Investors are betting that China’s planned infrastructure spending binge to boost its economy could mean the rally in construction and materials shares has further room to run.
The CSI 300 Infrastructure Index rose more than 8% last week to an almost three-year high, beating the broader benchmark by a wide margin. The upswing contrasts sharply with a slump in green energy names, as rising global bond yields clobbered highly valued stocks.
Traders see more upside for construction and engineering as Beijing puts behind its once-feverish deleveraging campaign and pivots to supporting growth. This means a greater push to upgrade both old and new infrastructure, making the sector a rare bright spot in the economy amid weak private consumption fueled by Covid Zero policy and an uncertain outlook for exports.
The record bank loans data in January also bodes well for infrastructure stocks, as a pickup in lending and bond issuance suggests construction has already gotten a lift.
“Reasonable front-loading of infrastructure investment is materializing and shows policy resolve to stabilize growth,” Cinda Securities analysts including Xie Yunliang wrote in a note Friday. Overall, companies are borrowing more to replenish capital as construction projects are “in full swing,” they wrote.
Here are some key areas to watch:
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New infrastructure
The government is doubling down on its bid to expand new infrastructure focused on 5G, data centres, and artificial intelligence. A 2020 masterplan shows such investment will amount to $1.4 trillion through 2025.
New infrastructure spending is an area that can increase and even create new forms of consumption, the Shanghai Securities News said last month, citing a “high multiplier effect.” More than 13 provinces have rolled out plans to build a total of 425,000 5G base stations in 2022, according to a report in the Securities Daily Friday.
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That’s a good sign for telecom firms like China Mobile, up 16% this year, and information services provider Guangdong Aofei Data Technology. Cloud computing firm Beijing Advanced Digital Technology jumped over 30% last week. SenseTime Group in Hong Kong, Iflytek and Hangzhou Hikvision Digital Technology are also potential beneficiaries.
Traditional Builders
As Chinese authorities hurry to front-load spending, many of the projects approved by local governments will still be of the old-school type -- railroad, highways, and transportation hubs.
That’s spurring traders to snap up the beneficiaries of earlier fiscal easing cycles, with contractor giants topping the list. China Communications Construction is one of the winners on the CSI 300 Index this year, rising 23% even as the benchmark slumped nearly 7%.
Chongqing Construction Engineering Group Corp has surged over 50% last week, while CK Infrastructure Holdings reached an almost two-year high in Hong Kong on Friday.
Some firms are already winning major projects. China Railway Signal & Communication, China Railway Construction, and China State Construction Engineering all disclosed such deals over the past weeks.
That’s likely to be a positive for steel and cement makers like Angang Steel and Gansu Shangfeng Cement, as well as excavation equipment makers including Sany Heavy Industry.
Environment Stocks
There is also significant room to improve China’s environmental landscape. Related shares received a boost from the state planner’s recent drive to enhance water treatment and waste disposal and modernize such facilities.
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Sewage and solid waste processor Fujian Haixia Environmental Protection Group was up 19% last week, while pollution prevention firm GAD Environmental Technology also gained by a similar magnitude.
To be sure, many of these infrastructure stocks are small cap, meaning they can whipsaw during times of volatility. Investors may also react sensitively to news flow, and policy shifts can bring price gains or falls on a whim.
Expectations that some decrepit buildings will be demolished before new constructions have also triggered a rally in firms dealing with explosive materials. Dynamite manufacture Poly Union Chemical Holding Group has gained by the 10% limit for eight consecutive sessions.
