1. business and industrial
2. construction

18 February 2015
Sector Report
One Belt One Road Initiative
A development plan, and a diplomatic strategy. The world’s attention was drawn
to the “One Belt One Road” initiative expounded by President Xi Jinping when he
announced the establishment of the US$40bn Silk Road Fund at the APEC Economic
th
Leaders’ Meeting on 11 November 2014. Indeed, the initiative had been
mentioned before by President Xi back in 2013 when he visited Kazakhstan and
Indonesia. The new Silk Road of the Silk Road Economic Belt (One Belt) will begin in
Xian (Shaanxi, China), then traverse Central Asia and Europe and end in Venice (Italy)
st
st
where it will meet the 21 Century Maritime Silk Road (One Road). The 21
Century Maritime Silk Road will begin in Quanzhou (Fujian, China), then head south
passing through the Malacca Strait to reach Nairobi (Kenya), and finally turn north
for Venice.
The initiative aims to realize economic cooperation through
interconnection among the countries by linking transportation infrastructures,
deploying port resources and facilitating convenient transport. Apart from
economic cooperation, the leadership of China aspires to deepen linkages between
China and its neighbours.
Enormous economic benefits likely. According to Xinhua News Agency, the Silk
Roads will bring “new opportunities and a new future to China and every country
along the road that is seeking to develop”. Other than infrastructure (railways,
roads and ports) to be built along the routes for speedy transportation, China
envisions a trade network where “goods are more abundant and trade is more
high-end”, according to Xinhua News Agency. Within China, about sixteen
provinces/autonomous regions are covered by the One Belt One Road initiative
geographically. The Leading Group for the One Belt One Road Development met
for the first time in early February. We believe a more detailed implementation
plan will be drawn up by this group under the auspices of the Chinese government.
By then, it will be easier for the market to reckon how much economic benefit could
be reaped by the enterprises from the initiative.
A general postulation of companies that can benefit. It is undeniable that most of
the Central Asian countries are less developed than China in terms of infrastructure.
An infrastructure investment program under the One Belt One Road initiative will
benefit the construction machinery companies, infrastructure construction
companies, some building materials producers, as well as infrastructure operators in
China. The Chinese enterprises are in a good position to benefit from the initiative,
in our view, as China is taking a leadership role in the initiative as well as the Silk
Road Fund and Asia Infrastructure Investment Bank.
China’s construction
machinery industry is able to provide a comprehensive range of products for
infrastructure construction. The leading Chinese infrastructure construction
companies have accumulated extensive experience of handling projects in harsh
environment. In view of the enormous funding needed for the projects, Chinese
infrastructure operators would likely participate in the initiative by taking part in BOT
projects under PPP programs.
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Thematic Report
President Xi Jinping had mentioned thest
Silk Road Economic Belt and the 21
Century Maritime Silk Road in 2013 during
diplomatic visits. However, the world
began to pay closer heed after China
announced the establishment of the
US$40bn Silk Road Fund in Nov 2014.
The One Belt One Road initiative has
economic and diplomatic implications for
related
countries.
Infrastructure
investment will likely be made in order to
facilitate more international trade and
cultural exchange.
