Zhongxin Jingwei client September 14 title: "Tao Jin: Investment Logic in the Infrastructure Sector, Focus on These Indicators"
Author Tao Jin (Deputy Director, Macroeconomic Research Center, Suning Institute of Finance)
Since the first quarter of this year, the style of the market can be described as extremely differentiated, with upstream, resource stocks, and cyclical stocks soaring, and the middle and lower reaches, consumption, and blue chips undergoing adjustments. Infrastructure listed companies have also enjoyed dividends such as economic recovery and policy support, and since the release of positive fiscal policy signals at the meeting of the Political Bureau of the CPC Central Committee at the end of July, the traditional infrastructure sector has risen by more than 20%.
Infrastructure refers to the material engineering facilities that provide public services for social production and residents' livelihood, and is a public service system used to ensure the normal progress of social and economic activities in the country or region.
Infrastructure includes transportation, posts and telecommunications, water supply and power supply, commercial services, scientific research and technical services, landscaping, environmental protection, culture and education, health and other municipal public works facilities and public life service facilities. They are the foundation for the development of all undertakings of the national economy. In modern society, the more the economy develops, the higher the requirements for infrastructure; perfect infrastructure plays a huge role in accelerating social and economic activities and promoting the evolution of its spatial distribution form. Building a sound infrastructure often takes a long time and a huge investment. For new construction and expansion projects, especially major projects and base construction far away from the city, it is even more necessary to give priority to the development of infrastructure so that the benefits can be brought into play as soon as possible after the completion of the project.
Core logic: demand and cycle driven
As a more typical cyclical stock, although the revenue of infrastructure listed companies comes from construction projects in various fields, these projects come from various needs, but to a large extent, they are closely related to infrastructure investment at the macro level. At the same time, these enterprises belong to traditional industries, and the valuation space brought to them by scientific and technological innovation in addition to the current performance is very small, so their stock trends are basically consistent with the performance, and their performance is basically related to the growth of infrastructure investment at the macro level.
Therefore, it is very important to analyze the growth rate of infrastructure investment and the corresponding macroeconomic fundamentals for studying the stock performance of infrastructure listed companies.
In the era of investment-driven growth, infrastructure investment has always been the stabilizer and basic disk of China's economy. From 2004 to 2017, the current GDP growth trend at almost every year was contrary to infrastructure investment, which also reflected that before 2017, infrastructure investment has been associated with macro hedging policies, and infrastructure has always been an important channel for fiscal policy to regulate economic operation.
However, after 2017, the "counter-cyclical" characteristics of infrastructure have weakened significantly, and the GDP growth rate and infrastructure investment growth rate have shown a downward trend in tandem. On the one hand, the leading forces of economic development are transitioning from investment to consumption, from investment to improving labor productivity, from industry to service industries, from industrialization to urbanization, and the overall trend is to suppress infrastructure demand. On the other hand, the marginal return on infrastructure investment is becoming more and more obvious, and the role of new projects in improving economic efficiency is weakening, which has also led to a change in the financial arrangements and requirements of the central government to a certain extent, further restricting the impulse of infrastructure investment.
Of course, infrastructure construction has not been decoupled from the macroeconomic situation, but with the maturity of the industry and the stability of the competition pattern, it is more linked to the macroeconomic cycle. The future economic growth situation is full of uncertainty, and if the downward trend reaches a certain level, the changes in macro policies may also exceed expectations. Therefore, no matter what, observing the demand for infrastructure investment still needs to be judged in combination with the macro trend and fiscal policy.
