construction industry

Characteristics of the construction industry:

In 20 15 years, the total output value of the construction engineering industry exceeded 18 trillion yuan, exceeding the GDP of Canada as a whole. The construction engineering industry is a veritable super-large-scale industry.

Investment in fixed assets is the source of the growth of construction projects.

From 2000 to 20 15, the annual compound growth rate of fixed assets investment in China was 2 1%, and the total output value of construction industry was 20%.

According to the fitting of historical data, the investment in fixed assets is linearly related to the output value of the construction industry.

Industry characteristics: full competition

Construction engineering industry is a typical fully competitive industry;

The low barrier to entry in the construction industry leads to a serious overcapacity in the industry, and the industry presents the structural characteristics of "fragmentation";

The gross output value of the construction industry in 20 15 years is 18. One trillion yuan, and the industry leader China's construction income is 880 billion, with a market share of only 5%;

The concentration of the first four shares in the industry only accounts for15% of the whole industry;

In terms of molecular industry, influenced by single demand-side structure and administrative monopoly intervention, water conservancy projects and railway projects are highly concentrated;

In the long run, the scattered industrial structure characteristics of construction engineering industry are difficult to change;

Referring to the concentration of foreign construction industry, there is limited room for improving the concentration of construction industry in China in the future.

Industry characteristics: light assets

Different from everyone's impression, the construction industry is a typical light asset industry;

In 20 16, the fixed assets of construction industry accounted for 7% of total assets;

Taking listed companies as the observation object, compared with other industries, it is found that the proportion of fixed assets in total assets in construction engineering industry is only higher than that in banks, real estate and non-bank finance.

The light property of assets and the lack of necessary pledge guarantee are one of the reasons that lead to the financing difficulties of construction enterprises.

Industry characteristics: liquidity is occupied

The characteristics of deposit system and progress payment of construction projects lead to the general occupation of enterprise liquidity by projects;

The business model of construction engineering enterprises is essentially capital flow.

Total demand for construction activities:

Where there are human activities, there must be construction projects.

Total demand for construction activities:

1. Domestic investment:

A. Infrastructure investment: urbanization+supporting real estate, steady government growth and private investment.

Real estate investment: urbanization and housing price expectation

Third, industrial investment: manufacturing profit expectations

2. Overseas projects (Belt and Road)

Infrastructure investment: by industry and company.

1. Railway/Rail Transit: China Railway, China Railway Construction and Tunnel.

2. Highways: China Jiao Jian, Shandong Luqiao, Sichuan Luqiao, Chengdu Luqiao and Beixin Luqiao.

3. Water conservancy and electric power: China Power Construction, Gezhouba, Guangdong Hydropower and Weihai Stock.

4. Municipal: Tengda Construction, Hongrun Construction and Pudong Construction.

5. Garden Ecology: Oriental Garden, Iron Man Ecology, Mongolian Grass Ecology, Li Peng Stock, Transocean Forest Paper and Famous Artists.

6. Housing construction: China architecture, Shanghai architecture, Ningbo architecture and Long Yuan architecture.

7. Metallurgical/mineral engineering: China MCC, Sinosteel International, China Mineral Resources, Jin Chengxin.

8. Chemical Engineering: China Chemistry, Donghua Science and Technology, 3D Engineering, Sinochem Geotechnical Engineering, Aerospace Engineering, Sanlian Hongpu.

9. Cement Engineering: Sinoma International

10. light industry project: Haicheng, China.

Overseas investment: subdividing industries and companies

1. Professional international contractor (window company)

Business model: take it in from the outside and turn it out at home.

Main competence: overseas market development and transnational risk control.

Representative companies: China Engineering Corporation, North International Corporation, Zhongcheng Co., Ltd. and China Mechanical Engineering (H shares).

2. International engineers:

Business model: commitment+implementation

Main ability: construction ability in professional field.

Representative companies: China Jiao Jian, China Power Construction, Gezhouba, China Great Wall, China Mining Resources, etc.