Given China’s leadership in the One Belt
One Road initiative, we believe Chinese
companies in the construction machinery
and infrastructure construction industries,
infrastructure operators and, to a certain
extent, the building materials industry
could benefit from the initiative. We
await more detailed implementation plan
from the government to gauge the
benefits for the listed companies in the
future
Geoffrey Cheng, CFA
[email protected]
Tel: (852) 2977 9380
Jovi Li
[email protected]
Tel: (852) 2977 9243
Fay Zhou
[email protected]
Tel: (852) 2977 9381
One Belt One Road Initiative
18 February 2015
Figure 1: Valuation comparison table
Company name
Construction Machinery
Hong Kong-listed
CHINA MACHINERY ENGINEERIN-H
LONKING HOLDINGS LTD
ZOOMLION HEAVY INDUSTRY - H
PRC-listed
SANY HEAVY INDUSTRY CO LTD-A
ZOOMLION HEAVY INDUSTRY S-A
SHANTUI CONSTRUCTION MACHI-A
GUANGXI LIUGONG MACHINERY-A
XCMG CONSTRUCTION MACHIN-A
Construction Companies
Hong Kong-listed
CHINA RAILWAY CONSTRUCTION-H
CHINA RAILWAY GROUP LTD-H
CHINA COMMUNICATIONS CONST-H
CSR CORP LTD - H
CHINA CNR CORP LTD-H
CHINA STATE CONSTRUCTION INT
METALLURGICAL CORP OF CHIN-H
CHINA NATIONAL MATERIALS - H
PRC-listed
CHINA RAILWAY CONSTRUCTION-A
CHINA RAILWAY GROUP LTD-A
CHINA COMMUNICATIONS CONST-A
CSR CORP LTD -A
CHINA CNR CORP LTD-A
METALLURGICAL CORP OF CHIN-A
SINOMA INTERNATIONAL ENGIN-A
Building materials
Hong Kong-listed
CHINA NATIONAL MATERIALS - H
WEST CHINA CEMENT LTD
ANHUI CONCH CEMENT CO LTD-H
PRC-listed
ANHUI CONCH CEMENT CO LTD-A
Stock code
Market Cap
(USD m)
1829 HK Equity
3339 HK Equity
1157 HK Equity
3,467
816
6,998
10.45
10.07
19.44
8.53
8.55
14.74
1.63
0.71
0.72
1.46
0.66
0.70
3.7
3.0
2.1
4.3
3.5
1.8
600031 CH Equity
000157 CH Equity
000680 CH Equity
000528 CH Equity
000425 CH Equity
9,982
6,998
1,329
1,876
4,657
35.81
29.66
103.08
48.74
18.70
24.55
20.40
-35.26
37.52
15.68
2.50
1.10
n.a.
1.25
1.23
2.35
1.06
n.a.
1.21
1.15
1.3
1.0
n.a.
0.8
0.5
1.7
1.1
n.a.
0.9
0.6
1186 HK Equity
390 HK Equity
1800 HK Equity
1766 HK Equity
6199 HK Equity
3311 HK Equity
1618 HK Equity
1893 HK Equity
23,141
26,082
27,570
25,552
24,283
5,741
11,204
888
7.85
9.87
8.47
19.40
17.19
12.54
8.57
7.78
7.33
8.83
7.75
16.49
15.07
9.88
6.05
7.72
0.98
1.07
1.09
2.67
2.05
2.31
0.69
0.45
0.88
0.97
0.97
2.34
1.87
1.97
0.62
0.44
1.9
1.6
2.8
1.5
1.7
2.4
2.3
1.8
2.1
1.8
3.1
1.8
2.0
2.9
3.4
1.8
601186 CH Equity
601390 CH Equity
601800 CH Equity
601766 CH Equity
601299 CH Equity
601618 CH Equity
600970 CH Equity
23,141
26,082
27,570
28,770
25,552
24,283
11,204
13.80
17.22
14.29
7.47
30.02
27.41
19.05
12.85
15.32
12.96
6.49
25.62
23.31
13.33
1.72
1.90
1.85
1.31
4.15
3.25
1.61
1.55
1.69
1.64
1.13
3.57
2.98
1.47
1.1
0.9
1.8
2.8
1.0
1.2
1.0
1.2
1.0
2.0
3.1
1.1
1.4
1.5
1893 HK Equity
2233 HK Equity
914 HK Equity
888
483
17,389
7.78
11.37
9.74
7.72
7.03
9.12
0.45
0.58
1.73
0.44
0.54
1.52
1.8
1.8
2.1
1.8
3.1
2.3
600585 CH Equity
17,389
8.99
8.26
1.66
1.44
2.4
2.7
17.12
12.81
15.61
11.44
1.28
0.88
1.23
0.84
2.4
3.4
2.7
3.8
23.48
21.76
2.76
2.53
2.4
2.5
Infrastructure Operators
Hong Kong-listed
CHINA MERCHANTS HLDGS INTL
144 HK Equity
9,581
COSCO PACIFIC LTD
1199 HK Equity
4,268
PRC-listed
SHANGHAI INTERNATIONAL POR-A
600018 CH Equity
23,822
Source: BOCOM International, Bloomberg *closing price as at 17th Feb 2015
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––––– PER(x) –––––
FY14E
FY15E
––––– PBR(x) –––––
FY14E
FY15E
– Dividend Yield% –
FY14E
FY15E
2
One Belt One Road Initiative
18 February 2015
One Belt One Road – A development plan, and a diplomatic strategy
The world’s attention was drawn to the “One Belt One Road” initiative expounded by
President Xi Jinping when he announced the establishment of the US$40bn Silk Road
th
Fund at the APEC Economic Leaders’ Meeting on 11 November 2014. However, the
“One Belt One Road” initiative is not something new that President Xi suddenly dreamt
up. In September and October 2013, President Xi already unveiled the Silk Road
st
Economic Belt and 21 Century Maritime Silk Road ideas when he visited Kazakhstan and
Indonesia, respectively.
