yum cha 飲 茶 · china railway sector - we expect railway investment to stay firm in the 13th fyp...
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Yum Cha 飲 茶 February 21, 2017
INDICES Closing DoD%
Hang Seng Index 24146.1 0.5
HSCEI 10445.5 0.8
Shanghai COMP 3240.0 1.2
Shenzhen COMP 1962.5 0.9
Gold 1238.5 0.3
BDIY 757.0 2.2
Crude Oil, WTI(US$/BBL) 53.4 0.1
Crude Oil, BRENT(US$/BBL) 56.2 0.7
HIBOR, 3-M 1.0 0.8
SHIBOR, 3-M 4.3 0.1
RMB/USD 6.9 0.2
RESEARCH NOTES
CHINA RAILWAY SECTOR - We expect railway investment to stay firm in the 13th FYP (2016-
2020), led by intercity railway and urban transit network development. We estimate that railway
investment will grow 24.3% in the 13th FYP and that total investment in urban transit networks
will grow 79.8%, reaching >RMB2.2trn. We expect limited growth for railway construction In the
13th FYP due to the high-base effect, but we expect much higher growth for late-cycle railway
investment related to equipment procurement, maintenance and upgrades from 2017 onwards.
We expect rolling stock investment to grow 31.6% and railway maintenance spending to more
than triple, but construction investment to grow only 4.9%. We believe CRC’s focus on opera-
tions should drive an increase in operation spending on equipment. Meanwhile, we expect rail-
way operators to benefit from passenger tariff hikes. Guangshen Railway and CRSC are our top
picks due to their superior earnings growth outlook compared to their peers and construction
companies.
GUANGSHEN RAILWAY [0525.HK; HK$4.88; INITIATE WITH BUY] - We initiate coverage on
Guangshen Railway with a Buy rating and TP of HK$5.81, implying 19.0% upside potential. We
believe further share price upside will come from a railway passenger tariff hike and likely other
railway reform gestures in 2017. We forecast that the Company’s net profit will grow at a CAGR
of 13.3% in 2016-2018, driven by 1) growth recovery in its passenger and freight business, and
2) business expansion related to its services. We didn’t include the earnings impact from a pos-
sible passenger tariff hike. Our earnings sensitivity analysis shows that every 5ppt increase in its
regular train passenger yield growth will boost our earnings forecast for the Company by >10%
in 2017. Therefore, we apply a target multiple of 23.5x 2017E PER for our TP, above its histori-
cal average PER of 17.9x.
CSRC [3969.HK; HK$6.20; INITIATE WITH BUY] - We initiate coverage of CRSC with a Buy
rating and TP of HK$7.74. CRSC is our top pick in the railway equipment sector because of its
high earnings visibility. The Company is involved in both early- and late-cycle railway investment.
Even if new line addition slows down, CRSC can benefit from an increase in demand for its prod-
ucts and services related to railway maintenance and operations. We expect its earnings to grow
at a CAGR of 18.3% in 2016-2018. CRSC had RMB14bn in cash on hand at the end of 1H16,
which was 29% of its market cap. It is likely to have some overseas M&A to enrich its technology
and product offerings for long-term growth. We think the market underappreciates its uniqueness
in the industry value chain and the fact that it is a system integrator, not just an equipment pro-
ducer.
CRRC [1766.HK; HK$7.46; INITIATE WITH HOLD] - We initiate coverage on CRRC with a Hold
rating and a target price of HK$7.72, which implies 3.5% upside potential. We believe its share
price re-rating will still be constrained by slow earnings growth recovery in 2017. With declining
locomotive and MU sales, we expect its earnings growth to be dampened in 2016 and 2017.
While MU maintenance revenue accounts for only ~10% of its total revenue, we expect the
growth recovery from increasing railway operations and maintenance spending to drive slower
earnings growth than for CRSC or CRRC Times Electric. We expect its earnings to remain flat-
tish in 2016 and 2017, with earnings growth recovery only in 2018.
