According to the Zhiyuan Finance APP, Guosen released a Research Report forecasting the construction Industry in 2025. From the perspective of PB, the long-term reason for the persistent low PB of construction companies is the increase in the proportion of long-term Assets and the decline in asset quality. With the implementation of a series of debt restructuring policies, related receivables of construction companies are expected to be settled, corresponding asset quality will rebound, and PB valuations will recover. From the PE perspective, the long-term undervaluation of construction companies is due to the divergence between Net income and free cash flow changes. As the cash content of construction companies' revenue increases and capital expenditures decrease, the direction of change for Net income and corporate free cash flow will converge, driving the PE valuations of the construction Sector upward.

Real Estate and Infrastructure investment is declining, while manufacturing investment remains relatively resilient. Real estate investment continues to decline due to sluggish sales, leading to a significant drop in new construction, which in turn causes a continuous decline in the area of houses under construction. It is expected that new investment in 2025 will still be weak, with a year-on-year decrease in housing construction investment of -7.7%. Due to issues like local debt risk control and the lack of projects for special bonds, Infrastructure investment continues to weaken, with a significant decline in new investment, and the number of ongoing projects significantly reduced. It is predicted that narrow Infrastructure investment will be -3.3% in 2025. Manufacturing investment is relatively more resilient, as the industrial inventory cycle is gradually shifting from passive inventory reduction to active replenishment, driven by a recovery in downstream demand that will promote manufacturing investment growth.

Construction companies are facing a decrease in new Orders, and the three financial statements are under pressure. The downstream demand in the construction Industry is declining, resulting in fewer new contracts for construction companies and a slowdown in output value growth. Leading state-owned enterprises are seizing market share by relying on lower financing costs, while private enterprises are experiencing continuous declines in revenue performance. Due to the worsening situation regarding payment collections from projects, receivables in various forms are continuously accumulating on the balance sheet, leading to a "passive expansion of the balance sheet" for construction companies. Under the combined effect of poor payment collections from downstream clients and policy requirements to clear the accounts receivable of private enterprises, current state-owned general contractors face considerable pressure on both receivables and payments, and the pressure of cash Outflow has significantly increased.

Major national projects are being advanced, and niche sectors are nurturing investment opportunities. Currently, domestic effective demand is insufficient, with residents and enterprises showing low willingness to increase leverage, prompting government departments to intensify investments to create incremental demand. However, the risks of local financial issues have not been resolved, and tools like special bonds face the dilemma of 'lack of projects.' It is expected that central finances will become the dominant force in the new round of incremental investment. More active fiscal policies will be implemented in 2025, with central finance funds, including budgeted funds, national bonds, and special national bonds, focusing on railway, hydropower, Nuclear Power, and port infrastructure construction, which have significant strategic importance.

Investment recommendations: Focus on recommending undervalued central construction enterprises leading major engineering and construction, including China Railway Construction Corporation (601186.SH), China Communications Construction (601800.SH), China Railway (601390.SH), China State Construction Engineering Corporation (601668.SH), and Metallurgical Corporation of China (601618.SH), also recommend Zhongyan Technology, which is expected to participate in significant projects like Nuclear Power and hydropower. Additionally, recommend Anhui Honglu Steel Construction (002541.SZ), L&K Engineering (603929.SH), Sinoma International Engineering (600970.SH), China National Chemical Engineering (601117.SH), China Haisum Engineering (002116.SZ), and Wuxi Taiji Industry (600667.SH) for stable operation and benefits from the Sector's valuation improvement.

Risk warnings: Risks of macroeconomic downturn, risks of fiscal measures falling short of expectations, risks of significant engineering project approvals not meeting expectations, risks of construction companies' strategic shifts being slower than anticipated.