Zhongxin Securities released a research report that stated state-owned construction companies have an advantage in undertaking major projects, with financing costs lower than the industry average, and are expected to maintain steady growth in orders and performance. As overseas orders continue to recover, it is recommended to pay attention to the performance of international engineering leading companies. The industrial construction sector is less affected by real estate and local government debt and is currently a policy-supported investment direction. Relevant sectors are expected to see a valuation recovery. The semiconductor industry's capital expenditures are expected to remain high, and some major wafer plant projects are expected to land this year. It is recommended to pay attention to opportunities in cleanroom construction. The top recommended companies are China Railway (601390.SH), China Railway Construction Corporation (601186.SH), Wuxi Taiji Industry (600667.SH), China Haisum Engineering (002116.SZ), Sinoma International Engineering (600970.SH), and Anhui Honglu Steel Construction (002541.SZ).

Guosen Securities' main points are as follows:

Looking back on the first half of the year: new construction starts were sluggish, and infrastructure slowed down.

From January to May 2024, the total investment in newly started projects decreased by 33.5% year on year. Due to the impact of the "12 provinces suspending infrastructure projects," new construction starts were significantly weaker than in the previous two years. In May, the year-on-year and month-on-month growth rates of new construction starts investment both fell significantly. The overall pace of special bond issuance was slow. After speeding up in May, the cumulative amount of special bonds issued this year has increased by about 1.2 trillion yuan, a year-on-year decrease of 36.7%, achieving 30.8% of the annual target. Local financing regulation continues to be tightened, and the accumulated net financing for urban investment bonds in the first five months was negative.

Construction companies: decreased efficiency, increased operating pressure.

In 2023, the listed companies in SW Construction and Decoration sector had a total revenue of 9.09 trillion yuan, a year-on-year increase of 7.3%, slightly higher than the growth rate of the industry's total output value (+5.8%). The scale of write-downs increased by 11.0% year on year in 2023; since 2021, the scale of write-downs for construction companies has increased significantly and has remained high for three consecutive years. Considering that downstream real estate and infrastructure customers still face significant financial pressure, the write-downs may remain high in the future.

By the end of 2023, the total balance of accounts receivable, contract assets, long-term accounts receivable, and other non-current assets was 6148.1 billion yuan, a year-on-year increase of 15.6%, significantly higher than the growth rate of revenue. The turnover rate of the four categories of assets decreased from 1.59 in the previous year to 1.48, reflecting that the overall expansion pace of the company has not slowed down, and the asset turnover efficiency continues to decline. The balance of short-term borrowings increased by 22.2% compared with the end of the previous year, and the balance of long-term borrowings increased by 12.7% compared with the end of the previous year. The industry's overall debt structure is displaying a trend of shortening debt maturity. Operating cash flow remains at a good level, but the ratio of cash received to cash paid has decreased simultaneously. Cash paid is relatively more rigid, and future construction companies may generally face greater pressure on cash flow.

International engineering is continuing to recover; "going global" is still expected.

In 2023, the newly contracted value of foreign contracted projects was USD 264.5 billion, a year-on-year increase of 4.5%, and the business completion amount was USD 160.9 billion, a year-on-year increase of 3.8%. Both have achieved the highest growth rate since 2020. Some countries along the Belt and Road Initiative have both geographical and transportation advantages and labor cost advantages and are expected to undertake China's excess production capacity. The shift in production capacity will drive economic growth in these countries and release infrastructure development demand. In 2023, the operating income of the international engineering sector increased by 31.6% year on year, and the net profit attributable to the parent company increased by 29.8% year on year. The contract liability slightly decreased, and combined with the fact that the new orders for international engineering companies have ushered in high growth rates, it can be determined that new orders for international engineering companies are rapidly accumulating into contract liabilities, while orders on hand are in the stage of accelerated transfer.

The industrial construction industry is picking up, and the core focus is on semiconductors cleanroom engineering.

Relative to infrastructure investment, investment in the industrial and manufacturing sector has a clear return mechanism, with high participation of private capital. It can expand investment while avoiding the continued increase of local debt pressure. It is expected to receive more policy support. The rebound of various indicators in the industrial sector reflects that the inventory cycle has gradually shifted from passive destocking to active restocking, and the capital expenditure is expected to enter an upturn cycle with the release of expanded production demands. Among them, cleanroom engineering is a core link in high-standard factories with complex related technologies.

Although chip makers have fully expected price declines after capacity expansion, they still need to maintain significant expansion efforts, strengthen economies of scale to reduce costs and gain market share. At the same time, policy support has been enhanced, and a large amount of local government funds have flowed in. This investment has a high tolerance for initial losses and can continue to drive capital expenditure growth. Cleanroom engineering service providers are expected to benefit from this continuously.

Risk warning: downward macroeconomic risk; risk of policy implementation falling below expectations; risk of major project progress falling below expectations.