CRRC TIMES ELECTRIC [3898.HK; HK$43.95; INITIATE WITH HOLD] - We initiate coverage
on CRRC Times Electric with a Hold rating and a TP of HK$47.60. We expect its earnings
growth to recover in 2017. We forecast that net profit will grow at a CAGR of 12.1% in 2016-
2018. We expect likely falling MU product business revenue to constrain its earnings growth in
2017. But we believe its urban transit product sales and other new business sales growth will
remain firm, partially offsetting the growth slowdown in its railway business. We expect cost sav-
ings from its acquisition of the IGBT production line only to help it maintain stable margins. We
think its earnings growth recovery in 2017 has largely been factored into the share price. A fur-
ther share price catalyst would be CRC’s incoming MU tenders to bring more clarity to its earn-
ings growth outlook in 2017 and 2018.
DATA RELEASES DUE THIS WEEK
Feb 22 China January Property Prices
Feb 22 Conference Board China January
Leading Economic Index
Source: Bloomberg
2
RESEARCH NOTES
GAMING SECTOR - We joined an investor tour organized by Dynam Japan (6889.HK) last week and met with a member
of the Liberty Democratic Party (LDP) and Japanese National Diet. We understand that the Integrated Resorts (IR) bill
enacted in December 2016 only provides a policy framework and that it will take about a year to formulate detailed laws
for implementation. At the Company level, Dynam Japan does not rule out the possibility of getting involved in developing
casino facilities in the future, but it will take some time for careful consideration, as the investment amount could be over
500bn yen (HK$34bn) for a casino project.
SNIPPETS
CHINA AIRCRAFT LEASING [1848.HK; HK$9.39; NOT RATED] - The Company released a positive profit alert for 2016
results. It expects net profit to grow not less than 60% year on year. This implies net profit last year should be more than
HK$608m, in line with market expectations. It is trading at 10.4x 2016 PER. One of its major peers, BOC Aviation
(2588.HK), is trading at 8.3x 2016E PER, based on consensus.
CGN POWER [1816.HK; HK$2.42; NOT RATED] - The Company announced that the expected commercial operation of
Taishan Unit 1 and Taishan Unit 2 has been adjusted from the original 1H17 and 2H17 to 2H17 and 1H18, respectively.
This is quite disappointing, in our view, as this is the second delay of this project since the Company’s IPO in 2014.
Taishan Unit 1 and Unit 2 have a total capacity of 3500MW, equivalent to 20% of its existing capacity in 1H16. As its
share price has risen by about 14% year to date because of favourable policy news flow, the project delay, although not
totally unexpected, may still trigger profit taking. The Company is trading 13.1x 2016E PER.
CENTRAL CHINA SECURITIES [1375.HK; HK$4.31; NOT RATED] - The Company announced a share buyback for
10% of its H-shares (125m shares). The buyback price will be capped at not more than 5% above the average closing
price of the last five trading days. We believe the reason for the buyback is quite straightforward, as its A-share price is
trading at a 197% premium over the H-shares.
1
Sector Report
February 21, 2017
Kelly Zou—Analyst
(852) 3698-6319
kellyzou@chinastock.com.hk
Wong Chi Man—Head of Research
(852) 3698-6317
cmwong@chinastock.com.hk
Railway investment focus shifting to late-cycle operations;
Guangshen Railway and CRSC top picks Investment focus shifting to late-cycle operations. We expect railway investment to
stay firm in the 13th FYP (2016-2020), led by intercity railway and urban transit network
development. We estimate that railway investment will grow 24.3% in the 13th FYP and
that total investment in urban transit networks will grow 79.8%, reaching >RMB2.2trn. We
expect limited growth for railway construction In the 13th FYP due to the high-base effect,
but we expect much higher growth for late-cycle railway investment related to equipment
procurement, maintenance and upgrades from 2017 onwards. We expect rolling stock
investment to grow 31.6% and railway maintenance spending to more than triple, but
construction investment to grow only 4.9%.
Accelerating railway reform to help resolve funding issues. The central government is
promoting public-private partnership (PPP) projects to sustain infrastructure FAI growth.