The “One Belt One Road” initiative has two components. According to Xinhua News
Agency, the land-based “New Silk Road” will begin in Xian in central China before
stretching west through Lanzhou (Gansu province), Urumqi (Xinjiang), and Khorgas
(Xinjiang), which is near the border with Kazakhstan. The Silk Road then runs southwest
from Central Asia to northern Iran before swinging west through Iraq, Syria, and Turkey.
From Istanbul, the Silk Road crosses the Bosporus Strait and heads northwest through
Europe, including Bulgaria, Romania, the Czech Republic, and Germany. Reaching
Duisburg in Germany, it swings north to Rotterdam in The Netherlands. From
Rotterdam, the path runs south to Venice, Italy — where it meets up with the equally
ambitious Maritime Silk Road.
The Maritime Silk Road will begin in Quanzhou in Fujian province, stopping at Guangzhou
(Guangdong province), Beihai (Guangxi), and Haikou (Hainan) before heading south to
the Malacca Strait. From Kuala Lumpur, the Maritime Silk Road heads to Kolkata, India,
then crosses the rest of the Indian Ocean to Nairobi, Kenya. From Nairobi, the Maritime
Silk Road goes north around the Horn of Africa and moves through the Red Sea into the
Mediterranean, with a stop in Athens before meeting the land-based Silk Road in Venice.
Figure 2: Silk Road Economic Belt & 21st Century Maritime Silk Road
Source: BOCOM Int’l, based upon Xinhua News
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3
One Belt One Road Initiative
18 February 2015
st
The Silk Road Economic Belt and 21 Century Maritime Silk Road combined will create a
massive loop linking three continents. There are more than 40 countries on the two
new Silk Roads, with a total population of 4 billion (about 63% of the world’s population)
and aggregate GDP of US$20 trillion (29% of the world’s total), according to Xinhua News
Agency.
The new Silk Roads aim to realize economic cooperation through
interconnection among the countries by linking their transportation infrastructures,
deploying port resources, and facilitating convenient transport.
Implication on international relations
Apart from economic cooperation, the One Belt One Road initiative under the leadership
of China aspires to deepen linkages between China and its neighbors via trade,
investment, energy, infrastructure, and internationalization of RMB, according to Foreign
Policy. It is also suggested by Foreign Policy that the One Belt One Road initiative is the
response of China to the Trans-Pacific Partnership (TPP) promoted by the United States.
This strategic objective is clearly underlined by the diplomatic visits of President Xi Jinping
to various countries covered by the two Silk Roads between September 2013 and
September 2014 before the APEC meeting in November 2014. All these visits, in one
way or another, were done by President Xi to garner support for his One Belt One Road
program.
The US$40bn Silk Road Fund is only a new proposal in addition to the Asian Infrastructure
Investment Bank proposal that 21 countries have already joined. The diplomatic visits
yielded positive outcome. Over 50 countries responded positively to the One Belt One
Road initiative, according to various news reports.
According to The Diplomat, China also hopes to foster closer cultural and political ties
with each of the countries along the Silk Roads, resulting in a new model of “mutual
respect and mutual trust.” The Silk Roads create not merely an economic trade route,
but also a community with “common interest, fate and responsibilities”. It also
represents China’s visions of an interdependent economic and political community
stretching from East Asia to Western Europe.
Economic benefits in a nutshell
There are also enormous economic benefits to be reaped from the One Belt One Road
initiative by China. According to Xinhua News Agency, the Silk Road will bring “new
opportunities and a new future to China and every country along the road that is seeking
to develop”. In short, the Silk Roads will create an “economic cooperation area” that
stretches from the Western Pacific to the Baltic Sea.
