseas, central construction enterprises are expected to use their financial advantages to select high-quality projects to implement “integrated investment, construction and operation”, and can use accumulated local resources to expand diversified territorial businesses. The volume of overseas operating assets is expected to accelerate expansion and enhance long-term investment value.

From the perspective of asset safety, the asset risk calculation of construction central enterprises is quite adequate. Under extreme circumstances, the priority for payment of construction project payments is higher, which means that assets related to construction central enterprises are relatively safe. In terms of asset quality, the new PPP regulations narrow the scope of application of PPP and prioritize the participation of private enterprises. Central and state-owned enterprises are reducing the scale of investment in PPP projects, which is expected to reduce the scale of investment expenses, improve the free cash flow of enterprises, and improve the quality of business operations.

Repurchase may become an important way for construction central enterprises to manage market value.

The head of the State Assets Administration Commission mentioned “conveying confidence and stabilizing expectations through the application of market-based shareholding increases and repurchases in a timely manner,” and has reviewed the share repurchases and equity incentive plans of construction central enterprises in the past three years. In the past, there were relatively few repurchases by construction central enterprises. Under the latest requirements of the State Assets Administration Commission, future repurchases may become an important way to manage their market value.

The dividend rate and dividend rate have great potential to increase, or drive a new round of construction central enterprise markets.

As of 2024.1.26, the dividend rate of major construction central enterprises is at a low level among “China Special Assessment” central enterprises. The highest dividend rate is China Steel International (dividend rate 5.3%). At the same time, the dividend rate of major construction central enterprises is basically at a low level among “China Special Assessment” central enterprises, and most construction central enterprises have a dividend rate of less than 20%.

Compared with other listed state-owned enterprises, the dividend rate and dividend rate of construction central enterprises have great potential for improvement; in the new round of “national reform,” market value management is included in the assessment, and construction central enterprises are expected to increase their cash dividends. If dividend rates increase in the future, it may drive a new round of construction central enterprise market.

Risk analysis:

Infrastructure investment falls short of anticipated risks, raw material price increases, dividend rates and dividend ratios fall short of anticipated risks.