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1、North America Equity Research 14 January 2020Electrical Equipment & Multi- IndustryC. Stephen Tusa, Jr CFA AC (1-212) 622-6623 Bloomberg JPMA TUSA J.P. Morgan Securities LLCPatrick M. Baumann, CFA (1-212) 622 0160 J.P. Morgan Securities LLC Abhipsa Sahu (91-22)6157-4230J.P. Morgan India Private Limi
2、tedJ.R MorganEE/MIQuarterly Check-Up: Non-Residential ConstructionUS non-res construction PIP data showed improving growth in 4Q19 QTD through Nov, as compared to 3Q19 and 1H19 levels. Top-down indicators including ABI, Dodge, and credit metrics have displayed some sluggishness, overall pointing to
3、a slowdown, similar to forecasts from industry experts, who. however, still call for growth. Bottom-up vertical specific indicators remain mixed on net. with sonic strength in particular verticals, mostly Institutional. 4Q saw a continuation of solid trends in Healthcare and Manufacturing, Office an
4、d Education showed accelerated positive growth, while Commercial remains negative, though also showing some gradual recovery. Finally, the overall tone from management teams on the state of the market remains cautiously optimistic with expectations for LSD-MSD type growth in 2020, solid but not nece
5、ssarily differentiated vs the overall macro backdrop and other end markets, as labor shortage and tariff challenges pose risk for a slowdown. Within our coverage, companies with relevant non-res exposure overall include OWs HON, UTX, PNR, IR. HUBB and HDS, UW-ratcd LII and WSO, and N-ratcd JCI and W
6、CC. Non-res quarterly update. This quarterly report provides a detailed dashboard of macro data related to the US non-residential construction market, which is important to the EE/MI sector, with -15-20% of large-cap sales directly or indirectly related. In addition to the commonly followed top-down
7、 data, we look at bottom-up drivers of construction activity with macro data across the major non-res verticals such as office, retail, and education. EE/MI-related US non-res construction improved in 4Q19 above 1Q/2Q/3Q levels. Construction put-in-pl ace in key verticals, as measured by our J PM EE
8、/MI Non-Res Index, was up -3.3% in Nov (-0.9% in Oct, -3.4% in Sept, -1.3% in 3QI9, -0.8% in 2QI9, -+1.1% in 1Q19). Growth in public markets (up 11.4% in Nov, +10.1 % in Oct, +4.7% in Sept) outpaced private markets (+0.6% in Nov, -4.4% in Oct, -6.1% in Sept). Among non-institutional verticals, offic
9、e continued to be strong and picked up to HSD in Nov vs LSD-MSD prior (vs double digits in 2H18), up 8.2% in Nov, vs up 3.2% in Oct, +3.1% in Sept, up 5.1% in 3Q19, up -7.1% in 2Q19 and up 8% in IQ19. Commercial had a slower negative growth of -10% in 4Q19 QTD through Nov, vs -14% in 3Q19, -15% in 2
10、Q19 and -12% in 1Q19 after decelerating from MSD levels in 2H18. Among institutional verticals, Education showed a positive rise in 4Q19 to +7% in Nov (+5% in Oct, flat in Sept) vs flat in 3Q19, down 3% in 2QI9 and down 1% in 1Q19 while Healthcare remained steady in the LSD-N4SD range in 4Q19 QTD th
11、rough Nov, up 5% in Nov. vs up 1% in Oct. -+4% in 3QI9,+3% in 2QI9 and +5% in I QI 9. Manufacturing maintained LSD growth mostly, with Nov up 2%. vs up 2% in Oct. -+2% in 3Q19. up -3% in 2QI9, up 6% in IQI9 after remaining negative for more than 2 years (down6% in 1H18 vs down low leens in 2H17). Th
12、e total non-res index including all verticals like Power. Highway & Street and Transportation, is tracking up 5.1% in Nov vs 2.3% in Oct. 0.4% in Sept,+0.7% in 3Q19,+3.0% in 2Q19, +3.7% in 1QI9 and +3.4% in 2018.See page 31 for analyst certification and important disclosures, including non-US analys
13、t disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor
