Negative impact: rising uncertainty on infrastructure investment
We believe the government’s tightening of infrastructure FAI is likely to have
an adverse effect on the highway construction and municipal transportation
sub sectors. These sectors are largely local government driven and have
relatively high dependence on bank loan financing (our GS China Banking
Team forecasts new loan to infrastructure projects to decline by 31% in
2010E). We reiterate our cautious view on waterway (i.e. ports) investment
outlook, in-line with market expectations. We believe the railway sector will
be relatively defensive, however new low-profile railway projects will likely
be more impacted than existing and upcoming high-profile railway projects.
We are cutting our infrastructure construction companies’ 12-m target prices
by 7% to 29%, mainly due to our downward revisions in construction growth
and using 2010E ROE (vs. 2011E ROE previously) given reduced visibility.
Risks include government investment policy shifts, MOR cost
reimbursements and raw material costs.