Total investment in all PPP projects the NDRC released by the end of 2016 reached
RMB13.5trn, 6.9x the investment value of the first batch of PPP projects announced in
May 2015. Progress, however, is far from satisfactory, considering only 32% of the PPP
projects had properly started by the end of 2016. We believe CRC has to accelerate
railway business reforms to improve railway profitability; otherwise, private investors won’t
participate in these railway projects. Key measures include raising passenger tariffs,
increasing HSR density, expanding freight business and developing land resources.
CRC highly likely to lift railway passenger tariffs in 2017. In Dec 2016, the NDRC
published a document titled “Tentative Measures for the Supervision and Examination of
Transport Cost Pricing for Normal Passenger Trains” for public consultation, signalling
railway passenger tariff reform is likely to happen in 2017. Railway passenger tariff base-
rate hikes have been suspended since 1995, making rail tariffs well below those of airlines
and highways. We expect CRC to raise passenger tariffs for regular train service in 2017
after it finishes the cost examination required by the NDRC. This should help railways
improve margins and resolve funding issues.
Order of preference: Guangshen Railway (GSR), CRSC, CRRC Times Electric,
CRRC. We believe CRC’s focus on operations should drive an increase in operation
spending on equipment. Meanwhile, we expect railway operators to benefit from
passenger tariff hikes. Guangshen Railway and CRSC are our top picks due to their
superior earnings growth outlook compared to their peers and construction companies.
China railway sector
Source: Bloomberg, CGIS Research estimates
Note: pricing based on Feb 20, 2017
Sources: Bloomberg, CGIS Research estimates
Ticker Mkt cap Up/Down PEG
US$ m % 2015 2016E 2017E 2015 2016E 2017E 2017E
Guangshen Railway 525 HK 5,355 4.88 5.81 Buy 19.1% 28.6 22.7 19.8 61.8% 25.8% 14.9% 1.3
CRSC 3969 HK 7,025 6.20 7.74 Buy 24.8% 17.0 16.0 13.5 11.4% 6.4% 17.7% 0.8
CRRC 1766 HK 40,886 7.46 7.72 Hold 3.5% 15.3 14.9 15.4 5.9% 2.2% -3.1% -5.0
CRRC Times Electric 3898 HK 6,657 43.95 47.60 Hold 8.3% 15.5 15.4 13.9 23.5% 0.7% 10.9% 1.3
Ticker
2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E 2015 2016E 2017E
Guangshen Railway 525 HK 1.1 1.1 1.1 10.2 8.8 8.1 1.5% 1.8% 2.1% 4.0% 4.9% 5.5%
CRSC 3969 HK 2.6 2.2 2.0 9.6 7.7 6.3 0.4% 1.0% 1.2% 15.1% 14.0% 14.5%
CRRC 1766 HK 1.9 1.7 1.5 7.4 6.7 5.9 1.8% 1.8% 1.8% 12.2% 11.5% 9.9%
CRRC Times Electric 3898 HK 3.4 2.9 2.5 11.9 10.6 9.2 0.9% 0.9% 1.0% 22.0% 18.7% 17.7%
P/Bk EV/EBITDA Dividend yield ROE
Price
(lc) PT (lc) Rec
PER EPS growth
Company Ticker RatingPrice
(HK$)
PT
(HK$)+/-upside
GSR 525 HK Buy 4.88 5.81 19.0%
CRSC 3969 HK Buy 6.20 7.74 24.8%
CRRC 1766 HK Hold 7.46 7.72 3.5%
CRRC Times Electric 3898 HK Hold 43.95 47.6 8.3%
2
Guangshen Railway [525.HK]
BUY
Close: HK$4.88 (Feb 20, 2017)
Target Price: HK$5.81 (+19.0%)
Price Performance
Market Cap US$5,354m
Shares Outstanding 1,431m
Auditor PWC
Free Float 100.0%
52W range HK$3.15-5.17
3M average daily T/O US$23m
Major Shareholding Guangzhou Railway
(Group) Company
(37.1%)
Sources: Company data, Bloomberg
Kelly Zou—Analyst
(852) 3698-6319
kellyzou@chinastock.com.hk
Wong Chi Man, CFA—Head of Research
(852) 3698-6317
cmwong@chinastock.com.hk
Source: Company data, CGIS Research estimates
China Railway Sector We initiate coverage on Guangshen Railway with a Buy rating and TP of HK$5.81, implying 19.0% upside potential. We believe further share price upside will come from a railway passenger tariff hike and likely other railway reform gestures in 2017. We forecast that the Company’s net profit will grow at a CAGR of 13.3% in 2016-2018, driven by 1) growth recovery in its passenger and freight business, and 2) business expansion related to its services. We didn’t include the earnings impact from a possi-ble passenger tariff hike. Our earnings sensitivity analysis shows that every 5ppt in-crease in its regular train passenger yield growth will boost our earnings forecast for the Company by >10% in 2017. Therefore, we apply a target multiple of 23.5x 2017E PER for our TP, above its historical average PER of 17.9x.
