China Industrials:Assessing potential implications of a Trump presidency

Trump presidency: Local infra spending, lower corp tax, higher tariffs.

Our US colleagues have identified potential policy changes that we findrelevant to Chinese industrials: 1) up to USD1bn/yr in add’l infra spending(The New York Times), mostly private financing encouraged by tax creditsover the next decade, a 33%/7% rise in public/total US construction spending(2018E) on our US team’s estimates, though it is unclear when the effects maybe realized, how add’l spending might be funded, and what level of spendingcould ultimately be enacted; 2) more restrictive int’l trade, with a potential45% tariff on exports from China; 3) a one-time 10% tax on all untaxedforeign earnings by US companies, followed by free cash repatriation anda lower corporate tax rate. We outline the potential impacts on Chineseindustrials but maintain estimates pending more clarity on policy.

E&C: Domestic and int’l addressable markets may both expand.

We see limited opportunity for Chinese E&Cs from potential growth in the USinfra market, given the high entrance barrier and limited exposure (CSCEC,with the strongest local franchise, booked 1% revenue from the US in 2015;our E&C coverage total overseas revenue percentage was 9% on avg). Yet ifUS E&Cs were to refocus on the domestic market given an improved growthoutlook and lower tax rate, Chinese E&Cs and others may see less competitionand even some growth to capture from US E&Cs’ 9% share in the world’s top250 contractors int’l revenue, or USD47bn (2015). Potentially diminished USpresence overseas could accelerate China’s “One Road One Belt” policyinitiative. Also, if China exports weaken due to higher US tariffs, the Chinesegov’t may need to step up local infra investment to support economic growth.

Machinery: Limited exports to US; several derivative effects possible.

We see a more direct impact on manufacturing industries that rely on exportsto the US, e.g., textiles (5% of 1-3Q16 industry sales from exports to US),electrical & electronics (7%) and meter & instruments (8%). Slower sales inthese industries could have secondary effects on their equipment suppliers,e.g., textile machinery to the textile industry. The scale of any potential effectis hard to quantify given a lack of policy detail, possible CNY depreciationand tariffs a Trump administration may impose on China. Also, while ourmachinery coverage is not heavily exposed to the US market, dependingon potential tariffs on China and policy changes toward foreign companieswith local production facilities, outlook for certain companies’ overseasbusiness growth (e.g., CRRC) may be dampened as success in US marketwould typically help Chinese companies break into developed countries.