Obviously, infrastructure (especially railways and ports) will be built along the routes.
More than simply speedy transportation, China envisions a trade network where “goods
are more abundant and trade is more high-end”, according to Xinhua News Agency.
Moreover, China expects the economic contact along the Silk Roads to boost productivity
in each country and offer technological assistance to key countries.
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4
One Belt One Road Initiative
18 February 2015
Figure 3: Ranking of China’s trading partners in Asia
Number
Country/Region
Exports(US$ million)
1
Hong Kong SAR
384,495
2
Japan
150,132
3
South Korea
91,165
4
Vietnam
48,586
5
India
48,432
6
Malaysia
45,931
7
Singapore
45,832
8
Taiwan
40,634
9
Indonesia
36,930
10
UAE
33,411
11
Thailand
32,718
12
The Philippines
19,868
13
Saudi Arabia
18,740
14
Turkey
17,747
15
Iran
14,037
16
Kazakhstan
12,545
17
Pakistan
11,020
18
Bangladesh
9,705
19
Israel
7,645
20
Burma
7,339
Source: BOCOM International, National Bureau of Statistics
Proportion
33.90%
13.24%
8.04%
4.28%
4.27%
4.05%
4.04%
3.58%
3.26%
2.95%
2.88%
1.75%
1.65%
1.56%
1.24%
1.11%
0.97%
0.86%
0.67%
0.65%
Number
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Country/Region
South Korea
Japan
Taiwan
Malaysia
Saudi Arabia
Thailand
Indonesia
Singapore
Iran
Oman
The Philippines
Iraq
India
Vietnam
Hong Kong SAR
Kazakhstan
UAE
Kuwait
Turkmenistan
Qatar
Imports (US$ million)
183,072
162,245
156,405
60,153
53,451
38,523
31,424
30,065
25,390
21,041
18,182
17,985
16,970
16,892
16,207
16,051
12,824
9,587
8,893
8,463
Proportion
16.80%
14.89%
14.35%
5.52%
4.90%
3.53%
2.88%
2.76%
2.33%
1.93%
1.67%
1.65%
1.56%
1.55%
1.49%
1.47%
1.18%
0.88%
0.82%
0.78%
A wide spectrum of beneficiaries with keen interest in the initiative
Officials from more than 27 provinces/regions/municipalities have expressed their keen
interest to participate in the One Belt One Road initiative. Within China, about sixteen
provinces/regions/municipalities are covered by the One Belt One Road initiative. The
Silk Road Economic Belt covers Xinjing, Qinghai, Gansu, Shaanxi, Ningxia, Chongqing,
st
Szechuan, Guangxi, Yunnan and a large part of Inner Mongolia. The 21 Century
Maritime Silk Road covers Jiangsu, Zhejiang, Fujian, Guangdong, Hainan and Shandong.
In addition to the above, Heilongjiang, Liaoning and Henan have expressed keen interest
to participate in the One Belt One Road initiative.
The Leading Group for the One Belt One Road Development, which is given the
responsibility to coordinate the One Belt One Road initiative by the Chinese government,
met for the first time in early February. We believe the Chinese government may draw
up a more detailed implementation plan in the near future to realize the strategic visions
of President Xi Jinping. There are various departments within the Chinese government
that could participate in the One Belt One Road initiative, but probably in their specialized
policy areas only. The implementation plan could also centralize the efforts of various
government departments to achieve more effective results and avoid duplications of
efforts and resources at the provincial/regional levels.
On the international front, the implementation plan could lead to a string of bilateral
agreements between China and individual countries, or between China and regional
groups like the ASEAN. It could also be a regional free trade zone incorporating all the
Silk Road countries in case of a grander vision.
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5
One Belt One Road Initiative
18 February 2015
It is undeniable that some of the countries along the Silk Road Economic Belt, especially
those in Central Asia, are less developed than China in terms of infrastructure, notably
physical and telecommunications infrastructure. Central Asia is also an important
source of energy supply for China. Hence, investment in oil and gas pipeline would
likely take off under the One Belt One Road initiative, benefiting Chinese pipeline
manufacturers, such as Chu Kong Pipe (1938 HK), Zhejiang Kingland Pipeline and
Technologies (002443 CH), and Jiangsu Yulong Steel Pipe (601028 CH).