Investment Highlights
Traffic diversion from HSR lines no longer a business overhang: We believe the traffic diversion to its passenger business from HSR lines has largely stabi-lized. The Company introduced new train services to offset the traffic decline from competition with HSRs with its parent company’s support. We expect passenger traffic growth to resume for its three train services from 2017 onwards, and we forecast that its passenger volume will grow modestly by 1% p.a. in 2017 and 2018. With the introduction of new services, the Company can improve its pas-senger yield, which we expect to grow >4% p.a. in 2017-2018.
Transportation service business expansion a new earnings growth driver: GSR’s services revenue to HSR lines grew at a CAGR of >30% in 2010-2015. Revenue from those services represented 19% of its total revenue in 2015 vs. only 7% in 2010. We expect its services revenue to grow at a CAGR of 10.9% in 2016-2018, driven by fast passenger traffic growth of HSR lines in Guangdong province. Based on the comprehensive service framework agreement GSR signed with CRC, the annual cap of its revenue from the services it provides to CRC will grow at a CAGR of >15% in 2016-2018.
Near-term share price catalyst to come from a passenger tariff hike: We think a rise in the passenger tariff is already on the government’s agenda. Pas-senger tariff rate hikes have been suspended since 1995, so railway tariffs are lower than those of airlines and highways. We didn’t include the earnings impact from a passenger tariff hike in our earnings forecast. Our earnings sensitivity analysis shows that every 5ppt increase in its regular train passenger yield growth will boost our earnings forecast for the Company by >10% in 2017.
Buy with a target price of HK$5.81: Our TP is based on a target multiple of 23.5x 2017E PER. Historically, the Company has traded at an average forward PER of 17.9x. Currently the stock trades at 19.8x 2017E PER. We expect further share price upside to come from accelerated railway business reform.
INITIATE COVERAGE: Share price upside on potential passenger tariff hike
February 21, 2017
Y/E Dec 31 2013 2014 2015 2016E 2017E 2018E
Turnover (RMB m) 15,801 14,801 15,725 17,371 18,647 19,965
Recurring net profit (RMB m) 1,274 662 1,071 1,347 1,547 1,729
Net margin (%) 8.1 4.5 6.8 7.8 8.3 8.7
Recurring EPS (RMB) 0.18 0.09 0.15 0.19 0.22 0.24
% change -3.4 -48.0% 61.8% 25.8% 14.9% 11.8%
PER(x) 24.0 46.2 28.6 22.7 19.8 17.7
PBR(x) 1.1 1.1 1.1 1.1 1.1 1.1
EV/EBITDA(x) 9.2 12.3 10.2 8.7 8.1 7.6
3
CRSC [3969.HK]
BUY
Close: HK$6.20 (Feb 20, 2017)
Target Price: HK$7.74 (+24.8%)
Price Performance
Market Cap US$7,025m
Shares Outstanding 1,969m
Auditor Ernst & Young
Free Float 64.0%
52W range HK$3.79-6.55
3M average daily T/O US$12m
Major Shareholding CRSC Corporation
(75.1%)
Sources: Company data, Bloomberg
Kelly Zou—Analyst
(852) 3698-6319
kellyzou@chinastock.com.hk
Wong Chi Man, CFA—Head of Research
(852) 3698-6317
cmwong@chinastock.com.hk
Source: Company data, CGIS Research estimates
China Railway Sector We initiate coverage of CRSC with a Buy rating and TP of HK$7.74. CRSC is our top pick in the railway equipment sector because of its high earnings visibility. The Company is involved in both early- and late-cycle railway investment. Even if new line addition slows down, CRSC can benefit from an increase in demand for its prod-ucts and services related to railway maintenance and operations. We expect its earnings to grow at a CAGR of 18.3% in 2016-2018. CRSC had RMB14bn in cash on hand at the end of 1H16, which was 29% of its market cap. It is likely to have some overseas M&A to enrich its technology and product offerings for long-term growth. We think the market underappreciates its uniqueness in the industry value chain and the fact that it is a system integrator, not just an equipment producer.
