[ET Net News Agency, 30 September 2020] Engineering and construction (E&C) companies
should remain the most resilient of all China's industrial sub-sectors this year and next,
according to a report S&P Global Ratings published today.
The entities are direct beneficiaries of the government's accelerated infrastructure
spending, undertaken to lift the nation from the first-quarter economic downturn. S&P
expects healthy revenue growth for the sector in China, and that most rated names will
maintain a stable credit profile over the next one to two years.
China's infrastructure investment (excluding utilities) has picked up since March, when
the pandemic was largely contained in the country. Correspondingly, the revenue and new
orders of our rated construction companies recovered rapidly in the second quarter.
"The gradual resumption of existing projects, accelerated project approvals, and
favorable funding conditions have all supported this recovery," said S&P's credit analyst
Yolanda Tan.
In S&P's base case, the rated E&C names will achieve 8%-10% revenue growth in 2020, on
average. The agency sees upside potential to its forecasts on a few names, including China
Railway Group Ltd. (00390), Metallurgical Corp. of China Ltd. (01618), and Power
Construction Corp. of China.
S&P thinks the EBITDA margin for its rated companies will likely stay stable in 2020 and
2021, supported by healthy demand and improving revenue mix. Most of the rated E&C
companies achieved better EBITDA margins in the first half compared with 2019, on
optimized revenue mix and stringent cost controls.
The agency believes most of its rated names will maintain largely stable leverage in
2020-2021. Healthy revenue growth and steady margins underpin growing profit, which may
surpass or match the debt increase from working capital outflow and capital spending.
"While our rated E&C firms are all under a central government directive to deleverage, a
few have seen rising leverage in the past one to two years, and greater ratings pressure,"
said S&P's credit analyst Claire Yuan.
Power Construction Corp. and China State Construction International Holdings Ltd. will
continue to face leverage strains in relation to their participation in, and consolidation
of, investment-linked projects.
Most of S&P's rated issuers generate less than 10% of revenue and profit from overseas
markets. The exposure should remain small over the next two to three years.
Although some large state-owned E&C companies, such as China Railway Construction
(01186), are included in the U.S. government entity list and are subject to potential
sanctions, S&P doesn't yet see a material hit on their operations or financial
performances. (KL)