On the domestic front, we believe the Chinese government could draw up plans to
demarcate zones or regions that receive special fiscal and economic supports to
spearhead the development and implementation of the One Belt One Road initiative.
Cities or provinces could be approved to develop new transportation, regional trading,
and Silk Road financing hubs to implement the One Belt One Road initiative.
In terms of geography, the economic and social development in central and western
China lags behind eastern China, especially the coastal provinces. The implementation
of the One Belt One Road initiative could, thus, accelerate the development of central
and western China to alleviate the regional disparity within the country.
Figure 4: Regional development and livelihood indices by region, 2013
Eastern Region
Central Region
Western Region
Development and
Livelihood Index
Economic
Development Index
Livelihood
Improvement Index
Social Development
Index
Ecological
Development Index
Technology
Innovation Index
73.17%
62.35%
60.08%
83.54%
67.57%
68.89%
79.67%
69.19%
64.85%
71.04%
70.00%
67.86%
72.29%
65.94%
63.25%
49.02%
22.73%
20.62%
Source: BOCOM International, National Bureau of Statistics
Even though the official detailed implementation plan of the One Belt One Road initiative
is yet to be announced, the Chinese government has wasted no time in announcing new
infrastructure projects since the start of the year to support the economic growth. Up
to 9th February 2015, twelve infrastructure projects including highway, railway, airports,
and telecommunication systems with an aggregate investment amount of Rmb120bn
were announced. Four of these infrastructure projects are located in the western part
of China that, in our view, can easily dovetail with the One Belt One Road initiative in the
future.
Figure 5: Approved infrastructure projects located in Western China, 2015
Number
1
2
3
4
Project
Mile – Mengzi (Yunnan) Railway Project
Shangri La – Lijiang (Yunnan) Highway
Zunyi – Guiyang (Guizhou) Highway
Longnan City Airport (Gansu)
Amount (Rmbm)
9,420
20,320
22,350
1,187
Length (km)
116.4
125
147
Date
16
26
26
28
Approved
Jan 2015
Jan 2015
Jan 2015
Jan 2015
Source: NDRC
Competitive technology for internationalization
We believe several sectors of China could benefit from the One Belt One Road initiative.
In broad terms, we believe the construction machinery, infrastructure construction
(roads, railways, airports and ports) and building materials industries could benefit.
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6
One Belt One Road Initiative
18 February 2015
The construction machinery industry of China has expanded rapidly in the past decades.
The annual sales of the industry increased from Rmb77.3bn in 2002 to Rmb562.6bn in
2011. The sales amount of the construction machinery industry of China has ranked first
in the world since 2007. Sales of certain construction machines have also achieved the
world’s number one position, such as wheel-loaders, bull-dozers, road maintenance units,
excavators and mobile heavy lifting cranes. Leaders in this sector include Zoomlion
Heavy Industry (1157 HK; in the areas of cement pump & mobile crane), Lonking Holdings
(3339 HK; wheel-loaders & excavators), Sany Heavy Industries (600031 CH; various types
of construction machinery), Shantui Construction Machinery (000680 CH; bull-dozers),
XCMG Construction Machinery (000425 CH; engineering cranes), and Guangxi Liugong
Machinery (000528 CH; excavators).
Despite the setback between 2012 and 2014, when the industry reported negligible sales
growth, the industry has continued to make progress in technological innovation and
expanding international market presence. Certain products have continued to exhibit
healthy demand and corresponding sales growth in recent years, including tunnel boring
machines (TBM), heavy-duty lifting cranes and large concrete box girder lifters.
In addition to providing a comprehensive range of construction machinery for different
engineering, climatic and geographical requirements, we believe the industry can
compete against international competitors in terms of price as well as quality.
Technological innovation has helped the industry to reduce reliance on high-priced
imported components to produce high value-for-money products for international
competition. The China Construction Machinery Association expects the industry sales
growth to reach 7% YoY this year. Any positive development in the One Belt One Road
initiative can probably support a higher growth rate for the construction machinery
industry.
