Guosheng Securities: Q2 revenue performance decline narrows, marginal improvement in cash flow in the construction and decoration industry.

Guosheng Securities released a research report stating that the economic data from January to July shows that the current issue of inadequate demand remains the core problem. It is expected that fiscal policy will be strengthened in the second half of the year, which is likely to boost sector revenues and achieve repair in performance on a low base. In addition, major projects such as Yaxia Hydroelectric and Xinjiang-Tibet Railway have been launched, indicating a clear trend of central leverage. It is expected that more major projects and regional key development strategies will be implemented in the future to stabilize overall infrastructure investment and total demand. It is recommended to focus on policy support directions such as Xinjiang/strategic hinterland, and continue to recommend: 1) undervalued state-owned enterprise leaders; 2) Xinjiang coal chemical EPC leaders. In addition, it is also recommended to focus on curtain wall high dividend leaders, steel structure leaders, and clean room leaders. The main points of Guosheng Securities are as follows: Performance overview: Revenue performance continues to be under pressure, Q2 decline narrowed Overall revenue of listed construction companies in 25H1 decreased by 5.7% (Q1/Q2 decreased by 6.1%/5.3% respectively). Revenues continued to be under pressure, mainly due to: 1) slowing down of infrastructure projects due to local fiscal constraints domestically, combined with the continued downturn in the real estate industry, maintaining low demand for construction; 2) international engineering sectors were impacted by high base numbers in EPC projects, trade and other businesses, leading to a decline in revenue. Only the power/chemical engineering sectors saw a year-on-year growth in revenue in Q2. The overall net profit of the construction industry in H1 decreased by 6.2% (Q1/Q2 decreased by 8.7%/3.5% respectively), with a narrower decline compared to the previous period, mainly due to the steady release of impairment risks, with a decrease in impairment losses provisioned in Q2 of 27 billion yuan, accounting for 6% of net profit). The performance of central and local construction companies improved in Q2 compared to Q1; the decoration and landscaping sectors saw significant performance improvement on a low base. Profitability: Impairment pressure significantly eased, net profit margin remained stable The gross profit margin of the sector decreased by 0.2 percentage points in 25H1, mainly due to a decrease in the proportion of investment projects with relatively high profitability and the drag from real estate operations; the expense ratio remained relatively stable with a decreasing trend in sales management expenses under reduced revenue, indicating favorable control; the impairment scale decreased significantly compared to 24H1 (a decrease of 17%), accounting for a 3 percentage points decrease in net profit, mainly benefiting from: 1) a reduction in impairment provisions previously impacted by credit shocks in real estate, with the peak of real estate bad debt impairments having passed; 2) leading central state-owned enterprises strengthened management of engineering and investment project repayments. The net profit margin in H1 was 2.34%, roughly stable year-on-year; a slight increase in Q2, up by 0.05 percentage points year-on-year. Asset and operational quality: Turnover slowed down, cash flow slightly improved At the end of Q2, both the year-on-year and quarter-on-quarter asset-liability ratios of the sector increased, mainly due to relatively tight local government funds, coupled with a relatively loose financing environment leading to an increase in liabilities. Inventory/accounts receivable turnover decreased by 0.05/0.23 percentage points, with widespread tightness in owners' funds and a decline in project settlement and repayment efficiency. The net cash outflow from operating activities in the construction industry in H1 was 496.9 billion yuan, a decrease of 225 billion yuan year-on-year; in Q2, it decreased by 325 billion yuan year-on-year, mainly due to the implementation of support policies such as debt conversion, and a slowdown in project commencement leading to a reduction in some expenses. Due to the impact of slow turnover, the sector's ROE continued to decline, reaching 3.46% in H1, a decrease of 0.43 percentage points year-on-year. Contract signings: Improvement in infrastructure contract signings in Q2, strong growth in overseas orders The nine major central enterprises signed new contracts worth 7.8 trillion yuan in 25H1, an increase of 0.2%, performing better than the overall industry which saw a 6% decrease in contract signings in H1. The competitive advantage of leading companies continues to be demonstrated; contract signings in Q2 increased by 2%, with a slight acceleration. By region, domestic/foreign contract signings of the eight major central enterprises (excluding nuclear construction) decreased by -2%/+16% year-on-year in H1 (increased by 1%/10% in Q2), with domestic signings expected to continue to be affected by traditional infrastructure and real estate sectors; overseas contract signings maintained rapid growth. Risk warnings: Risks of unforeseen macroeconomic policies, operational risks overseas, risks of reduced accounts receivable, etc.