Investment Highlights
Early- and late-cycle railway investment to drive railway business growth. We expect CRSC’s railway business revenue (63.5% of its total revenue in 2017E) to grow 15% p.a. in 2016-2018. CRSC provides control systems prod-ucts and services for both early- and late-cycle railway investment. Even if early-cycle railway construction investment slows down, the Company can sustain revenue growth with its product and service offerings for late-cycle HSR opera-tions. We estimate over 50% of its revenue is recurring revenue from rail control systems upgrades and replacements, which usually happen 8-10 years after its products are put into operation.
Urban transit business to outgrow its railway business. We expect CRSC’s urban transit product and service (19.5% of its total revenue in 2017E) to grow faster than its railway business. We expect its urban transit business revenue to grow 30% per annum in 2016-2018. Apart from new line addition, China is pro-moting control system connectivity among different urban transit rail lines. We expect domestic companies like CRSC to gain market share from foreign com-panies, like Siemens and Alstom.
Overseas expansion and other business diversification to drive long-term growth. We forecast that its overseas business revenue will grow at a CAGR of >17% in 2016-2018, driven by 1) railways’ “Go Overseas” strategy, and 2) CRSC’s penetration into other emerging markets with its experiences in railway “speed-up” projects. We forecast that its other business revenue will grow by 10-20% p.a. in 2016-2018, with growth from its sales expansion in areas like smart city and ultra high-speed wireless LAN technology.
BUY with a TP of HK$7.74: Our TP is based on a target multiple of 17x 2017E PER, vs. its historical average of 13.3x PER. Currently, the stock trades at 13.5x 2017E PER. We think market underappreciates its uniqueness in the in-dustry value chain and the fact that it is a system integrator, not just an equip-ment producer.
INITIATE COVERAGE: Preferred rail-equipment stock with high earnings growth
February 21, 2017
Y/E Dec 31 2013 2014 2015 2016E 2017E 2018E
Turnover (RMB m) 13,065 17,329 23,952 29,187 34,136 40,002
Recurring net profit (RMB m) 1,260 2,033 2,496 3,026 3,563 4,232
Net margin (%) 9.6% 11.7% 10.4% 10.4% 10.4% 10.6%
Recurring EPS (RMB) 0.19 0.29 0.32 0.34 0.41 0.48
% change 1.8% 49.2% 11.4% 6.4% 17.7% 18.8%
PER(x) 28.2 18.9 17.0 15.9 13.5 11.4
PBR(x) 3.8 3.3 2.6 2.2 2.0 2.6
EV/EBITDA(x) 22.2 12.1 9.6 7.7 6.3 6.1
0
50
100
150
200
250
300
350
400
450
500
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
Turnover(HK$m, rhs) Price(HK$)
4
CRRC [1766.HK]
Hold
Close: HK$7.46 (Feb 20, 2017)
Target Price: HK$7.72 (+3.5%)
Price Performance
Market Cap US$40,881m
Shares Outstanding 4,371m
Auditor Deloitte
Free Float 94.0%
52W range HK$6.45-8.35
3M average daily T/O US$184m
Major Shareholding CRCCG (54.2%)
Sources: Company data, Bloomberg
Kelly Zou—Analyst
(852) 3698-6319
kellyzou@chinastock.com.hk
Wong Chi Man, CFA—Head of Research
(852) 3698-6317
cmwong@chinastock.com.hk
Source: Company data, CGIS Research estimates
China Railway Sector We initiate coverage on CRRC with a Hold rating and a target price of HK$7.72, which
implies 3.5% upside potential. We believe its share price re-rating will still be constrained
by slow earnings growth recovery in 2017. With declining locomotive and MU sales, we
expect its earnings growth to be dampened in 2016 and 2017. While MU maintenance
revenue accounts for only ~10% of its total revenue, we expect the growth recovery from
increasing railway operations and maintenance spending to drive slower earnings growth
than for CRSC or CRRC Times Electric. We expect its earnings to remain flattish in 2016
and 2017, with earnings growth recovery only in 2018.
