Infrastructure construction sector – Powered up by strong backlog

• Most of listed infra construction companies recorded positive revenue growth in 1Q23 and but their net margin dropped yoy mainly due to a lack of one-off gained profit and higher interest expenses.
• Expectations of strong public investment disbursement and high backlog value will help infra construction companies break through in terms of revenue and operating profit in the 2023-25F period.
• We believe that the North-South Expressway Phase 1 & 2 projects will be the main growth drivers for construction companies in 2023-25F.

Government accelerates disbursement of infra development in order to support economy expansion
Since early 2023, Vietnam’s government has stepped up public investment to support economic growth amid weak private investment and FDI inflows. Thus, we maintain our forecast that the implemented state capital to increase by 25% compared to the actual 2022 figure. We believe that infra construction companies will benefit from this trend. In fact, the backlog value of the leading companies increased significantly in 1Q23, equivalent 3.7x-6.0x compared to annual revenue in 2021-22 period.

2023 outlook: Negative bottom line growth despite promising top line
In FY23F, most of listed infra construction companies aimed for revenue growth recovery but were still concerned about the bottom-line growth due to a lack of one-off gained profit. Regarding 1Q23 business results, infra construction companies’ revenue increased by 35% yoy but net profit decreased by 83% yoy mainly due to a lack of one-off gains and higher interest expense.

Financial health will determine the profitability of infra construction companies
We believe that only construction companies with good construction capacity, reasonable machinery mobilisation and abundant working capital can ensure profitability at the North-South Expressway project due to (1) requiring a short construction period; and (2) a fixed profit margin to the project based on the bid price assigned by the Government. At the end of 1Q23, average net debt/equity ratio of infra construction companies was 1.1x. Notably, LCG’s net debt/equity ratio was only 0.01x. Meanwhile, excluding the debt in Nam Ben Thuy 2 BOT project, the net debt/equity ratio of C4G was 0.5x at the end of 1Q23.

We believe C4G and LCG are top beneficiaries of the infra investment booming
Downside risks include: (1) disbursement of public investment is slower-than- expected, (2) shortage of raw materials due to slower-than-expected mining license.
Potential catalyst is raw material prices are lower-than-expected, supporting infra construction companies’ gross margin.

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