Top-down: taking quantity as the main research object

1. Cost plus pricing model, the gross profit margin is relatively stable.

2. The main driving force of performance comes from the number of orders converted into revenue.

3. Follow the logic of "industry-order-revenue-performance";

4. Calculation of market segment size:

1), estimated with reference to the government investment plan;

2), according to the upstream growth rate conduction calculation;

3), according to the proportion of urbanization rate increase and permeability increase;

5. Market share: according to industry status, past market share and bid winning rate.

Bottom-up: Research as the Core

1. There are many sub-sectors of architecture, and individual stock research must be the main research method.

2. After discovering the highlights of individual stocks, it is necessary to confirm with peers in time. Once it is judged that there is an industry trend, there may be plate opportunities (20 10 decorative gardens, 20 12 decorative and architectural intelligence, 20 16 PPP).

3. There are many independent markets in the construction industry, and the catalytic factors of individual stocks often exceed the constraints of the industry environment.

4. With the current slowdown of macro investment, there are more and more bottom-up transformation companies, which are the focus of industry research.

Profit forecasting method:

1. Follow the profit forecasting method of "industry boom-order-revenue-performance".

Forecast the future order trend of the company through the industry prosperity and the company's industry status and competitiveness.

Forecast the future income series through the number of executable orders (valid contracts) and the commencement schedule.

Under normal circumstances, the gross profit margin is generally stable because the construction industry adopts the cost plus pricing method.

We should carefully examine the impact of three variables, such as cost, asset impairment loss, investment income and tax rate, on profits.

In addition, we should also consider the impact of mergers and acquisitions.

2. On the basis of the above profit forecast, release the performance by investigating the confidence of listed companies in this profit forecast. Adjust the profit forecast according to the confidence and willingness of listed companies.

3. Adjust according to the prosperity of the industry and the situation of peer companies.

4. Dynamically adjust the profit forecast at the beginning of the year according to the quarterly performance and mid-year order data.

The main catalysts for industry investment opportunities:

1. National policies: economic stimulus plan, Belt and Road strategy, PPP reform, real estate policy.

2. Macroeconomic data:

GDP: Once it weakens, there may be a policy expectation of "steady growth".

Interest rate: the orders of construction companies have great flexibility to the price of funds.

Exchange rate: affecting the performance of international engineering companies

3. Individual stock factors:

Order: (framework, new contract, effective contract)

Performance growth rate

Corporate events: peer acquisition, transition acquisition, equity incentive, etc.

Valuation of the construction company:

1. Different sub-industries and different companies can generally be valued according to PEG.

2. On the basis of PEG= 1, adjust according to the market preference for business content (such as whether there are emerging industries), market value, corporate capital market image, market style preference and other factors.

3. On the basis of considering PEG valuation, from the historical experience, the valuation of most construction companies is between 10-30 times PE, and there is convergence pressure beyond this range.

4. Construction companies are not suitable for PB valuation.

profit statement

At the macro level, the growth rate of industry investment-income growth rate

1. For construction enterprises, from a macro perspective, the growth rate of enterprise income is closely related to the growth rate of investment.

2. Since the establishment of China Architecture, the growth rate of income has been highly correlated with the growth rate of fixed assets investment;

3.20 1 1 In the context of the sharp decline in investment in railways and fixed assets, China Railway and China Railway Construction, which have already diversified their businesses, still cannot escape the nightmare of negative revenue growth.

At the micro level, newly signed orders-revenue growth rate

1. For construction engineering enterprises, from a micro point of view, the growth rate of enterprise income is closely related to the growth rate of orders. However, it is worth noting that there is no strict correspondence between the growth rate of new signing orders and the growth rate of income.

2. The business model of the construction industry is the order completion model, and the income is confirmed according to the execution progress of the order. Therefore, for construction enterprises, the growth rate of newly signed orders is directly related to the income growth rate of enterprises.

3. The factors that determine the income of construction enterprises are: newly signed orders, the carry-over rate of newly signed orders, in-hand orders and the carry-over rate of in-hand orders.