Investment Highlights
Core business recovery to dampen in 2017. With slow locomotive and MU sales
recovery, we expect earnings growth to be dampened in 2016 and 2017. We forecast
that its revenue will remain largely flat YoY in 2016 and 2017. Since MU maintenance
revenue accounts for ~10% of CRRC’s total revenue, we don’t expect rising mainte-
nance revenue to fully offset falling newly built MU product revenue in 2017. New line
addition, increasing HSR train density and rising maintenance demand will drive busi-
ness growth recovery from 2018 on. We expect its revenue to grow 11.3% YoY in
2018.
Urban transit business and new business growth to continue. We expect its
urban transit business revenue to grow by 20% p.a. in 2016-2018. As at the end of
9M16, the order backlog for its urban transit vehicle business stood at RMB106.9bn,
equivalent to 4.4x of its urban transit business revenue in 2015. CRRC has expanded
its business into the new energy and environmental protection equipment industries.
We forecast that its new business revenue will grow by 10-15% p.a. in 2016-2018.
Margin expansion due to post-merger cost savings. We expect its gross profit
margin to expand from 19.6% in 2015 to 20.3% in 2016. Even with changes in prod-
uct mix, we expect its gross profit margin to largely stabilize at around 20% in 2017-
2018. We also expect cost savings in SG&A. After factoring in other losses, we ex-
pect its operating profit margin to stabilize at 7.4-7.5% in 2016-2018.
HOLD with a TP of HK$7.72. We set our TP at HK$7.72 and give CRRC a Hold
rating. Our TP is based on a target multiple of 16x 2017E PER and suggests 3.5%
upside potential. Historically, the stock has traded at an average PER of 18.6x. Given
the subdued EPS growth in 2017, we believe a lower target PER multiple is appropri-
ate.
INITIATE COVERAGE: Earnings to remain subdued in 2017
February 21, 2017
Y/E Dec 31 2013 2014 2015 2016E 2017E 2018E
Turnover (RMB m) 96,525 218,451 237,785 242,311 249,659 277,982
Recurring net profit (RMB m) 4,140 10,815 11,818 12,082 12,294 13,839
Net margin (%) 4.3% 5.0% 5.0% 5.0% 4.9% 5.0%
Recurring EPS (RMB) 0.30 0.41 0.43 0.44 0.43 0.48
% change 0.2% na 5.9% 2.2% -3.1% 12.3%
PER(x) 22.0 16.1 15.2 14.9 15.4 13.7
PBR(x) 2.5 1.0 1.9 1.7 1.5 1.4
EV/EBITDA(x) 11.0 4.2 7.4 6.7 6.3 5.5
0
200
400
600
800
1,000
1,200
6.00
7.00
8.00
9.00
10.00
Jan
-16
Feb-1
6
Mar-
16
Ap
r-16
May-
16
Jun
-16
Jul-1
6
Au
g-1
6
Se
p-1
6
Oct
-16
Nov-
16
Dec-
16
Jan
-17
Feb-1
7
Turnover(HK$m, rhs) Price(HK$)
5
CRRC Times Electric [3898.HK]
Hold
Close: HK$43.95 (Feb 20, 2017)
Target Price: HK$47.60 (+8.3%)
Price Performance
Market Cap US$6,656m
Shares Outstanding 547m
Auditor Ernst & Young
Free Float 100.0%
52W range HK$36.50-49.50
3M average daily T/O US$116m
Major Shareholding CRRC ZELRI (50.2%)
Sources: Company data, Bloomberg
Kelly Zou—Analyst
(852) 3698-6319
kellyzou@chinastock.com.hk
Wong Chi Man, CFA—Head of Research
(852) 3698-6317
cmwong@chinastock.com.hk
Source: Company data, CGIS Research estimates
China Railway Sector We initiate coverage on CRRC Times Electric with a Hold rating and a TP of HK$47.60.
