[20081113]Construction - "Comments on Latest MoR and MoC Investment Pla

Event:
Following the ten stimulus measures released by the State Council on November 5, the MoR and MoC both announced their investment plans for the next two years:
•           MoR: FY08 investment plan raised by Rmb50bn. According to YANG Zhongmin, Director of the Development & Planning Department of the MoR, FY08 railway infrastructure investment will be raised by Rmb50bn (from Rmb300bn to Rmb350bn) and FY09 investment will be Rmb600bn. The increase in investment aims to spur domestic demand, and is expected to create 6mn jobs, require 20mn tonnes of steel products and 120mn tonnes of cement, and boost GDP growth by 1.5ppt.
•           MoC: 2008 FAI to total Rmb800bn. According to LI Xinghua, Deputy Director of the Planning Department of the MoC, FY08 transportation FAI will total Rmb800bn, and the MoC will try hard to push the figure past Rmb1 trillion in 2009 and 2010.
Comments:
The increase in railway construction is within our expectations, but the magnitude of the increase is much larger than our and market expectations
Our previous forecast factored in an increase in railway construction due to China’s expansionary fiscal policies, but the MoR’s latest plan is much larger than either we or the market expected. We previously forecast railway construction investment of Rmb280bn in 2008 (up 58%), Rmb350bn in 2009 (up 25%) and Rmb400bn in 2010 (up 14% ), bringing aggregate investment over FY06~10 to Rmb1.36 trillion, or 10% more than under the last 11th Five Year Plan (Rmb1.25 trillion). Following the recent announcement, we raise our FY08~10 forecasts to Rmb320bn in 2008 (up 81% YoY), Rmb500bn in 2009 (up 56% YoY) and Rmb600bn in 2010 (up 20% YoY), bringing aggregate investment over FY06~10 to Rmb1.75 trillion (Table 1).
Road/port construction plan in line
We previously forecast road/port construction investment of Rmb750bn in 2008, Rmb820bn in 2009 and Rmb900bn in 2010, and we tentatively maintain this forecast as it is not far off the MoC’s plan (Rmb800bn in 2008, Rmb1 trillion in 2009 and Rmb1 trillion in 2010).
More earnings upside in the three listcos due to the new railway construction assumptions
We conduct a scenario analysis of the FY09 earnings of the three listcos (assuming FY09 railway construction investment of Rmb400bn / Rmb50bn / Rmb60bn), and find that CRG and CRCC both have relatively good upside (Table 3). We will re-examine our earnings forecasts for the three listcos once the MoR formally launches its investment plan and we have communicated with management of the companies. 
 

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