Construction Weekly:Year End Government Meetings to Further Support Water Conservancy Stocks

Water conservancy stocks may receive further policy support with a set of government meetings. The CentralEconomic Work Conference, the Central Rural Economic Meeting and the National Water Conservancy WorkConference will convene in December or January, and the "2011 No.1 Central Document" will also be released duringthis period. Given the 12th FYP policy's emphasis on people's livelihood and encouraging water conservancyconstruction, all of the meetings could unveil policies to accelerate construction investment. Policy catalysts usuallygive the strongest boost to construction stocks. In this sense, we believe positive policies may trigger a rally on waterconservancy stocks at year-end.

    More water resource projects have been approved, creating ample project pipeline for growth of waterconservancy investment. Xinhua reported that the Ministry of Water Resources (MWR) and NDRC have approved 37water resource projects YTD with a total investment of Rmb177.5bn1. We estimate water conservancy projectsapproved by the NDRC and MWR this year will have total investment of Rmb800bn, assuming the proportion of theseprojects in water conservancy construction investment is flat with 2010’s 20%. This will create an ample projectpipeline for high growth of water conservancy construction investment. Meanwhile, the MWR has approved orsubmitted 42 water resource projects for central government review YTD, with total planned investment ofRmb235.6bn. Of the 42 projects, three have finished project planning, seven have project proposals, 21 have feasibilityresearch reports, and the other 11 have preliminary design reports.

    Investment recommendation: A-share construction stocks are trading at 14.4x 2011e P/E and 12.2x 2012e P/E onaverage, with the four leading players averaging 10.1x/9.5x 2011/2012e P/E. H-share construction stocks are trading at8.4x/7.5x 2011/2012e P/E on average. In the short-term, we believe water conservancy stocks including Sinohydro,Gezhouba, Anhui Water Resources and Guangdong No.2 Hydropower may still rally on positive year-end catalysts.Over the long term, we continue to suggest investors buy A-share CSCEC, and H-shares CSCI and CCCC on dipsgiven their stable earnings growth.