We expect its earnings growth to recover in 2017. We forecast that net profit will grow at a
CAGR of 12.1% in 2016-2018. We expect likely falling MU product business revenue to
constrain its earnings growth in 2017. But we believe its urban transit product sales and
other new business sales growth will remain firm, partially offsetting the growth slowdown
in its railway business. We expect cost savings from its acquisition of the IGBT production
line only to help it maintain stable margins. We think its earnings growth recovery in 2017
has largely been factored into the share price. A further share price catalyst would be
CRC’s incoming MU tenders to bring more clarity to its earnings growth outlook in 2017
and 2018.
Investment Highl ights
Late-cycle spending on railway operations to drive its railway business growth
recovery: We expect a gradual recovery in demand for the locomotive and MU prod-
uct segment resulting from the 13th FYP. New HSR line additions are expected to drive
only modest demand growth for MUs. But increases in HSR speed and the CRC focus
on shifting railway operations should drive operation and maintenance demand for its
products. The expansion of the railway freight business also supports demand growth
for its locomotive products. We expect urban transit product revenue growth to remain
firm in 2016-2018. Overall, we expect its core train-borne electrical systems (>70% of
its total revenue) to grow at a CAGR of 10.5% in 2016-2018.
IGBT and deep-sea marine engineering product business to drive long-term
growth: We forecast that the Company’s electric parts and components business
revenue will grow at a CAGR of 15.0% in 2016-2018. It has applied its IGBT modules
to its urban transit vehicle products. As its urban transit vehicle equipment sales
growth should remain strong in 2016-2018, we expect this to drive IGBT production to
achieve economies of scale and generate profit. We expect its marine engineering
product segment revenue to grow at a CAGR of 7.5% in 2016-2018. The Company
plans to build a plant for this business in Mainland China. Given the lack of major do-
mestic competitors in the deep-sea marine equipment sector and SMD’s (Soil Ma-
chine Dynamics Ltd) leading market share, it should be able to gradually develop its
sales in the domestic market in the long term.
HOLD with a TP of HK$47.60: Our TP is based on a target multiple of 15.0x 2017E
PER, which suggests 8.3% upside potential. The stock has historically traded at an
average PER of 18.7x. With slower EPS growth, we believe a lower PER multiple is
appropriate. A further share price catalyst would be CRC’s incoming MU tenders to
bring more clarity to its earnings growth outlook in 2017 and 2018.
INITIATE COVERAGE: Growth to recover in 2017 but reflected in share price
February 21, 2017
Y/E Dec 31 2013 2014 2015 2016E 2017E 2018E
Turnover (RMB m) 8,856 12,676 14,145 15,380 16,603 18,775
Recurring net profit (RMB m) 1,467 2,395 2,958 2,978 3,302 3,740
Net margin (%) 16.6% 18.9% 20.9% 19.4% 19.9% 19.9%
Recurring EPS (RMB) 1.33 2.04 2.52 2.53 2.81 3.18
% change 18.1% 52.9% 23.5% 0.7% 10.9% 13.3%
PER(x) 29.2 19.1 15.5 15.4 13.9 12.2
PBR(x) 5.1 4.2 3.4 2.9 2.5 2.1
EV/EBITDA(x) 23.4 14.7 11.9 10.6 9.2 7.8
0
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800
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16
Jun
-16
Jul-
16
Au
g-1
6
Se
p-1
6
Oct
-16
Nov-
16
Dec-
16
Jan
-17
Feb-1
7
Turnover(HK$m, rhs) Price(HK$)
1
COMPANY NEWS
Analyst: Livy Lyu (Tel: (852) 3698 6393); Livylyu@chinastock.com.hk;
Wong Chi Man, CFA (Tel: (852) 3698 6317); cmwong@chinastock.com.hk
GAMING SECTOR – UPDATE ON JAPAN’S INTEGRATED RESORTS BILL
Summary. We joined an investor tour organized by Dynam Japan (6889.HK) last week and met with a member of the Liberty Demo-
cratic Party (LDP) and Japanese National Diet. We understand that the Integrated Resorts (IR) bill enacted in December 2016 only
provides a policy framework and that it will take about a year to formulate detailed laws for implementation. At the Company level,
Dynam Japan does not rule out the possibility of getting involved in developing casino facilities in the future, but it will take some time
for careful consideration, as the investment amount could be over 500bn yen (HK$34bn) for a casino project.
