China Construction Infrastructure:3Q16PPP pulse check,Steady new start with healthier regional mix

Steady project new start with quickly expanding project pool…

In 3Q16, China Ministry of Finance Public-Private-Partnership (PPP) projectpool grew to Rmb12.5tn from Rmb10.6tn in 2Q16 (excluding the Rmb4.2tnNDRC project pool, which does not have full disclosure). Among the Rmb1.9tn increase, a steady Rmb500bn entered execution stage (vs. Rmb550bnin 2Q16), bringing execution stage project pool to Rmb1.6tn while an extraRmb1.4tn passed identification, bringing preparation/procurement stageproject pool to Rmb4.4tn. As a result of new projects flowing in, executionrate as of Sep 16 remained flattish at 26.3% from 26.0% as of June 16.

…better geographical distribution with less transportation focus

Unlike in 2Q16 when many new PPP projects came from less economicallydeveloped regions (such as Guizhou, with 28% of 2Q16 new projects invalue terms), leading to investor concerns about local governments’ abilityto raise financing for these projects, we see a more balanced geographicaldistribution in 3Q16’s Rmb1.4tn in new projects. Particularly, we see moreparticipation from economically vibrant regions, with Jiangsu now takingthe highest share (9%) among all provinces. Sector-wise, transportation’sshare of new projects also dropped to 21% in 3Q16 from 46% in 2Q16 whilemunicipal projects grew to 34% thanks to higher contributions from urbanroad/subway.

PPP becoming the major driver of road/subway/environment worksWhile we expect PPP’s penetration in the overall infra sector to rise overtime, road/subway/environment should see a more pronounced impactfrom PPP, with over 57%/65%/55% of their 2016-18E FAI explained by PPPprojects on our estimates. We thus expect further market consolidation andmargin improvement by market leaders in these sectors as PPP’s large sizeand complicated financing structure create higher entry barriers for smallerplayers (for details, please refer to “related research” in the grey bar).

Shifting focus to actual project progress bodes well for revenueIn line with our view that the government is shifting focus from signing toactual project start, we see more policy tailwind to drive faster PPPexecution, e.g. the ongoing auditing of project progress under theRmb1.8tn special construction bond program, and the central governmentsending inspection teams to ensure on-time investment/project deliveryThis underpins our view of a further acceleration in construction companyrevenue growth in 4Q16/2017 from a 3Q16 rebound.