The Zhitong Finance App learned that Huatai Securities released a research report saying that the CS construction sector's revenue in '23 was YoY +7.71%, the growth rate was 2.51 pct lower than in '22, net profit YoY +7.01%, and the growth rate decreased by 5.20pct from '22, mainly due to factors such as the decline in real estate construction and the slowdown in the growth rate of traditional infrastructure investment. At the same time, depreciation pressure was still strong, leading to a decline in profitability. The reduction in net interest rate and turnover ratio of the sector caused the sector's ROE (diluted) to fall by 0.13pct year on year. Affected by the local government's focus on debt and the slow implementation of physical volume, the 24Q1 construction sector's revenue/net profit to mother ratio was +1.3%/-3.4%, and the concentration of leaders accelerated. With the gradual release of Q2 special treasury bonds and real estate policies, etc., the 24Q2 physical volume is expected to improve.

The main views of Huatai Securities are as follows:

Expense rates and depreciation pressure increased during the 23-year sector period, and cash flow was under pressure

The gross margin of the sector in '23 was +0.09pct year over year, and net margin to mother was -0.01pct year over year. The year-on-year change in the sales/management/R&D/finance expense ratio for the sector in '23 was +0.02/-0.02/+0.02pct. Impairment pressure on real estate customers remained, and payment of infrastructure project progress payments slowed down. As a result, corporate accounts receivable increased, depreciation pressure increased, and impairment losses increased as a share of revenue by +0.01pct. The net outflow from the 23-year sector (CFO+CFI) was 231.9 billion yuan, an increase of 66.4 billion yuan over the previous year. Huatai Securities believes that it may be affected by slow implementation of 23-year project funds and increased repayment pressure for existing PPP projects. As the disbursement of 24-year ultra-long-term special treasury bonds and special bonds is accelerated, it is expected to usher in certain improvements. The sector debt ratio was +0.77pct year on year in '23, and corporate leverage ratios were raised under financial pressure in the industrial chain.

In the 23-year sub-sector, international engineering performance was high, and the infrastructure chain was fragmented

The year-on-year growth rate of international engineering/steel structure/major infrastructure revenue in the 23-year sub-sector was 31.4%/8.5%/7.9%, respectively. In terms of net profit attributable to mother, only international engineering, major infrastructure, and chemical engineering achieved year-on-year growth. Among them, the performance of international engineering was outstanding, with a year-on-year increase of 30.6%. The gross margin of the sector has increased in more than 23 years, but the net profit margin to mother has generally declined. In 23, all sub-sectors achieved net operating cash inflows. With the exception of small and medium-sized construction enterprises, design and large infrastructure, operating cash flow improved year-on-year, indicating an increase in cash flow pressure in the infrastructure industry chain.

The physical volume is expected to improve in 24Q2, pending the effects of the policy

The 24Q1 construction sector's revenue and net profit attributable to mother were +1.26%/-3.42% YoY. The sub-sector achieved year-on-year growth in infrastructure, design and decoration revenue, while the rest declined. In terms of net profit attributable to mother, only major infrastructure and international projects achieved year-on-year growth of 0.56% and 8.50%, respectively. Affected by the business model, the CFO in the construction sector still showed a net outflow in the first quarter, but 24Q1 had an increase of 103.9 billion yuan over the same period last year. Huatai Securities believes that large infrastructure bears more social responsibility, and the increase in Q1 payments is the main reason. New orders signed in 24Q1 were highly fragmented. Energy engineering, urban construction and overseas prosperity were high, and traditional infrastructure orders generally declined. With the accelerated implementation of funds such as 24Q2 special treasury bonds and special bonds, and the release of real estate policies, sector performance is expected to improve upward.

Construction state-owned enterprises: Market value assessments are expected to drive high-quality development, and overseas markets are booming

Using the eight major construction central enterprises as an observation sample, infrastructure and real estate chains were under double pressure in 23 years. Affected by depreciation, most central companies' ROE declined, and cash flow was divided, indicating that traditional infrastructure businesses are under high pressure. Looking at overseas market development, China Chemical accounted for the highest share of overseas revenue in 23 and 24Q1, with the best growth rate of new overseas signings, 165%/240%, respectively. Next, China Communications Construction's new overseas signings increased by 47.5% in 23, while China Construction, China Construction, China Railway, and China Energy Construction grew at a high rate of overseas signings in 24Q1, which is faster than in 23 years.

Risk warning: Ongoing order conversion and profitability improvement fell short of expectations, and overseas business expansion fell short of expectations.