Still one year to go to enact the implementation bill. After enactment on December 15, 2016, the IR bill requires the Japanese
government to enact the “Implementation bill”, which incorporates regulatory requirements and concrete provisions to deal with gam-
bling addiction within one year. According to Tsukasa Akimoto, a member of the LDP and Japanese National Diet, the implementation
bill should be enforced by end-2017, and will probably be passed during special sessions of the Diet around October. So far, the po-
tential social effects and precaution measures for addiction and violence are still under discussion by the IR project team members of
the LDP.
Two kinds of partnerships may be considered for Japanese casino operators: 1) forming JVs with foreign players with experi-
ence in operating casinos; and 2) franchising models, such as Tokyo Disneyland, i.e. foreign partners collect royalties without getting
involved in daily operations. The local prefecture government may first choose among the operators and sites before screening and
licensing from the central government. The main purpose of the IR bill is to attract more inbound tourists. They do not rule out a high-
er entrance fee for local Japanese residents to prevent any negative social impact, such as gambling addiction.
Potential changes in the regulations related to the Pachinko industry remains unclear. Most Pachinko players are seniors and
farmers. The Company believes pachinko, a local time-killing game in Japan, is different from the potential casino gambling industry
in terms of its gaming characteristics. The Company has been focusing on lower-spending pachinko machines (1 yen/ball) in the last
few years and will continue to get rid of high-volatility machines in the next couple of years. The regulation of pachinko machine vola-
tility is still in a grey area, but this should become clearer after enactment of the implementation bill.
Visit to Dynam’s Yamaguchi resort land site. We visited the Company’s staff training center in Yamaguchi and a pachinko hall in
Ishioka last week. According to management, they are still considering how to build the training center into a resort with hotel and
convention facilities. The training center is well-located by the Japan Sea, with 58 lodging rooms available for 274 guests and two
indoor natural hot spring pools. The Company does not rule out the possibility of casino facilities development in the future. But it will
take some time for careful consideration, as the investment amount could be over 500bn yen for a casino project.
Valuation. If we assume Dynam will pay a DPS of 12 yen for this financial year, the Company is offering 6.4% dividend yield. We
believe the share price may remain range-bound in the near term, as there are limited growth prospects for the existing business, and
we may not see much progress with the implementation bill before Q3 this year.
February 21, 2017
2
Figure 1: Pachinko machines in Dynam Training Center, Yamaguchi
Source: CGIS Research
Figure 2: Accommodation in Dynam Training Center, Yamaguchi
Source: CGIS Research
Figure 3: Undeveloped land site in Yamaguchi Figure 4: Pachinko hall in Ishioka, Ibaragi
Source: CGIS Research Source: CGIS Research
3
Figure 5: Pachinko players are mainly seniors
Source: CGIS Research
Figure 6: Third-party gift buyer booth by the Ishioka Pachinko hall
Source: CGIS Research
4
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BUY share price will increase by >20% within 12 months in absolute terms :
SELL share price will decrease by >20% within 12 months in absolute terms :
HOLD no clear catalyst, and downgraded from BUY pending clearer signal to reinstate BUY or further downgrade to outright SELL :
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