According to the app of Zhongjin Finance, Zhongjin released a research report stating that due to the slow recovery of physical work volume in infrastructure construction and the slow recovery of real estate demand, as well as the emphasis on operational quality by construction and building materials companies, the corresponding performance is reflected in the refusal of advance payment and the intensification of competition for high-quality projects. In the second quarter of 2024, the overall revenue and profit of construction and building materials companies were under pressure, performing lower than our expectations and the market's expectations. Looking ahead to the second half of the year, cement demand is expected to marginally improve, and leading companies in the peak season are expected to continue leading the price increase, boosting industry profitability. The expected pressure of completed projects in the second half of 2024 will affect the demand for float glass, and the supply and demand in the industry still need to be rebalanced.

CICC's main points are as follows:

Construction SOEs and international engineering companies: Overall marginal pressure on SOE profits, noticeable differentiation among international engineering companies. In the second quarter of 2024, the overall growth rate of orders for the top eight construction SOEs turned negative, with most of the companies experiencing a decline in revenue and profit. Only China State Construction Engineering Corporation and China National Chemical Engineering showed a growth in quarterly profits, and there is also some pressure on cash flow, reflecting tight infrastructure funding and weak physical work volume. SOEs have also strengthened project selection and cash flow control in an effort to improve cash flow in the second half of 2024. There are significant differences in the professional engineering field and regional performance, while the performance of international engineering companies is relatively differentiated, with Sinoma International Engineering and Sinosteel Engineering & Technology showing growth in quarterly net profits.

Cement: Significant year-on-year decline in performance in the second quarter, with the prospect of performance improvement brought by price increases. In the first half of 2024, industry demand decreased by 10% year-on-year, and after price competition, the performance of leading companies decreased significantly. However, under the guidance of leading companies, the concept of prioritizing profits was established, which led to a rare price increase in the off-season. It is expected that industry demand will marginally improve in the second half of 2024, and leading companies in the peak season are expected to continue leading the price increase, lifting the industry's profitability.

Consumer building materials: Pressure on the B-end, relatively resilient C-end. In the second quarter of 2024, the leading companies in the B-end saw a decline in both revenue and profit, weaker than the performance of leading companies in the C-end (steady revenue growth, stable profit margin). The focus of leading companies has shifted towards high-quality orders and rejecting advance payment, resulting in lower revenue and profit than our expectations and the market's expectations. However, some leading companies have successfully stimulated steady growth in the retail sector through channel expansion and cost support.

Fiberglass: Pressure on profits in the second quarter, with expectations of improvement in the second half of the year due to price increases. In the first quarter of 2024, the industry faced intense competition, resulting in widespread losses. In the second quarter, the net profit of leading companies declined by more than 40% year-on-year. At the end of March, manufacturers changed their pricing strategies and downstream companies actively replenished their inventories, leading to a significant price increase for fiberglass. It is expected that profitability will improve significantly in the second half of 2024.

Glass: Declining demand drags down 2Q24 performance, and prices have not stopped falling. Due to the early decline in completion demand and the continuous decline in glass prices, the overall performance of leading enterprises in the glass sector has declined significantly in 2Q24. It is expected that the pressure from completed projects in 2H24 will affect float glass demand, and the supply and demand in the industry still need to be rebalanced.

Investment advice: Due to the slow recovery of physical workload in infrastructure and real estate demand, as well as the emphasis on operational quality by construction and building materials companies, which is reflected in the refusal to provide financial support and intensified competition for high-quality projects, the overall revenue and profit of construction and building materials companies in 2Q24 are under pressure and have performed below our expectations and the market expectations.

The construction sector is still bullish on the performance of top state-owned enterprises and international engineering companies. We recommend China State Construction Engineering Corporation (601668.SH), Metallurgical Corporation of China (601618.SH), Sinoma International Engineering (600970.SH). For building materials, it is still recommended to focus on high-quality leading companies with strong pricing power and cash flow, or building materials leaders with resolved supply-side contradictions and ample profit margins. We recommend Shandong Pharmaceutical Glass (600529.SH), Zhejiang Weixing New Building Materials (002372.SZ), Beijing New Building Materials (000786.SZ), CR Building Materials Technology (01313), Conch Cement (600585.SH), Huaxin Cement (600801.SH), Shangfeng (000672.SZ), and China Jushi Co., Ltd (600176.SH).

Risk factors: Continued downturn in real estate; project funding constraints; slower than expected collection of payments by leading enterprises.