Deutsche Bank Markets Research Asia China Transportation Infrastructure Industry China Infrastructure Date 3 March 2017 Forecast Change PPP story continues, upgrading 2017- 2018 infra FAI; Buy CCC/CSCI Reiterating positive view on constructors in 2017 ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P)057/04/2016. Phyllis Wang Research Analyst (-)-- phyllis.wang@db Key Changes Company Target Price Rating 1800.HK 12.08 to 13.71(HKD) - 3311.HK 14.97 to 16.06(HKD) - 1186.HK 11.84 to 13.36(HKD) - 0390.HK 6.93 to 7.92(HKD)- Source: Deutsche Bank Top picks China Comms Construct (1800.HK),HKD10.78 Buy CSCI (3311.HK),HKD13.40 Buy Source: Deutsche Bank Companies Featured China Comms Construct (1800.HK),HKD10.78 Buy 2015A 2016E 2017E P/E (x)8.99.47.9 EV/EBITDA (x)8.89.38.9 Price/book (x)0.71.11.0 CSCI (3311.HK),HKD13.40 Buy 2015A 2016E 2017E P/E(x)11.813.610.2 EV/EBITDA(x)11.511.08.4 Price/book(x)2.62.01.8 China Rail Construction (1186.HK),HKD11.20 Buy 2015A 2016E 2017E P/E (x)9.49.48.1 EV/EBITDA (x)5.04.94.4 Price/book (x)0.91.11.0 China Railway Group (0390.HK),HKD7.16 Buy 2015A 2016E 2017E P/E (x)11.610.89.3 EV/EBITDA (x)8.67.76.9 Price/book (x)0.91.11.0 Source: Deutsche Bank We reiterate our positive view on the construction sector for the rest of this year after our recent trip and analysis of PPP projects. Domestic orders for infrastructure projects are still healthy in Jan 2017. We believe healthy momentum in the coming months will continue, supported by the accelerating development of PPP projects (mainly highway and municipal projects). Management guidance on new orders in 2017 looks stronger than expectation. We raise our estimate on infrastructure spending in China by 2-4% in 2017- 2018, on our base case analysis of PPP projects. We still like constructors on the back of healthy earnings and order outlook. CCC and CSCI are top picks. Positive message from recent tour: healthy new orders growth to continue Our trip last week to Beijing, Shangdong, Jiangsu, Hubei and Hunan in relation to the infrastructure construction sector gave us the impression that sentiment in the infrastructure industry remains strong. Progress on the PPP model (especially from highway, subway and municipal projects) is ahead of our expectation, which should support infra spending in 2017-19. In addition, all the constructors expect positive new order growth this year after the strong growth in 2016. Accordingly, we raise our new orders estimates for the constructors by 8-23% in 2017. Lifting infra FAI in China, due to accelerating development of PPP projects We lift China infra spending (including railway, road and municipal projects) forecasts by 2-4% for 2017-18 on a base-case scenario, mainly due to higher assumption on highway and subway investment. Thus, we now forecast infra FAI in China to grow 5% CAGR in 2016-2018(vs. previous 3.5%), among which we expect investment via the PPP financial model to account for 20% of total in 2018(vs. previous 15%). We estimate the market size for PPP projects (mainly including transportation and municipal projects) will be more than Rmb2trn in 2017-18(vs. our previous estimate of Rmb1.65trn), representing a 35% CAGR over 2016-2018. Our blue sky scenario implies 2% and 9% potential upside from our current estimates for infra FAI and investment for PPP projects, respectively; we believe this would enhance constructors’ earnings by 5-10% on the back of higher construction volume and better margin expansion led by a rising portion from high-margin PPP projects. Upgrade earnings/TP; consensus estimates conservative; top pick: CCC/CSCI We raise CRCC, CRG, CCC and CSCI’s 2016-2018 earnings by 4-7% on higher infra spending assumption. Our revised 2017-2018 earnings forecasts are 3- 16% ahead of market consensus. CCC is our top pick as it is likely a medium- term beneficiary of the OBOR initiative and has more attractive valuations then peers. It has the highest exposure to PPP projects among the big three names and strong capability to control projects. Potential SOE reforms may benefit its B/S. CCC trades at 7.9x 2017E PE (3%/15% discount to CRCC/CRG’s). We also like CSCI for its potential to be the biggest beneficiary of the PPP model promotion given its high exposure to the domestic infra investment business. Valuing Chinese railway companies on DCF; risks Our preferred valuation methodology for railway names is one-year forward FY17E DCF (WACC:7.4% for CRG,7.0% for CRCC,8.0% for CCC, and 8.5% for CSCI). Risks: government spending and political risk for overseas projects. In this report we change estimates and TPs for companies under coverage. Please see Figure 18-19 on page 9 for details. Distributed on:02/03/201721:03:35 GMT 每日免费获取报告 1、每日微信群内分享5+最新重磅报告； 2、每日分享当日华尔街日报、金融时报； 3、每周分享经济学人 4、每月汇总500+份当月重磅报告 （增值服务） 扫一扫二维码 或加微信：qidian-j加入“起点财经”1- 040微信群，已有微信群的不用重复添加 备注：研究报告 3 March 2017 Infrastructure China Infrastructure Page 2 Deutsche Bank AG/Hong Kong PPP story continues Positive message on constructors from our recent trip We took a trip last week to gain further insight into the infrastructure sector. We covered five regions in China (Beijing, Shangdong, Jiangsu, Hubei and Hunan) and visited infrastructure constructors (MCC, CSCEC, Gezhouba, and JSTI group), Jinan Development and Reform Commission and industry expert from China Railway Construction (CRC). The trip gave us the impression that sentiment in the infrastructure industry remains strong. Progress on the Public-Private Partnership (PPP) model (especially from highway, subway and municipal projects) is ahead of our expectation, which should support infrastructure spending in 2017-19E. We believe railway infrastructure spending (a key driver for infrastructure spending growth in the past few years), will no longer be the catalyst in the next few years, which is also in line with industry expert’s view (from CRC). 1) All the constructors we visited are positive on the outlook, given the accelerating development of PPP models. As well, they cite the continued healthy new orders growth from infrastructure projects in January 2017 and expect this trend to remain for the rest of this year. 2) Jinan local government is aggressively pushing PPP project developments.32 projects are now in their project pool, among which 10 are in execution period. They have picked up 30 projects this year, which will be put into the local governments’ PPP project pool. 3) The railway expert from CRC expects railway infrastructure to have no growth in 2017. The development of PPP railway projects looks slow due to low returns. Good signals from PPP annual report Expanding national PPP reserves, further accelerating implementation The China Public Private Partnerships Center (CPPPC) recently released an annual report on the MoF’s PPP project pool. The report notes improvement in scale and quality of reserved PPP projects. At the end of 2016, total investment from 11,260 reserved PPP projects amounted to RMB13.5tr, up 8.3% from end-September 2016 and 66% from end-January 2016. Despite the expanding scale, the contract signing rate in terms of project number and total investment continued to rise; it jumped to 12.0% from 9.0% at end-September and to 16.5% from 12.5% at end-September, respectively. By percentage points, the 4Q16 contract signing rate enjoyed the fastest quarterly growth in 2016. 3 March 2017 Infrastructure