China's urbanization rate is set to rise, and infrastructure stocks in the country are at "super cheap" valuations, says DBS Bank, which highlighted three stocks investors don't want to miss. "We expect greater growth potential in new infrastructure areas, especially those related to urbanisation," said Manyi Lu, an equity research analyst at DBS, Southeast Asia's largest bank. China's urbanization rate is expected to rise to 75% by 2035 from the current 60%, Lu said. This will result in big market opportunities for sectors such as urban rail transit, housing construction as well as urban comprehensive development, she said in a note dated Nov. 4. Here are three stocks set to benefit, according to the bank. DBS' current top pick in the sector is China Railway Construction Corporation , citing the firm's "strong new contract growth, lower net gearing and exposure in the high-potential housing construction market." CRC has been given a "buy" rating by DBS. Stocks given a "buy" rating by DBS are expected to see more than 15% total return over the next 12 months if they're small caps, or over 10% gains in the same period for large caps. Other stocks that have also been given a "buy" rating by DBS include Hong Kong-listed shares of China Railway Group and China Communications Construction . DBS: China infrastructure stocks are 'super cheap' DBS analyst sees valuations in the infrastructure sector at "super cheap" levels despite the strong year-to-date gains. "The sector experienced a devaluation in 2018-20 and the trading multiples were stable at around current level since the end of 2020," Lu said. "We believe it's undervalued on the expectation of 1) solid earnings (compound annual growth rate) of 9-12% in FY21-23F; and 2) high dividend yield of over 7% for FY22F." As of Thursday's market close in Hong Kong, shares of CRC listed in the city have risen 17% for the year. China Railway Group and China Communications Construction have also seen their Hong Kong-listed shares jumping 10% and 23% respectively. In comparison, the Hang Seng index has dropped 7%. Turnaround from 2021 Following a relative underperformance in 2020 due to factors such as U.S. sanctions on large Chinese state-owned enterprises and operation pressure from Covid, infrastructure firms have bounced back this year. "We believe the market has ignored the SOE's new growth drivers," she said, referring to China's state-owned enterprises. Since the end of 2020, the infrastructure sector has been trading at between two and three times the forward price-to-earnings ratio for full year 2021 — an estimate for the relative value of earnings, the note added. "In 2021, the valuation is on the recovery track from the bottom as some of the previous concerns [are] being removed," Lu said, pointing to the sector's outperformance against the broader Hong Kong market that has been slammed by Beijing's ongoing regulatory crackdown in sectors such as private education and technology.
Workers at the construction site of the Dafaqu grand bridge of Renhuai-Zunyi expressway in southwest China's Guizhou Province, on April 21, 2021.
Yang Wenbin | Xinhua News Agency | Getty Images
China's urbanization rate is set to rise, and infrastructure stocks in the country are at "super cheap" valuations, says DBS Bank, which highlighted three stocks investors don't want to miss.