A stock trader’s guide to China’s expected infrastructure frenzy

(Bloomberg) – Investors are betting that China’s planned infrastructure spending spree to boost its economy could mean the rally in construction and materials stocks still has room to maneuver.

The CSI 300 infrastructure index rose more than 8% last week to a nearly three-year high, beating the broader benchmark index by a wide margin. The rally contrasted sharply with a slump in green energy names, as rising global bond yields rattled highly valued stocks.

Traders see more upside for construction and engineering as Beijing puts behind its once feverish deleveraging campaign and pivots to support 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 the Covid Zero policy and an uncertain outlook for exports.

Record bank lending data in January also bodes well for infrastructure stocks, as a recovery in lending and bond issuance suggests that construction has already gained momentum.

“The reasonable frontloading of infrastructure investment is materializing and shows the political will to stabilize growth,” Cinda Securities analysts, including Xie Yunliang, wrote in a note on 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:

New infrastructure

The government is stepping up efforts to develop new infrastructure focused on 5G, data centers and artificial intelligence. A 2020 master plan shows this investment will amount to $1.4 trillion through 2025.

New infrastructure spending is one area that can increase and even create new forms of consumption, 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 on Friday.

That’s a good sign for telecom companies like China Mobile Ltd., up 16% this year, and information services provider Guangdong Aofei Data Technology Co. Cloud computing firm Beijing Advanced Digital Technology Co. jumped more than 30% last week. SenseTime Group in Hong Kong, Iflytek Co. and Hangzhou Hikvision Digital Technology Co. are also potential beneficiaries.

Traditional builders

As Chinese authorities rush to ramp up spending, many projects approved by local governments will still be of the old school type – railways, highways and transportation hubs.

This is prompting traders to grab the beneficiaries of previous fiscal easing cycles, with contractor giants topping the list. China Communications Construction Co. is one of the winners of the CSI 300 index this year, rising 23% even as the benchmark fell nearly 7%.

Chongqing Construction Engineering Group Corp. jumped more than 50% last week, while CK Infrastructure Holdings Ltd. hit a nearly two-year high in Hong Kong on Friday.

Some companies are already winning big projects. China Railway Signal & Communication, China Railway Construction and China State Construction Engineering have all disclosed such transactions in recent weeks.

This should be positive for steel and cement makers like Angang Steel and Gansu Shangfeng Cement, as well as excavation equipment makers including Sany Heavy Industry Co.

Environment stocks

There is also significant scope for improving China’s environmental landscape. Related actions have received a boost from the state planner’s recent campaign to improve water treatment and waste disposal and upgrade these facilities.

Sewage and solid waste treatment group Fujian Haixia Environmental Protection Group rose 19% last week, while pollution prevention firm GAD Environmental Technology also rose by a similar magnitude.

Certainly, many of these infrastructure stocks are small caps, which means they can be skewed in times of volatility. Investors can also react sensitively to news flow, and changes in policy can lead to price gains or declines on a whim.

Expectations that some decrepit buildings will be demolished before new construction has also sparked a rally at companies dealing with explosive materials. Dynamite manufacturing Poly Union Chemical Holding Group Co. has exceeded the 10% limit for eight consecutive sessions.

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