Engineering and construction corps are well qualified
One of the major contributors to the export of construction machinery is indeed the
construction enterprises engaged for overseas construction projects. Many Chinese
engineering companies have gone overseas for various types of projects, including the
construction of infrastructure such as roads, railways and ports, construction of open cast
or underground mines, and erection of in-situ equipments such as asphalt mixing-plants
and cement kilns.
During the EPC (engineering, procurement and construction) cycle, a lot of construction
machines will be required in the construction phase. In our view, the PRC-based
companies, due to historical reasons as well as cost consideration, would more likely
bring with them the construction machinery made by the Chinese manufacturers,
whenever possible. This provides ample opportunities for the construction machinery
industry to expand international sales if the PRC-based construction companies are able
to win infrastructure construction projects covered by the One Belt One Road initiative.
In this respect, the leading PRC construction/EPC companies are very competitive as the
domestic market has provided them with a lot of engineering challenges as credentials
for international competition. For example, China has the largest high-speed railway
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7
One Belt One Road Initiative
18 February 2015
network in the world in terms of mileage. Besides, the climatic challenges as well as the
significant geographical differences in various parts of China have equipped the railway
construction companies with substantial experience in high-speed as well as
normal-speed railway construction.
Figure 6: Development of China’s transport infrastructure (‘000km)
Year
Railway
Operating Mileage
Road Mileage
1990
58
1995
62
2000
69
2005
75
2010
91
2013
103
Source: BOCOM International, National Bureau of Statistics
Inland
Waterways Mileage
Oil&Gas
Pipeline Mieage
109
111
119
123
124
126
16
17
25
44
79
100
1,028
1,157
1,403
3,345
4,008
4,356
Urban Rail Mileage
Total
0.43
1.5
2.5
1,210
1,350
1,620
3,590
4,300
4,690
The leading Chinese railway engineering companies as well as the rolling stock
manufacturers such as China Railway Group (390 HK), China Railway Construction (1186
HK), CSR Corps (1766 HK) and China CNR Corp (6199 HK) should be able to benefit the
most from the railway infrastructure projects, in our view.
Also, China is leading the world in terms of the number of high-tensile steel suspension
bridges. The road and bridge construction companies are, thus, very knowledgeable
about dealing with extreme projects. China Communications Construction (1800 HK),
China State Construction International (3311 HK) and China State Construction
Engineering (601668 CH) would likely benefit the most from investment in new roads and
bridges. China National Materials (1893 HK) competes successfully to provide in-situ
engineering services for cement manufacturing equipment internationally.
Substantial navigation channel and port construction works completed in the past
decades have also equipped the marine engineering companies in China to compete in
the international arena. China Communication Construction, equipped with a strong
fleet of dredgers, is a reputed builder of ports and terminals both in China and overseas.
Solving overcapacity - partly only
One of the much talked about benefits from the One Belt One Road initiative is the
possibility for the projects, especially the material-intensive infrastructure projects, to
resolve the overcapacity of various industries within China. To a certain extent, we
believe this is possible, particularly for projects within the Chinese territory as well as
high-value metal products such as steel and aluminum. However, it could be difficult to
ship low-value materials, such as cement, over long distances, particularly for Central
Asian destinations.
Hence, in the case of engineering projects under the One Belt One Road initiative within
China, cement producers in the proximity of the project sites, such as the Silk Road area
in northwestern China, could benefit most, in our view. Hence, cement companies
focusing on the northwestern China market such as West China Cement (2233 HK) should
benefit.
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8
One Belt One Road Initiative
18 February 2015
Indeed, some leading cement producers, in preparation for the forthcoming
opportunities to be created by the One Belt One Road initiative, have already started to
invest in new capacity overseas, such as Anhui Conch Cement (914 HK) in Indonesia.
Alternatively, cement producers also pursue opportunities in the form of minority
investment in local producers of potential project countries. This, however, does not
help to alleviate the overcapacity problem within China.
PPP could benefit Chinese infrastructure operators
In order to kick start the One Belt One Road initiative, China announced the
establishment of a US$40bn Silk Road Fund in November 2014. This is in addition to the
US$50bn contribution by the Chinese government to the registered capital (US$100bn) of
the new Asia Infrastructure Investment Bank established in October 2014.
