China Construction:May infrastructure FAI growth showed strong recovery

Strong infrastructure FAI growth in May, accelerating from April.

    According to National Bureau of Statistics (NBS), May railway transport FAI growthaccelerated to 33% YoY (6% YoY in April). According to Ministry of Transport, Maytransportation FAI rose 7% YoY (7% YoY in April), among which highway FAI growthdecelerated to 2% YoY (7% YoY in April), while waterway FAI growth recovered to20% YoY (-13% YoY in April). Overall infrastructure FAI (according to NBS) growthaccelerated to 22% YoY in May (vs. 18% YoY in April), among which utilitymanagement (mostly municipal engineering) rose 32% YoY (24% YoY in April),representing close to 50% of total.

    Strong FAI numbers should lead to strong revenue recognition by contractors.

    We believe strong FAI numbers in recent months should translate to strong revenuerecognition by Chinese construction companies during the same time period, as thetwo sets of data have high correlation. In other words, construction companies shoulddeliver strong Q216 revenue growth at end-August result time. Q216 new contractnumbers may also surprise on the upside, which is due to be announced between mid-July and mid-August. We also anticipate breakthroughs at some key overseas projectsto be potential catalysts, e.g. Russia, Laos and Thailand.

    Positive takes from our recent field trips, remain positive on subway outlook.

    We took two field trips in the past few weeks, visiting some corporates/industry expertsin Beijing (see link for takeaways) and a railway/subway design firm in Chengdu (seelink for takeaways). The two trips reinforced our positive view (please refer to 2016railway outlook for details) on the urban rail transit market, as design firms,construction companies and equipment makers all guided strong subway new contractgrowth YTD. Furthermore, the lowering of criteria for cities to build subways (see“Potentially Rmb1trn incremental investment if urban rail transit criteria will belowered”) should create more demand for subways.

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