A-Share Non-metallic Building Materials:PPP Model Brings Source of Funds

Cooperation between governments and private funds seestremendous potential amid the popularity of PPP model.

    The PPP model has gradually popularized recently, through whichgovernments are able to introduce social capital into investmentand operation of public welfare undertakings, and the two partiescan share benefits and risks to achieve the improvement in qualityand supply efficiency of public products and services. Compared todeveloped countries, in China, the PPP model is still at an initialstage of development, enjoying huge upside and promisingprospect.

    PPP model conducive to stabilizing growth throughinfrastructure construction.

    Infrastructure investment has become a key growth-stabilizingengine amid the economic slowdown, given land sale is no longerenough to support local government finance, while credit stimuluspolicies as represented by the LGFVs and urban constructioninvestment bonds, also caused concerns. The PPP model, whichprovides sources of funds for the booming urbanization-relatedconstruction, is therefore advocated by both Beijing and localgovernments. According to calculations made by the NDRC’s PPPproject library, there are currently over 1000 projects across thecountry, with total investment of nearly Rmb2tn, and localgovernments are making efforts to promote PPP projects orestablish project libraries.

    Key regions and industries stand to benefit as stronginvestment demand fuels downstream cement demand.

    The PPP model is mostly adopted in infrastructureconstruction-related projects, through which, the problem ofinfrastructure fund shortages due to mounting local governmentdebts will hopefully be resolved. By region, promotion of the PPPmodel concentrates in eastern provinces like Jiangsu, Anhui, etc.

    By industry, it mainly covers municipal construction, public services,transportation, environmental protection, etc. What’s more, the PPPmodel has expanded overseas under One Belt One Road, andthrough international production capacity cooperation. It’spredictable that such a huge amount of investment demand willtrigger downstream demand in the cement industry.

    Investment suggestion.

    At present, domestic cement stocks are still hovering at bottom levels, butexpectation for a recovery in property investment slowly intensifies as multiplefactors have shown signs of improvement, e.g. the contraction in newly addedproduction capacity, rising concentration ratio and the bigger role leadingparticipant plays in the industry. The growing adoption of the PPP model athome and abroad will fuel downstream demand further in the cement market,in our view. We maintain our Buy rating on the industry. Our Hot picks includeConch Cement, Huaxin Cement, Wannianqin, TCJT and Tongli Cement. Webelieve Ningxia Building Materials and YBTI are noteworthy.

    Risk factors:PPP projects typically features huge investment, long duration, high risks, andcomplex agreement structure. Risks include government credit risks, legal risks,capital risks, project management risks, etc.