Why is there no mention of monetary and debt cycles here? In general, during periods of monetary and credit expansion, physical liquidity is more likely to flow into investment areas such as infrastructure, especially when government financing can reach bank credit. However, in the past decade, China's financial management and system have become increasingly scientific and rational, and the government financing behind infrastructure construction and bank credit have become increasingly decoupled. More importantly, after the introduction of the new asset management regulations in 2018, local government financing and social financing in non-standard financing, shadow banking is also significantly decoupled, local government financing platform infrastructure investment biased towards marketization, platform financing, non-standard financing scale growth is also slowing down, there is no large cycle fluctuations, and the consistency with infrastructure investment fluctuations is also weakening. However, from the data point of view, the credit cycle measured by the scale of social financing still seems to be positively correlated with the growth rate of infrastructure investment, which is due to the fact that government financing was included in social finance statistics in 2018, and the positive correlation relationship is mainly contributed by government financing, while government financing is more related to fiscal policy. Therefore, the analysis of infrastructure investment demand focuses on judging the strength and direction of fiscal policy. In fact, the marginal changes in infrastructure investment are increasingly linked to special debt financing, and attention needs to be paid to the application of the public-private partnership (PPP) model in the infrastructure sector.
It is worth noting that the logic of new infrastructure in the past two years is not the same as that of traditional infrastructure. In the future, the new infrastructure represented by 5G, new energy, UHV, etc. is expected to gain new growth space, but these areas are more dominated by the enterprise sector, following the manufacturing investment logic and the willingness of enterprise capital expenditure, the pro-cyclical characteristics are more obvious, in many cases and traditional infrastructure is not the same, the need for specific industries as the idea for specific analysis.
The long-term and short-term logical contradictions of current infrastructure demand
There are two contradictory logics about the long-term and short-term logic of infrastructure demand.
In the long run, there are two contradictory logics: First, under the real estate regulation and control of "housing and not speculation", real estate will be suppressed for a long time, and real estate and infrastructure are the two most effective channels for the effect of macro policies to be transmitted to the real economy. With real estate being suppressed, is it possible that infrastructure will become the core area of China's economic convergence macro policies and economic fundamentals in the future? Second, the investment-driven economic development model has gradually given way, the significance of the infrastructure support economy has decreased, the long-term growth space of infrastructure investment is not large, and the necessity of large-scale infrastructure construction has gradually decreased, and the time node of universal renewal has not yet been reached nationwide.
In the short term, in the face of economic downward pressure in the second half of 2021, the market's expectations for fiscal policy increase are strong, and the infrastructure sector should rise, but there is still great uncertainty in the future.
In the second half of the year, the growth of fiscal expenditure and the acceleration of the issuance of special bonds have a complex impact on infrastructure investment. On the one hand, the fiscal expenditure in the second half of the year will be significantly larger than in the first half of the year, and the recent important meetings have expressed fiscal policy more positively. Under the certainty expectation of accelerated issuance, special bonds are likely to be issued within the year, superimposed to resolve the requirements of financial redundancy, and a large probability of forming a considerable scale of infrastructure investment in the short term.
But there are still two constraints to the growth of infrastructure investment. First, the restrictions on the number of good projects, the requirements for the efficiency of the use of special debt funds will constrain the input of funds, and the funds directly used for infrastructure construction within the budget are limited, and more and more attention is paid to the bottom line of the "three guarantees"; second, local governments are subject to stricter special debt balance and project income requirements, blindly investing funds in projects, and the use of funds is cautious.
Overall, policy changes such as stricter auditing of fiscal revenue and expenditure, strengthening the accountability of local debt, and strict control of local hidden debts have all limited the strength of infrastructure construction.
From the perspective of industry logic, economies of scale and stable competition patterns
In addition to the core macro variables, different companies get different performance space when facing the same financial cycle. As a large-scale project, the scale economy of the related companies is very obvious, and the comprehensive strength of the technical level, construction experience, and equipment function caused by the scale is quite different. In the case of the increasing maturity of the industry and fewer breakthrough points in innovative business, the performance guarantee of the industry leader is greater, although there are also many private, small and medium-sized construction and transportation engineering companies, but their performance guarantee is weaker than that of the leading companies. The leading companies in the industry largely refer to large construction groups with Chinese characters. When the fiscal cycle comes, the performance and market performance of large central enterprises are more worth looking forward to, and these companies are more likely to take the lead in obtaining opportunities to go to sea and share the growth of fixed asset investment in emerging economies. Therefore, in the future analysis of infrastructure stocks, we should also focus on covering Chinese enterprises. (Zhongxin Jingwei APP)
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