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“The global infrastructure construction market is expected to double in 10-years’ time, reaching approx. USD 9Tn” says Richard Miratsky, Head of the Corporates Analytical Team. “Despite sovereign budget constraints, we expect the stable European and American infrastructure sectors to provide good risk mitigation for the infrastructure project portfolios of European construction companies. China and India will remain the main growth-driving territories due to a continuous need for additional infrastructure spending, commanded by demographic and urban developments. We expect the share of the Asia-Pacific region to exceed 50% of the industry’s total revenues within the next decade”, continues Mr Miratsky.
“The growth of China’s infrastructure spending is expected to slow down and in the medium term reach growth averages of GDP. However, we expect the Chinese government to maintain its intensive promotion of infrastructure projects, aimed to improve mobility and connectivity both domestically and within the Euro-Asian region. This is evidenced by the AIIB foundation and the governments’ strong commitment to the One Belt and One Road initiative, supported by the USD 50Bn Silk Road Fund”, concludes Mr Miratsky.
“The expected rise of the urban population mainly in Asia, which should reach 52% of the global urban population by 2050, together with the further development of megacities, population-aging and climate-disaster prevention are the strategic pillars of the future development of the infrastructure construction sector. In China alone, Fixed Assets Investments (FAIs) surpassed USD 8Tn in 2014, as the Chinese government is clearly utilising FAIs as one of the main pillars to maintain growth”, adds Marta Bevilacqua, Director of the Corporates Analytical Team. “Despite high barriers to entry, fast-growing emerging markets could present attractive risk-reward opportunities for European players that possess strong know-how and expertise”, concludes Ms Bevilacqua.
Main findings:
·We expect the infrastructure sector to double its value in 10 years, rising from USD 4Tn to approx. USD 9Tn. Demand will be driven by fast-developing countries, with developed economies maintaining a fairly stable level of investment. In the long term we expect the Asia-Pacific region to have a weighting of more than 50% of total sector revenues, and developed countries’ weighting to shrink to 30-35%.
·China presents the world’s highest ratio of investments over GDP, which as of the end of 2014 was 47%. We expect China’s expenditure in infrastructure to remain the highest, but the sector’s growth is expected to slow down to reach averages in line or slightly lower than GPD annual change. In 2008-10 the average growth for Chinese FAIs amounted to approx. 33% yoy, at end-2014 it had fallen to 14.6% yoy, and we expect it to further decrease and follow the same trend as GDP growth.
·Infrastructure works are extremely capital intensive and need extensive financing which can be hard to source. For developed countries additional funding via national debt can be constrained due to already high deficits and sovereign indebtedness. Lower-than-average debt level allows emerging economies to potentially further leverage their national accounts. However, investors require higher yields, reflecting higher economic and political risks.
·The global infrastructure construction industry is primarily influenced by global urbanisation trends. By 2050 the global population living in urban areas will grow to approx. 6.3Bn, a +61.5% increase if compared to 3.9Bn inhabitants in 2014. This will lead to a very strong infrastructure demand especially from fast-growing economies. The biggest cities in the world are already located in the East and we expect a progressive increase in megacities in this area. Therefore, new infrastructure and services will need to be developed to increase capacity and connections.
·Protection against climate changes and natural disasters are a new opportunity for infrastructure construction companies. Risk prevention projects will provide further opportunities for the sector to grow and to strengthen specific expertise.
·In China, the One Belt and One Road initiative together with greater infrastructure needs is expected to fuel the infrastructure spend. The continuing need for further improvement in Chinese infrastructure is expected to offer good market opportunities for companies with high expertise and technical skills.
·Our peer group of European construction companies is generally well-positioned within the low-investment and the high spec-grade range, after considering both qualitative and quantitative factors. Although intrinsically different, Vinci and Skanska both position strongly among construction peers due to their solid business profiles and successful strategies. We see Balfour Beatty as the weaker peer due to its need to streamline its business model and strategy, coupled with a very disappointing financial performance which is now draining cash. This is the result of unsuccessful post-merger integration processes.
·Total outstanding bonds for our European peer group for this specific industry amount to approx. EUR 20Bn. The industry’s bond maturity schedule is showing a first concentration of bond expiries in 2018 for a total of approx. EUR 3.3Bn, when all the European peers will see at least one of their bonds or convertible notes mature. The only frequent issuer is Vinci, representing approx. 61% of the issuances currently outstanding. Traded instruments represent more than 40% of the total debt undertaken by the selected peer group.