China Merchants Securities released a research report stating that new regulations for existing PPP projects have been introduced, which will help promote construction progress of existing projects and resolve construction companies' PPP-related operational debt. The firm emphasizes the importance of financially stable, undervalued state-owned and central enterprises under a "more proactive" fiscal policy framework, where fundamental improvements and enhanced market value management could drive valuation recovery. The report highlights three pathways for the industry to break through bottlenecks as it gradually matures. Recommended stocks include China State Construction Engineering (601668.SH), CHINA RAILWAY (601390.SH, 00390), China Communications Construction (601800.SH), and Honlu Steel Structure (002541.SZ).

**Funding Availability**: Fixed asset investment funds showed cumulative growth of 1.0% in January-July. The cumulative growth rate of actual funds for fixed asset investment reached +1.0% (down 1.8 percentage points from January-June, up 3.3 percentage points from full year 2024). State budget funds increased by +9.4% (down 5.4 percentage points from January-June, up 0.9 percentage points from full year 2024). Given the marginal improvement in July fiscal revenue and expanded broad deficit for the full year, budget funds under fixed investment are expected to maintain current growth rates.

According to the Ministry of Finance, general public budget revenue and government fund revenue growth rates were +0.1%/-0.7% respectively in January-July (compared to -0.3%/-2.4% in January-June). As of August 25, cumulative new issuance of general bonds and special bonds reached approximately 620.8 billion yuan and 3.263 trillion yuan respectively, with issuance progress at 77.6% and 74.2%, accelerating by 6.3 and 8.0 percentage points compared to the same period last year.

**New Contracts and Project Starts**: New construction contracts face pressure while project starts maintain positive growth. This reflects construction companies' abundant existing project inventory, supporting the assessment that "work focus leans toward initiating construction of existing projects with good funding conditions." For new contracts, construction industry new signings declined by -1.6% year-over-year in H1 2025 (improving 2.0 percentage points from the previous quarter, down 1.9 percentage points from full year 2024). For project starts, cumulative project investment reached 24.2 trillion yuan in January-July, with cumulative growth of +8.8% (down 0.9 percentage points from January-June, up 41.6 percentage points from full year 2024).

**Workload**: Growth rates in energy, transportation, and water conservancy sectors all showed marginal weakening. Physical workload indicators showed weakening construction material production, while steel and glass prices improved slightly month-over-month. Production-wise, July output for cement/steel/glass/petroleum asphalt declined by -6.4%/-4.2%/-2.8%/-2.5% respectively month-over-month. Price-wise, cement and petroleum asphalt prices fell -1.7% and -1.3% respectively in July, while steel prices rose +2.1% and glass prices increased +4.1% compared to the four-week average.

Broad infrastructure investment growth reached 7.3% in January-July (down 1.6 percentage points from January-June, down 1.9 percentage points from full year 2024), showing slight deceleration. Fixed asset investment completion reached 28.8 trillion yuan in January-July, up +1.6% year-over-year (down 1.2 percentage points from January-June, down 1.6 percentage points from full year 2024). Real estate, manufacturing, and infrastructure investment grew by -12.0%, +6.2%, and +7.3% respectively.

Within infrastructure subsectors: Power, heat, gas and water production and supply grew +21.5% (down 1.3 percentage points from January-June), with power and heat remaining investment priorities; Transportation, storage, and postal services grew +3.9% (down 1.7 percentage points from January-June), maintaining low growth; Water conservancy, environment, and public facility management grew +2.0% (down 1.5 percentage points from January-June), with water management showing significant acceleration since June last year, benefiting from accelerated national major water conservancy projects.

**Investment Recommendations**: (1) Focus on financially stable, undervalued state-owned and central enterprises under "more proactive" fiscal policy, where fundamental improvements and enhanced market value management drive valuation recovery; (2) Monitor three pathways for industry bottleneck breakthrough: superior business models and brand advantages in competitive markets; incremental demand opportunities in energy and water conservancy construction, western development, and overseas markets; developing new productive forces through clean room engineering, low-altitude economy planning and consulting, and data elements; (3) Recommended stocks include China State Construction Engineering, CHINA RAILWAY, China Railway Construction, China Communications Construction, Honlu Steel Structure, and China National Materials International.

**Risk Warnings**: Policy implementation below expectations, infrastructure investment funding shortfalls, slower workload conversion, intensified industry competition, accounts receivable collection difficulties, and geopolitical risks.