Date
15 December 2017
New projects under the 'One Belt, One Road' program, soft commodity prices and lower interest rates are expected to boost the profitability of major Chinese infrastructure plays next year. Photo: Xinhua
New projects under the 'One Belt, One Road' program, soft commodity prices and lower interest rates are expected to boost the profitability of major Chinese infrastructure plays next year. Photo: Xinhua

Three trends that favor Chinese construction firms next year

Mainland China’s engineering and construction firms will enjoy several tailwinds in the coming year.

First, large-scale projects under the “One Belt, One Road” initiative are likely to kick off.

“In the first half of 2016, the first round of cross-border funding by China-led financial institutions (Silk Road Fund and Asia Infrastructure Investment Bank) will start” for government-level projects, research by brokerage CLSA says.

Major players, such as China Railway Group (00390.HK), CRRC Corp. (01766.HK) and China Communications Construction Co. Ltd. (01800.HK), will benefit from a rise in the value of new projects and revenue.

Falling commodity prices and interest rates are also going to work in favor of the sector.

Benefits from the 1.25 percentage points in interest rate cuts this year will continue to come next year.

There is also a possibility of further rate cuts if the mainland’s economy slows down further.

Nearly half of the cost of goods sold for construction firms is linked to commodity prices, CLSA says.

Commodity prices have dropped about 20-30 percent this year, ensuring a low cost base for 2016.

With margins in the sector typically in the low single-digit percentages, these cost savings could give profitability a reasonable lift.

The biggest risk to watch out for, however, is whether geopolitical issues will stand in the way.

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FL

EJ Insight writer

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