It is reported that the fiscal and tax system reform may increase local revenue, enhance the investment and payment capability of local governments, and on the one hand, expect new contracts to be signed by construction companies. On the other hand, more orders on hand may accelerate the formation of physical workload and performance, improve the total profit, net asset yield ratio, and PEG dimension valuation.

In addition, the improvement of local governments' payment capability and frequency may increase the inflow of operating cash flow of construction companies, improve the ratio of operating cash to income, and enhance the DCF dimension valuation. The increase in consumption taxes and value-added taxes and strengthened supervision will increase government financial power's income and reduce the probability and proportion of bad debts receivable by construction companies. Water conservancy and other infrastructure areas are transferred from local government investment to special national debt used by the central government to reduce local government expenditure pressure, and the asset quality of construction companies will be improved, increasing the PB dimension valuation.

GTJA's main opinions include:

The improvement of the fiscal and tax system reform of central and local government finance power and expenditure responsibility sharing will complement the local government's financial resources through the consumption tax. (1) On June 25, the State Council issued an audit work report on the implementation of the central budget for the year 2023 and other financial revenues and expenditures, mentioning the planning of a new round of fiscal and tax system reform to improve the central and local government finance power and expenditure responsibility sharing and increase the balance transfer payment efforts. (2) According to the views of the Guojun policy group's released research report, the core of the new round of fiscal and tax system reform is to maintain the stability of the macro tax rate and the rebalancing of financial and legal power between the central and local governments. Tax reform focuses on expanding the tax base, cultivating local tax subjects and optimizing tax reduction and fee reduction. (3) According to the views of the Guojun macro group's released research report, from the perspective of moving the consumption tax levy link backward, it may objectively increase no more than 200 billion tax burdens to make up for local financial resources. The more significant significance is establishing an incentive mechanism for local governments to encourage consumption by reducing some consumption scene restrictions.

Fiscal and tax revision of a profit model with five rates for construction will enhance the PEG and DCF dimension valuations of construction companies. (1) We believe that the fiscal and tax system reform may increase local revenue and enhance the investment and payment capabilities of local governments. On the one hand, new contracts may be signed or expected by construction companies. On the other hand, more orders on hand may accelerate the formation of physical workload and performance, improve the total profit, net asset yield ratio, and PEG dimension valuation. (2) The improvement of local governments' payment capability and frequency may increase the inflow of operating cash flow of construction companies, improve the ratio of operating cash to income, and enhance the DCF dimension valuation. (3) The increase in consumption taxes and value-added taxes and strengthened supervision will increase government financial power's income and reduce the probability and proportion of bad debts receivable by construction companies. Water conservancy and other infrastructure areas are transferred from local government investment to special national debt used by the central government to reduce local government expenditure pressure, and the asset quality of construction companies will be improved, increasing the PB dimension valuation.

The special bond plan for 2024 Q3 has an issuance of 1.6 trillion, and the acceleration of construction order expectations will benefit from fiscal and tax system reform. (1) From January to May, national public finance revenue fell by 2.8% year on year (increased by 14.9% over the same period in 2023), and national public finance expenditure increased by 3.4% year on year (increased by 5.8% over the same period in 2023). (2) The net financing amount of special bonds in the first half of 2024 was 142.61 billion yuan, a year-on-year decrease of 32%. According to incomplete statistics from the China Bond Information Network, the national new special bond plan issued in the third quarter of 2024 was 1559.7 billion yuan, of which 268.1/725/566.6 billion yuan were planned for September. (3) From January to May, the investment in general infrastructure increased by 6.7%, a decrease of 2.8 percentage points compared with the same period in 2023, of which the electricity increased by 23.7%, the railway increased by 21.6%, and the water conservancy increased by 18.5%. (4) In the first quarter of 2024, China Railway, China State Construction Engineering, Power Construction Corporation of China, and China Railway Construction Corporation's new contract growth rate slowed down compared with the same period in 2023, benefiting from fiscal and tax reform and accelerating new orders in the future.

Risk warning: the fiscal and tax system reform falls short of expectations, macroeconomic policy risks, and lower-than-expected infrastructure investment.