14、 in making their investment decision.Figure 13: EE/MI Non-Residential Construction Index vs. ABI C&l andInstitutional (Near-Term View)ABIConstruction PIP, Y/YFigure 13: EE/MI Non-Residential Construction Index vs. ABI C&l andInstitutional (Near-Term View)ABIConstruction PIP, Y/Y25%5%15%-35%Figure 12
15、: EE/MI Non-Residential Construction Index vs. ABI C&l andInstitutional (Historical View)ABIConstojction PIP, Y/Y65.055.045.035.0Total EbMI-related Construction ABI C&l25% ABI Institutional-15%Ou ,0N ZON 90N gON 30N mON ZON 0N 0ON g02 80 AON ZOAON 90 AON 2 02 ，3 02 3 02 s02 a 02 00 02 66 AON25.0-3o
16、二 6L宴 8WN 8工星 匚0N 二富 9L0N 9工罡 loL 复 M0N W A星 RA0N coLAew I AON NLAes 二 0N ，二富 A0NSource: AIA, U.S. Census.Source: AIA, U.S. Census.Dodge new contractsThe Dodge new non-res contracts are another commonly watched indicator. Because this data series captures large project contracts as opposed to the ru
17、n rate of activity, it is more volatile and often overshoots to the upside or downside in any given month. The volatility in this monthly series makes it tougher (o draw reasonable conclusions from any short-term trend, but the 12-nionth rolling average has historically been a more reliable indicato
18、r. Also note that Dodge data includes 100% of the estimated value of a project in the first month of activity vs. Census data (which relies on Dodge for leads), which assigns spending across the duration of a project. The most recent contracts data from Nov showed new contracts down 5% y/y on a 3mo
19、rolling average, while the 12mo rolling average was down 3% in Nov vs down 4% in Oct, flat in 3Q19, up 5% in 2Q19.Figure 15: Dodge New Non-Res Contracts vs. EE/MI Non-Residential Construction Index (Near-Term View)Dodge New ContractsConstruction PIP, Y/Y30% -10% -10% -Figure 14: Dodge New Non-Res Co
20、ntracts vs. EE/MI Non-ResidentialConstruction Index (Historical View)Dodge New ContractsConstnjction PIP, Y/Y-Y/Y 3mo Avg Dodge Non-resTotal EE/Ml-related ConstructionJ 66 AONy/y 12mo Avg Dodge Non-res Contracts8 3 S 8 3 8 8 SseoN ZLAON 9 二。N g 二。N W AON6 二ON EON 二、ON 0 二。NeON coLAew Z1 ZL富 LON 二妻y/
21、y 12mo Avg Dodge Non-res Contracts 寸 biog99zzcoeo6X-5t-TT-XXT-A A A AAAC0O0ODO0O0OON 9LAON 巴AON 三AON S2A0N ? ON 二 ON OLAON SAON ON Z0AON 8ON 90 aon 名ON 8 4 si a 02 8 5 66ON 96ON Z6AON 96 AON IO6AONSource: BLS. U.S Census.Construction PIP. Y/Y20% EE/MI-Related Non-Res*CT5OCD OCUW N W N WFigure 19: No
22、n-Res Building Construction Employment vs. EE/MI Non-Residential Construction Index (Near-Term View)12Source: BLS. U.S. Census.Figure 20: Office Employment vs EE/MI Non-Residential Construction Index (Historical View)Construction PIP, Y/YEmployment30%EE/WI-Related Non-Res0%20% -10%Office Emplo;-10%
23、-20% -8.0%16.0%4.0%2.0%0.0%-2.0%-4.0%6.0%o% 69 二。N ZLAON 9=0N GZON 二 AON J2A0N CM= ON 二 0N 0=ON SAON 0N Z0AON 8oz 号。N 3oz 2oz 8 02 3oz 8oz 66 AON 86 AON Z6ON 96 AON JIO6AONSource: BLS. U.S. Census.Financial indicators mixedStability in financial markets is an important precondition for construction
24、spending and remains relevant, particularly given the role that credit played in the last peak and subsequent downturn. The quarterly FRB loan officers survey provides a good directional indication of both Ioan demand and lending standards for non-residential construction loans. Historically, howeve
25、r, the data tends to be better at calling inflection points in (he cycle than it does absolute levels of growth mid-cycle. In the 4QI9 survey, a net 13% of loan officers indicated a tightening of lending standards for non-residential construction loans (7% in 3Q19, 11% in 2Q19, 12% in 1Q19, 4% in 4Q
