Construction Industry: The Middle East Reconstruction Begins, Leading State-owned Construction Enterprises Accelerate Toward a Trillion-Yuan New Battlefield

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I. What happened? — Industry "downsizing" intensifies, overseas expansion becomes the only bright spot for "breaking the deadlock"

Entering the first year of the "15th Five-Year Plan", the construction industry has not seen the expected recovery, but has instead fallen into deeper structural adjustments. Reviewing 2025 and the first quarter of 2026, the dual weakness in domestic infrastructure and real estate demand has compelled the industry to shift from "investment-driven" growth to "high-quality development", a transformation accompanied by intense pain.

1. Domestic business: Downsizing continues, impairment clear-out

2024 was defined as the "first year of downsizing" for central construction state-owned enterprises (SOEs), a trend that not only continued but accelerated in 2025. According to Changjiang Securities statistics, the overall construction sector (167 companies) achieved revenue of 8.21 trillion yuan in 2025, a decrease of 5.7% year-on-year; net profit attributable to parent company was 129.9 billion yuan, down 23.4% year-on-year. Notably, gross margin fell and expense ratio rose, net margin dropped to 1.6%, and ROE declined by 1.8 percentage points year-on-year.

Into Q1 of 2026, things did not improve. Sector revenue fell another 6.1%, and profits dropped 15.1%, with gross margin hitting a recent low of 9.1%. Two main factors contributed to this: (1) The traditional infrastructure market is saturated, and local government fiscal pressures led to PPP project reductions and insufficient new project increments; (2) Historical burdens are being cleared out more quickly. Total asset and credit impairment losses in 2025 across the industry reached 133 billion yuan, a record high. This indicates that central SOEs are using the window at the end of the 14th Five-Year Plan to defuse risks so they can move forward lightly into the 15th Five-Year Plan.

Specific to the eight major central SOEs, in 2025 only China National Chemical Engineering (+13.2%) saw positive net profit attributed to the parent, while the rest such as China Communications Construction (-36.9%), China Railway Group (-17.9%), and Metallurgical Corporation of China (-80.4%) all saw double-digit declines.

Moving into Q1 2026, the situation remains severe: only Metallurgical Corporation of China (+2%) and China National Chemical Engineering (+8%) maintained positive growth, while profits for leading firms like China Communications Construction and China Railway Group continued to decline by more than 20%. The bottom for industry profitability is still unclear. Companies are going through a painful phase of "swapping scale for quality" as they clear out non-performing assets.

2. Overseas business: Contrarian high growth, "real growth" under order differentiation

In sharp contrast to the bleak domestic market, overseas markets have become the core engine enabling central construction SOEs to weather industry cycles. However, in 2026, the logic of overseas expansion has transitioned from a phase of broad-based growth to differentiation, as true industry leaders begin to lock in high-prosperity regions through full industry-chain advantages.

As of Q1 2026, differentiation in overseas orders among the eight major central construction SOEs was especially clear:

"Energy and resources" focused enterprises led the way: PowerChina saw Q1 2026 overseas orders surge 130.3% year-on-year, MCC followed with 70.9% growth. This was mainly due to a boom in demand for energy infrastructure in the Middle East (Saudi Vision 2030), power transformation in Southeast Asia, and energy/mining cooperation in Africa.

"Professional engineering" remained solid: China National Chemical Engineering, leveraging global dominance in chemical engineering, saw Q1 2026 overseas orders grow 9.9% year-on-year with overseas orders consistently making up over 30% of total, serving as a ballast stone across cycles.

"Traditional infrastructure construction" under phase pressure: Due to geopolitical disruptions and a high base last year, China Communications Construction's overseas orders fell 50.1% in Q1 2026, and China Railway Construction dropped 29.1%.

For leading construction firms facing ongoing pressure in the domestic market, overseas business is no longer just a "story" but a substantial contributor to performance. The core logic in 2026: Only companies deeply bound to "Belt and Road" energy security and possessing high-value industry output capabilities (such as electricity, chemicals, metallurgy) can achieve steep order growth against the wind.

II. Why is this important? — Overseas construction: Macro tailwinds, micro-level transformation, and business model restructuring

Central construction SOEs' ability to expand overseas is the result of the synergy of macro political dividends, improvements in micro-level capabilities, and fundamental changes in business models.

1. Macro context: From "infrastructure export" to "national strategy coordination"

The Belt and Road Initiative has entered its second decade, with a qualitative change in direction. In the past, overseas expansion was more about exporting infrastructure capacity, but now it's about collaboration in energy security, industrial transfer, and supply chain resilience.

