Fitch: Slow Recovery in China Building Materials & Construction

Fitch Ratings expects a slow recovery in China construction demand, driven by a pick-up in housing construction activities and stable infrastructure construction. Consolidation should increase in the cement industry, which will benefit long-term profitability. The earnings outlook is stable, supported by a strong order backlog. Credit metrics will benefit from better project funding and lower finance costs.

Infrastructure construction should maintain its growth momentum in 2016, with the projects approved in 2014 and 2015 coming to fruition. The agency sees housing construction in first-tier cities rising from a low base in 2015. However, we do not expect a significant recovery nationwide, given the weak property sales in second- and third-tier cities.

Fitch expects stable profitability for construction companies, thanks to their strong order book/revenue ratio. Revenue growth should average 10%-15% in 2016, with the EBITDA margin remaining at 5%-10%. Liquidity will be boosted by spin-offs and hybrid financing by issuing perpetual bonds and preference shares. China's interest-rate cuts will also assist in reducing financing costs.

It is in government's interest to increase project returns to attract social capital to invest in infrastructure. Government has started to promote public private partnerships to leverage private capital.