26、18). In terms of loan demand, a net -5% saw stronger loan demand in the 4Q19 survey (-6% in 3QI9, -17% in 2Q19,-11% in 1Q19,-Il%in 4QI8, -7% in 3Q18).net % (tighteningyioosening standardsFigure 21: Commercial Real Estate Lending Standards and Loan Demand (Fed Loan Officers Survey, Historical View)%9
27、7024O2OO-2O4O-6O-8O1OOFigure 22: Commercial Real Estate Lending Standards and Loan Demand (Fed Loan Officers Survey, Near-Term View)%Source： FRBSource FRB13Figure 23: Commercial Real Estate Lending Standards vs. EE/MI Non-Residential Private Construction IndexConstruction Private, Y/YLending Standar
28、ds (%)Figure 23: Commercial Real Estate Lending Standards vs. EE/MI Non-Residential Private Construction IndexConstruction Private, Y/YLending Standards (%)bP寸bbbbbbbbbbbbbbbbbb寸bb ooacoaooooooooaooooooaoc9Z86OLZSb99Z86O 一 CJCOb99ZCO6 66660000000000LLLLLbLLT- LEE/MI Private Non-Res Y/Y (Ex-Mfg) net
29、% (tightening)/looseningstandardsFigure 24: Loan Demand vs. EE/MI Non-Residential PrivateConstruction IndexConstruction Private, Y/YLoan Demand (%)Source: FRB, U.S. Census.Source: FRB, U.S. Census.Tying the above back to the quarterly organic growth for our group, there is little tangible historical
30、 correlation, which doesnt make this data conclusive, but we think its necessary to watch closely.Figure 25: FRB Survey vs EE/MI Index Non-Res Organic GrowthNon-res company averageFRB Survey (increase in tightening/loosening of standards)Source. FRB. U.S. Census.Looking at CMBS spreads for BBB- bond
31、s vs others, after some moderation in 2017, data has somewhat stabilized in 2018 YTD.Figure 26: CMBS Spreads bpsAPL3Dec. 19Aug, 19 APL9Dec.18 Aug.18 Apr8Dec7Aug. 17 Apz.7Dec6Aug, 6 APL6Dec5 Aug，15APL5 06914Aug-14 Apr，14AA CMBS AAA Jr CMBSBBB-CMBSSource: Bloomberg.Commercial Real Estate (CRE) Price I
32、ndexThe CoStar Commercial Repeat-Sales Index is an indicator of CRE price changes in the US. The index is constructed using a repeat sales methodology that measures the price change in the sale of a commercial property relative to the previous sale of the same property. This helps measure price move
33、ments due to change in market conditions and has been a good leading indicator of overall spending trends. In Nov, the CRE Value Weighted Price Index was up 7.3% y/y compared to 6.8% y/y in Oct, 8.2% in Sept, up -9.9% in 3Q19, up -5.9% in 2Q19,6.2% in 1Q19.Figure 27: CRE Value-Weighted Price Index v
34、s. EE/MI Non-Res SpendingConstruction PIP, Y/YCRE Price Index Value-Weighted-25.0%于子矛吝于子王舌于于25.0%15.0%s S 55.0%-5.0% -15.0% -N N N o o o 30.0%20.0%10.0%0.0%-10.0%-20.0%-30.0%-40.0% NNDOO c 8 8 2O O Q 2 3HTotal EEjWI Non-Res SpendingCRE Price Index Value Weighted-35.0%Source: Costar, U.S. Census.Thir
35、d-party forecastsSeveral third-party sources issue forecasts for the non-res conslruction markets that are typically (but nol always) based on the U.S. Census pul-in-place data; in other words, they may not be directly comparable. Below, we show the AIA consensus construction forecast, an average of
36、 the miijor forecasting agencies including McGraw Hill Dodge. Global Insight, and others (updated twice yearly). Current 2019/2020 consensus calls arc 3.8% / 2.4% growth, respectively.152Q19E2020ENon-Residential Total3.8%2.4%Commercial Total2.5%1.1%Office6.9%2.2%Retail/Other Commercial-0.8%0.3%Hotel
37、3.6%0.5%Industrial Total6.4%3.3%Institutional Total4.9%3.7%Healthcare2.7%3.7%Education6.1%4.4%Religious4.5%2.8%Public Safety8.2%5.9%AmusemenbRecreation4.4%1.0%Table 5: AIA Consensus ForecastsSource: AIA.2016Y/Y Growth in.20172018201920202H15 forecast8.20%1H16 forecast8.30%6.70%2H16 forecast5.80%5.60%1H17 forecast5.60%4,90%2H17 forecast3.80%3.60%in io lorecasi4.UU%4.yu%2H18 forecast4.70%4.00%1H19 forecast4.40%2.40%2H19 forecast3.80%2.40%Table 6: Non-Res Construction Forecasts Have Consistently Been