Middle East reconstruction and "de-oil" transformation: Saudi Vision 2030 involves investments exceeding $3 trillion, with landmark projects such as NEOM city and the Red Sea Tourism Development fueling massive demand for green energy, smart cities, and advanced chemical construction. Chinese construction firms, with full industry-chain capabilities, have become indispensable partners in this transformation.

Further strategic depth to "projects for resources": Against the backdrop of intensified global resource competition, some central SOEs secured high-quality copper, cobalt, gold, and other mining resources through "projects for resources" deals early on, which not only extend project revenues but also ensure raw material supply security for China's domestic new energy industry chains at a strategic level.

2. Competitive edge: From "cost leadership" to "full industry chain dominance"

Exporting technological standards: In high-speed rail, ultra-high voltage, port automation, and large-scale chemical engineering, Chinese standards are being adopted by more emerging markets, creating higher entry barriers.

Extreme delivery efficiency: Having honed supply chain management competitiveness domestically, Chinese construction companies can complete projects in far shorter cycles compared to their European and American counterparts.

Integrated engineering-operating model: Central SOEs are transforming into "investor + operator" roles, providing full life-cycle services spanning design, investment, construction, and operations, closely binding their interests to those of clients.

3. Business model restructuring: Solving the "low valuation" dilemma

Financial model restructuring: Overseas projects follow international norms, with a high portion of down payments plus milestone settlements, which translates into much better cash collection than domestic projects. In 2025, the construction sector’s overall cash collection ratio rose to 101.2%, with the international contracting segment reaching 105.6%.

Improved profitability: As overseas strategies mature, companies are shifting to "profit first". The proportion of high-value-added projects (new energy, fine chemicals, computing centers) is rising and profit margins on overseas projects are seeing real improvement.

Hidden asset mining: Some SOEs (like MCC, China Railway Group, etc.) secured overseas mining interests years ago. With the global energy transition, the potential value of these assets is enormous and serves as a core driver for corporate profitability.

III. What next? — Policy support, Middle East reconstruction, new productive forces

1. Domestic: Downturn persists, "bottoming out" driven by internal demand support and new infrastructure under the "Six Networks"

Currently, the domestic construction industry remains in a "weak reality" phase. From January to May 2026, cumulative growth rates for fixed asset investment and real estate development investment were -4.1% and -16.2%, respectively.

On the other hand, forces for marginal improvement are building under the "weak reality" environment. First, clear policy direction: The 2026 National People's Congress arranged 755 billion yuan in central budget investment, 1.3 trillion yuan in ultra-long-term special treasury bonds (800 billion yuan for "dual priority" construction), and special bonds quota totaling 4.4 trillion yuan, providing ample financial backing. Furthermore, local debt resolution policies are continuously advancing, expected to ease local government financial stress and improve payments and launches for projects under construction.

More importantly, the central government recently emphasized strengthening planning and construction of the "Six Networks": water, new power grid, computing power network, next-generation communication network, urban underground pipeline network, and logistics network. These are not just important tools to offset short-term downward pressure, but also strategic directions for infrastructure efforts during the 15th Five-Year Plan. Major projects such as the downstream Yarlung Zangbo River hydropower hub (trillion-yuan investment), Xinjiang coal chemical industry (plan over 800 billion yuan), and western transport network (Tibet’s "Fifteen Five-Year" railway intensity up 136% over "Fourteen Five-Year" first three years) are accelerating. These projects will provide certainty for increased orders to construction SOEs, driving a bottom and rebound in physical workloads in the sector.

2. Overseas: US-Iran peace deal concluded, Middle East reconstruction and Saudi Vision 2030 open trillion-dollar market

According to Iranian media, Iran and the United States have reached consensus on the final text of a peace deal, with the Strait of Hormuz likely to reopen soon.

The implementation of this agreement means the Middle East reconstruction will shift from expectations and gamesmanship to actual order fulfillment. According to the Nikkei, a European agency estimates that repairing energy facilities in the region damaged by US-Israel-Iran conflict may require as much as $58 billion. Asia Daily reports that Iran’s overall postwar reconstruction scale exceeds $300 billion, covering ports, energy, refining, transport, airports, communications, electricity, water, and industrial parks; when including oil and gas facilities, refineries, power plants, roads, railways, data centers, and smart cities, the real scale could be much greater.

