China Securities Co., Ltd.: Construction performance under pressure, cash flow continues to improve; focus on high-dividend and high-prosperity directions.

China Securities Co., Ltd. released a research report stating that in the first half of 2026, the construction and decoration industry achieved revenue of RMB 3.62 trillion, down 9.2% year-on-year, and net profit attributable to parent companies of RMB 68.38 billion, down 25.5% year-on-year. The decline in profit exceeded the decline in revenue, mainly due to rising expense ratios and increased impairment losses, with both revenue and profit declines widening in the second quarter. Industry operating cash flow saw a year-on-year reduction in outflow of RMB 78.61 billion, and the cash collection ratio increased by 4.2 percentage points from the same period last year to 99.4%. The trend of cash flow improvement has been established, and 21 companies have announced interim dividends. Chemical engineering revenue was basically flat, cleanroom performance grew rapidly, decoration and renovation turned losses into profits, and steel structure gross margins rebounded. The eight major central SOEs saw new contract signings decline 11.0% year-on-year, while their market share rose to 58.5%. Overseas new signings increased 6.9% year-on-year, with their proportion rising to 15.2%. It is recommended to focus on high-dividend yield targets, as well as high-prosperity directions such as chemical engineering and cleanrooms. The main views of China Securities Co., Ltd. are as follows: In the first half of the year, construction and decoration industry revenue and performance came under pressure, while gross margins rebounded In the first half of 2026, the construction industry's new contract value reached RMB 11.98 trillion, down 14.1% year-on-year; total output value reached RMB 11.94 trillion, down 12.7% year-on-year. Listed construction and decoration companies collectively achieved revenue of RMB 3.62 trillion, down 9.2% year-on-year, and net profit attributable to parent companies of RMB 68.38 billion, down 25.5% year-on-year. The decline in profit exceeded the decline in revenue, mainly due to rising expense ratios and increased impairment losses. In the second quarter alone, revenue and net profit attributable to parent companies declined 12.2% and 35.8%, respectively, both weakening compared with the first quarter. Total impairment losses amounted to RMB 27.61 billion, with RMB 1.35 billion more provisioned year-on-year, of which asset impairment increased 58.3% year-on-year. Gross margin rebounded to 10.2%, and half-year ROE was 2.5%, still in the historical bottom range. Cash flow continued to improve, and interim dividends continued In the first half of 2026, the industry's net operating cash flow outflow was RMB 424.39 billion, with outflow reduced by RMB 78.61 billion year-on-year, and the cash collection ratio was 99.4%, up 4.2 percentage points from the same period last year. The eight major central SOEs collectively reduced outflow by RMB 68.70 billion, serving as the main force behind the industry's improvement. Net investing cash flow outflow was RMB 104.84 billion, with outflow reduced by RMB 19.11 billion year-on-year, as companies continued to scale down investment. In terms of dividends, 21 companies have announced interim dividends for 2026, of which 15 are continuing interim dividends from the previous year. Targets with current dividend yields exceeding 5% include Changjiang & Jinggong Steel Building, China State Construction Engineering Corporation, Sinoma International Engineering, Anhui Construction Engineering Group Corporation, and Sichuan Road & Bridge Group. Segment operations diverged, with overseas new signings as the core incremental driver By segment, in the first half, chemical engineering revenue declined 0.8% year-on-year, the smallest decline among all segments. The cleanroom segment benefited from semiconductor capacity expansion and AIDC computing center construction, with leading companies achieving high revenue and performance growth. L&K Engineering's net profit attributable to parent companies increased 204.8% year-on-year. The steel structure segment saw gross margin rebound, and decoration and renovation turned losses into profits in the first half. In the first half, the eight major central SOEs' total new signings declined 11.0%, with market share of approximately 58.5%, up 2.0 percentage points from the same period last year. Among these, overseas new signings grew 6.9%, accounting for 15.2% of total new signings, up 2.6 percentage points from the same period last year. Recommend focusing on three main lines: high-dividend construction, high-performing high-prosperity, and "six networks" construction Some construction companies have strong dividend sustainability. It is recommended to focus on companies such as China State Construction Engineering Corporation, Sinoma International Engineering, and Jangho Group; high-performing high-prosperity specialized engineering companies, it is recommended to focus on China National Chemical Engineering, Anhui Honglu Steel Construction, and Holsin Engineering Consulting Group; the construction of the "six networks" continues to accelerate, and it is recommended to focus on infrastructure central SOEs such as China Railway, China Communications Construction, China Energy Engineering Corporation, and Shanghai Tunnel Engineering. Risk analysis 1. Construction progress is greatly affected by fund availability and natural conditions, and delays may occur, thereby affecting revenue recognition; overseas engineering construction progress is also affected by local political and security environments. 2. The continued downturn in the real estate market may cause adverse effects on construction companies in multiple aspects. 3. New energy business expansion may fall short of expectations. Some traditional construction companies are deploying in new areas such as new energy consulting, engineering, and operations, and there may be risks of expansion failure.