Notwithstanding the generous contribution by China, compared with the US$8 trillion
required for infrastructure investment, including energy, transport, telecommunications,
water, and sanitation during 2010-2020 in Asia and the Pacific, as estimated by the Asia
Development Bank (ADB), all these amounts contributed by the Chinese government
seem to be insufficient. We also fully acknowledge that the geographical coverage of ADB
is different from that of the One Belt One Road initiative.
The main issue here is that, given the limited size of funding from the abovementioned
entities compared with the required funding, a lot of the infrastructure investment for
the implementation of the One Belt One Road initiative would probably need to be
funded by means of Public-Private Partnership (PPP), in our view.
BOT
(Build-Operate-Transfer) is a common form of PPP that allows the private sector to
provide the necessary capital investment for the relevant projects. The private
enterprises have profit consideration and projects must be financially viable for the
investing enterprises.
There are companies listed in Hong Kong and China stock exchanges with expertise in
operating infrastructure projects. Some of them are experienced in operating overseas
infrastructure projects, notably port operations. Some of the PRC-based infrastructure
construction companies have also invested in BOT highway projects in mainland China.
All in all, we do not see any reason why these companies could not participate in PPP
projects available from the One Belt One Road initiative.
Among the different types of infrastructure, Chinese port operators such as COSCO
Pacific (1199 HK), China Merchants Holdings International (144 HK) and Shanghai
International Port (600018 CH) have extensive experience in managing overseas
st
concessions. News projects along the 21 Century Maritime Silk Road could offer
attractive opportunities for these companies. For example, China Merchants Holdings
International has just signed a contract to develop and operate a terminal near Port of
Colombo, Sri Lanka.
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One Belt One Road Initiative
18 February 2015
Chinese players to benefit
The companies listed in Figure 1: Valuation comparison table are the companies that we
believe can benefit from the One Belt One Road initiative once it enters the stage of
implementation. While it is difficult to estimate the actual amount of benefits accrued
to these companies from the One Belt One Road initiative, we believe the Chinese
companies have very good chance to share a good portion of the related infrastructure
investment, as:
the Chinese government has a leading role in the initiative as well as the Silk Road
Fund and the Asia Infrastructure Investment Bank;
the Chinese construction machinery industry is able to offer price-competitive
products for use in infrastructure construction even amidst severe conditions;
the PRC-based infrastructure construction companies have already entered the
international arena and some of them have great experience in providing
state-of-the-art engineering and construction services for railway construction; and
some of the HK and China-listed infrastructure operators have already entered the
international infrastructure market through PPP programs.
Risks
The One Belt One Road initiative is a major development strategy with tremendous
opportunities for the Chinese companies to benefit, in our view. However, there are
also inherent risks attached to such strategy. For example, some of the regions along
the Silk Road Economic Belt are not politically stable. Some of these governments are
also not very effective in terms of governance. Hence, infrastructure built in these
countries bears the risk of sabotage.
Infrastructure built under PPP programs requires good financial discipline as well as
careful budgeting. However, some of the countries with PPP projects could be subject
to foreign exchange risks that disrupt return performance. Participating private sector
enterprises will need to have the mechanism to weather these risks.
Even though we think the Chinese government will lead and probably be the anchor in
providing development finance for some of the infrastructure projects of the two Silk
Roads, a true and fair tender procedure could still be used for open competition. The
Chinese companies would still need to compete for the projects on their own competitive
strength.
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One Belt One Road Initiative
18 February 2015
BOCOM International
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liwenbing
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yufan.zhang
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Consumer Staples
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alfred.lau
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luella.guo
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louis.sun
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lizhiwu
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miles.xie
Geoffrey CHENG, CFA
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geoffrey.cheng
Fay ZHOU
(852) 2977 9381
fay.zhou
(86) 21 6065 3675
wei.yao
Renewable Energy
Healthcare
Louis SUN
Telecom & Small/ Mid-Caps
Milo LIU
Insurance & Brokerage
Zhiwu LI
Technology
Internet
Miles XIE
Transportation & Industrial
Metals & Mining
Jovi LI
Alfred LAU, CFA, FRM
Automobile
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One Belt One Road Initiative
18 February 2015
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