Iran's long-suppressed infrastructure demand, stifled by sanctions for years, is set for a major release, and given local technology and capacity constraints, the majority of projects will rely on external contractors—offering a historic opportunity for Chinese construction firms. Especially noteworthy, energy facility restoration will be the starting point—according to European institutions, repairs to damaged energy facilities in the Middle East alone will require close to $60 billion, representing clear and direct demand growth for China National Chemical Engineering and other engineering companies with global leading capacity in the oil and gas chemical field.

Meanwhile, infrastructure investment in other Middle Eastern countries continues. Saudi Vision 2030 outlines over $3.19 trillion in projects, driving forward megaprojects like NEOM City ($500 billion), Diriyah Gate ($63.2 billion), and Red Sea Tourism. Kuwait's Vision 2035 sets out $50 billion of infrastructure targets, and 46% of UAE’s 2025 budget is for infrastructure.

With full industry-chain capabilities, efficient delivery, and long-term experience in the region, Chinese construction companies are among the most important partners locally. With regional tensions set to ease post US-Iran reconciliation, previously stalled projects are likely to relaunch, order execution will accelerate for Chinese SOEs in Saudi Arabia, and new orders are expected to surge in Iran and Iraq. Engineering firms with a high proportion of foreign orders, like CIE, PowerChina, Energy China, and China National Chemical Engineering, stand to benefit.

3. New tracks: Energy infrastructure, computing facilities, cleanrooms, low-altitude economy and the rapid rise of new productive forces

With traditional residential and infrastructure markets nearing saturation and sectoral incremental space narrowing, construction firms are accelerating a transition to high-value-added new tracks. According to industry estimates, by 2025, the ratio of traditional to emerging business in construction is roughly 55:45, projected to improve to 40:60 by 2030, as new tracks become key to traversing cycles and reshaping company valuation. The following areas warrant particular attention:

① Energy infrastructure (new power systems): Green fuels have for the first time been included in government work reports, with surging demand for new energy storage, intelligent grids, hydrogen energy, etc., on the eve of a boom. Under the dual drivers of "dual carbon" targets and energy security, investment in facilities like compressed air energy storage and integrated hydrogen energy is heating up. Unlike conventional thermal or power transmission engineering, new energy infrastructure requires strong system integration and cross-disciplinary technical capabilities, meaning higher technical barriers and better profit prospects. Industry data show leading engineering companies are seeing EPC order growth in these segments above 15% annually, with gross margins well above those in traditional infrastructure.

② Computing infrastructure (AIDC smart computing centers): AI large models and multi-modal applications are sharply driving up computing demand, spurring a wave of major smart computing center projects. Single projects frequently involve several to tens of billions of yuan and, due to fast tech iteration and urgent end-user demand, have shorter project cycles and better payments than most working capital-driven builds. More importantly, these centers require expertise in high-voltage power distribution, liquid cooling, intelligent O&M, etc., placing high demands on comprehensive solution capabilities. With features of "technology-driven, light assets, and high turnover", they are becoming a key grasp for leading construction companies to pivot.

③ Cleanroom engineering (semiconductor / panel factories): Exploding demand for AI chips is fueling global capex expansion for semiconductors. Cleanrooms—vital for chips, panels, and other precision manufacturing—account for about 15% of total chip plant investment. With continual miniaturization of processes, standards for air cleanliness, temperature/humidity, and anti-vibration are rising exponentially, raising the technical threshold. Global semiconductor capacity is dispersing to Southeast Asia, North America, etc., providing vast overseas markets for domestic cleanroom engineering firms. The segment features strong client stickiness, long certification cycles, and high-tech premiums, with profitability leading all construction verticals.

④ Low-altitude economy infrastructure: Low-altitude economy has been designated a "Fifteen Five-Year" emerging industry priority. Since 2026, China has issued a raft of policy frameworks and info/comm infrastructure support for this area, with top-level designs being quickly implemented. Basic facilities for general aviation airports, vertiports, low-altitude air corridors, and air traffic info systems are transitioning from “zero to one”. Industry forecasts see long-term investment in low-altitude infrastructure possibly reaching trillion-yuan scale. The segment is still a blue ocean, and early movers in engineering planning, design, and air traffic system integration will have first-mover advantages.

In sum, these new tracks share the features of "high demand, high technical barriers, and high profit quality", fundamentally changing the industry's traditional image of "low margin, asset-heavy, and long cycle". Companies making bold advances in these areas are poised to leap from traditional contractors to tech-oriented engineering service providers during the 15th Five-Year Plan, driving a restructuring and upgrade of their valuation systems.

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