4. Among them, the carry-forward rate of newly signed orders and the carry-forward rate of in-hand orders are closely related to the macro-capital. In the case of stable macro funds, the income of construction enterprises is mainly determined by newly signed orders and orders in hand. When macro funds are tight, the carry-over rate of newly signed orders and orders in hand will drop sharply, and the income of construction enterprises will be determined by the carry-over rate of orders.

Decentralized industrial structure:

1. The industrial structure is scattered, and full competition leads to the overall meager profit of the industry.

Serial number? Sub-industry gross profit margin

1 ? Railway engineering 5- 10%

2 ? Road and bridge engineering 9- 15%

3 ? Water conservancy project 10- 14%

4 ? International engineering? 1 1-22%

5 ? Steel structure? 14-30%

6 ? Industrial engineering? 12-25%

7 ? Housing project 8- 1 1%

8 ? Landscape Engineering 16-30%

9 ? Decoration project 16-38%

Cost of enterprise production capacity under light assets

1. The property of light assets in the construction industry leads to the "expensiveness" of its production capacity. Construction engineering enterprises present a typical "light assets" attribute.

2. The production capacity of construction enterprises is generally manifested in three aspects: capital (caused by the occupation of circulating funds), personnel and management. These abilities are generally reflected in the form of expenses, and personnel abilities are generally reflected in sales expenses and management expenses in the form of employee compensation; Management is generally embodied in the form of management fees; Funds are generally reflected in the form of financial expenses.

Operating assets and operating liabilities dominate.

1. The asset-liability ratio of the construction industry is relatively high. In 20 16 years, according to the caliber of the whole industry, the asset-liability ratio of the construction industry was 67%. Taking listed companies as the observation object, compared with other industries, it is found that the asset-liability ratio of construction engineering industry is only lower than that of banks, real estate and non-bank finance.

2. From the asset side, the assets of construction enterprises mainly include: monetary funds (15.82%), accounts receivable (14.38%), other receivables (4.87%) and inventory (27.30%), accounting for 62.38% in total.

3. From the debt side, the liabilities of construction enterprises mainly include short-term loans (7.42%), long-term loans (15. 1 1%), bonds payable (4.67%), accounts payable (35.63%) and accounts received in advance (/kloc).

4. The high asset-liability ratio of construction enterprises is mainly due to the high operating liabilities.

5. In terms of interest-bearing liabilities/total assets, central construction enterprises account for 20.67%, local state-owned enterprises account for 24. 18%, and private construction enterprises account for 17.22%. Therefore, operating liabilities are the main reason for the high asset-liability ratio of construction enterprises.

Thematic Analysis-Monetary Fund

1. Monetary funds: The monetary funds of construction enterprises are mainly composed of cash on hand, bank deposits and other monetary funds.

2. Because of its special business model, construction enterprises have a relatively high proportion of other monetary funds. Therefore, when testing the relevant capital pressure of construction enterprises, other monetary funds that enterprises cannot use should be excluded.

3. Other monetary funds of construction enterprises mainly include various deposits, including acceptance bills deposits, letter of guarantee deposits and credit deposits.

Account Analysis-Accounts Receivable

1. Accounts receivable: the revenue recognition mode of the completion percentage of the construction enterprise, and the characteristics of the owner's payment according to the progress of the project lead to accounts receivable becoming the main component of the asset side of the construction enterprise.

2.20 16 accounts receivable of listed construction enterprises account for 14.88% of total assets.

3. The provision for bad debts of accounts receivable is an important factor affecting the current performance of construction enterprises. In 20 17 years, the proportion of asset impairment loss to net profit was close to 30%.

4. The impairment of assets of construction enterprises is mainly composed of nine impairment reserves:

Bad debt reserve (the highest proportion), inventory depreciation reserve, fixed assets impairment reserve, Shangyu impairment reserve and so on.

Among them, except for bad debt provision and inventory depreciation provision, the other five impairment provisions are accrued together and cannot be reversed.

Due to the large scale of accounts receivable and low net interest rate of construction enterprises, the loss of asset impairment has a great influence on the net profit of enterprises.

