Three secular trends in China’s PPP projectsWe visited 12 PPP (Public-Private-Partnership) related companies in Chinain the week of January 9-13, including construction companies (CSCEC,CRG, CCCC, and China Energy Engineering) and machinery manufacturers(Sany Heavy and Lonking), as well as environmental companies, insurers,and property developers, to get a sense of project progress. Overall, wethink the growth momentum for PPP investment will continue into 2017with three secular trends:(1) Shifting sector focus from railway towards municipal projects,implying higher demand for small tonnage excavators.
(2) Regional divergence: More PPP projects from less developed areas butconstruction companies are getting more prudent in project selection.
(3) Tightening project returns as a result of increased market competitionto bid for good projects.
Construction companies taking a more prudent approachThe key reason for construction companies to participate in the PPPprojects is to secure EPC contracts through minimal equity investment inthe project. Although the large construction companies are becoming moreprudent in project selection, PPP projects are still very attractive to them as(1) gross margin for PPP projects is 5-8ppt higher than cash constructionprojects and (2) off-balance-sheet financing through SPVs (specialpurpose vehicles) offers more room for earnings growth without risking ahighly geared balance sheet, and a risk isolation mechanism may benegotiated to protect contractors.
Machinery companies feeling the upbeatSany Heavy and Lonking both reported over 100% sales volume growth forexcavator in December, together with positive growth of utilization hoursand a pick-up in capacity utilization (Lonking at 70% vs. 50% at troughlevel), signaling the machinery upcycle is well on track.
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