Account Analysis-Inventory

Inventory: the inventory of construction enterprises is different from all other industries, and the inventory of construction enterprises is composed of "completed and unsettled assets formed by construction contracts".

In 20 17, the "completed unsettled assets formed by construction contracts" accounted for 38.29% of the inventory.

Completed unsettled assets formed by the construction contract: revenue and cost have been confirmed, and accounts receivable have not been accrued due to unsettled. Therefore, this item can be basically equivalent to the accounts receivable of construction enterprises.

The balance sheets of some construction enterprises are characterized by "low receivables and high inventory", which is actually caused by more "inventory-unfinished". This is also the place where garden enterprises are criticized the most.

It is worth noting that for most construction enterprises, "inventory-unfinished" basically does not include inventory depreciation reserve.

To a certain extent, this can be considered as the lack of impairment preparation of construction enterprises.

Garden enterprises, decoration enterprises, most infrastructure companies and central enterprises basically do not mention the impairment reserve of "inventory-completed and unsettled"

Account Analysis-Payable &; Collect money in advance

Accounts payable and accounts received in advance: Accounts payable and accounts received in advance are the main components of the liabilities of construction enterprises, accounting for about 50%.

Actually deal with &; Advance payment is essentially the embodiment of the bargaining power of construction enterprises to upstream and downstream. The stronger the bargaining power of construction enterprises to upstream suppliers, the more accounts payable the company has;

The stronger the bargaining power of construction enterprises to downstream owners, the more accounts will be received in advance.

cash flow statements

Project Advance Payment+Progress Payment = Cash Lag

The revenue recognition method of construction enterprises is the unfinished percentage method, and the project payment is the progress payment, so there is a certain time difference between revenue recognition and project payment, which is reflected in the lag of cash flow ratio in financial indicators.

Generally speaking, the cash ratio of construction enterprises is mainly determined by macro liquidity and self-expansion strategy.

When the macro liquidity is tightened, the owners (usually local governments and local enterprises) will slow down the payment progress of the project, and the repayment speed of the construction enterprises will also slow down, resulting in a decline in the cash withdrawal rate of the construction enterprises. The decentralized industrial structure and fully competitive industrial competition pattern in the construction industry lead to the extremely weak bargaining power of construction enterprises.

With the tightening of macro-liquidity, the income-cash ratio of construction enterprises is closely related to their expansion strategy. When the scale of construction enterprises expands rapidly, the ratio of income to cash decreases; When the scale expansion of construction enterprises slows down, the ratio of income to cash increases.

Assess cash flow and collection risk

1. Use cash-to-cash ratio and aging structure to judge the risk of account recovery.

Cash-to-cash ratio = operating cash flow inflow/income, generally above 70% is healthy.

If the aging structure has no obvious signs of aging and the old accounts cannot be recovered, the risk of accounts receivable is in a healthy and controllable state.

2. The risk of accounts receivable cannot be simply evaluated by positive or negative net operating cash flow.

Construction companies in the expansion period often have negative net operating cash flow, but it does not mean that the company's engineering quality is not good or it faces greater risk of recovering accounts.

On the contrary, a construction company's net operating cash flow in the contraction period is likely to be positive, but it does not mean that the projects in its hands are not at risk of collection.

Short-term prospect of building materials industry

The core issues of infrastructure "capital" and "standardization" have both erupted. After more than a year of fermentation, the policy is gradually improved and is expected to be quickly transmitted to the fundamentals. A large number of orders undertaken in the previous two years will be released in the fourth quarter of this year, and the overall performance of the industry will be improved.

Mid-and long-term views of building materials industry

19-20In the last two years of the Thirteenth Five-Year Plan, the remaining space of the general-speed railway is about 3500-5250 trillion, the high-speed railway is about15 billion, and the highway (including high-speed) is about 3.7-5. 13 trillion, which is relatively flat with previous years. Under the expectation of "complementing the shortcomings" of infrastructure, the sector is expected to advance steadily.

Core targets: Golden Mantis, China Architecture, China Railway Construction and China Railway.