CRRC 1Q16 Financial Summary and Investment Analysis
Core Content Overview
CRRC (China Railway Rolling Stock Corporation) reported a net profit of RMB1.99bn for 1Q16, showing a 2% YoY increase, which was in line with estimates. Its revenue remained largely flat YoY, as rising sales of Multiple Units (MUs) offset the decline in locomotive sales. The gross margin improved by 0.3 percentage points to 22.7%, mainly due to the higher contribution margin from MU sales. The EBIT margin also improved by 0.6 percentage points to 8.1%, contributing to a 7.5% YoY increase in EBIT. The improvement in EBIT was attributed to reduced selling costs and higher other income, including government grants.
Key Financial Highlights
- Net Profit (1Q16): RMB1.99bn (+2% YoY)
- Revenue (1Q16): Flat YoY, driven by increased MU sales
- Gross Margin (1Q16): 22.7% (+0.3ppt YoY)
- EBIT Margin (1Q16): 8.1% (+0.6ppt YoY)
- EBIT (1Q16): RMB3.24bn (+7.5% YoY)
Investment Opinion
- Price Objective: HK$11.20
- Investment Rating: Buy
- Reasons for Buy Rating:
- The merger of CSR and CNR is expected to help CRRC avoid price competition and improve margins for Rapid Transit Vehicles (RTVs) and overseas orders.
- Potential for more overseas locomotive orders and breakthroughs in MU exports.
- Domestic revenue is projected to rise gradually due to increased RTV delivery and MU maintenance revenue starting in 2017.
- Upsides: More domestic MU demand and overseas orders.
- Risks: Weaker-than-expected demand for locomotives and MUs in China.
Financial Forecast (Estimates - Dec)
| Year |
Net Income (Adjusted - mn) |
EPS |
EPS Change (YoY) |
Free Cash Flow / Share |
| 2016E |
12,872 |
0.47 |
8.5% |
0.265 |
| 2017E |
14,566 |
0.53 |
13.2% |
0.396 |
| 2018E |
15,976 |
0.58 |
9.7% |
0.459 |
Valuation Metrics (Dec)
| Metric |
2014A |
2015A |
2016E |
2017E |
2018E |
| P/E |
15.42x |
14.80x |
13.63x |
12.04x |
10.98x |
| Dividend Yield |
1.95% |
2.33% |
2.18% |
2.49% |
2.80% |
| EV / EBITDA |
9.89x |
8.80x |
7.95x |
7.28x |
6.83x |
| Free Cash Flow Yield |
10.36% |
3.02% |
4.12% |
6.16% |
7.14% |
Key Income Statement Data (Dec)
| Item |
2014A |
2015A |
2016E |
2017E |
2018E |
| Sales |
217,802 |
237,785 |
236,182 |
249,906 |
258,142 |
| Gross Profit |
42,977 |
46,535 |
47,178 |
49,572 |
52,211 |
| Operating Profit |
15,189 |
16,750 |
18,114 |
20,121 |
21,949 |
| Net Income (Adjusted) |
10,547 |
11,862 |
12,872 |
14,566 |
15,976 |
Key Cash Flow Statement Data (Dec)
| Item |
2014A |
2015A |
2016E |
2017E |
2018E |
| Net Income |
10,511 |
11,871 |
12,872 |
14,566 |
15,976 |
| Depreciation & Amortization |
5,241 |
6,217 |
7,315 |
7,654 |
7,662 |
| Cash Flow from Operations |
28,041 |
14,505 |
18,591 |
20,200 |
21,912 |
Key Balance Sheet Data (Dec)
| Item |
2014A |
2015A |
2016E |
2017E |
2018E |
| Total Assets |
298,677 |
311,694 |
323,365 |
342,970 |
354,829 |
| Total Equity |
102,102 |
113,575 |
124,017 |
136,946 |
150,819 |
| Total Liabilities |
196,575 |
198,119 |
199,348 |
206,024 |
204,009 |
| Net Debt |
-9,305 |
-10,993 |
-6,376 |
-11,851 |
-18,273 |
Operating Metrics
| Metric |
2014A |
2015A |
2016E |
2017E |
2018E |
| Return On Equity |
12.9% |
12.7% |
12.8% |
13.3% |
13.3% |
| Return On Capital Employed |
9.3% |
9.2% |
9.4% |
9.6% |
9.9% |
| Operating Margin |
7.0% |
7.0% |
7.7% |
8.1% |
8.5% |
| EBITDA Margin |
9.4% |
9.7% |
10.8% |
11.1% |
11.5% |
Valuation Rationale
- SOTP-based Price Objective: HK$11.20
- Valuation Method: Using a 10.5x EV/EBITDA multiple for the rolling stock business, which is 10% higher than the industry average and historical average, reflecting the upside potential from overseas expansion and increased demand for MUs.
- Subsidiary Valuation: Zhuzhou CSR (3898 HK) is valued at 15x EV/EBITDA, 20% higher than its historical average, due to its potential for increased sales to new customers and CRRC's overseas expansion.
Stock Data
- Price: 7.68 HKD
- 52-Week Range: 6.61 HKD - 16.98 HKD
- Price to Book Value: 1.7x
- Market Value: 209,578 HKD
- Free Float: 44.1%
- BofAML Ticker / Exchange: CRRRF / HKG
- Bloomberg / Reuters: 1766 HK / 1766.HK
- ROE (2016E): 12.8%
- Net Debt to Equity (Dec-2015A): -9.7%
Risk and Growth Drivers
- Growth Drivers:
- Rising MU maintenance revenue
- Increased RTV delivery in China
- More profitable overseas orders
- Risks:
- Weaker-than-expected demand for locomotives and MUs in China
Summary of Key Changes
| Metric |
Previous |
Current |
| 2016E Rev (m) |
236,667.5 |
236,181.7 |
| 2017E Rev (m) |
252,449.8 |
249,905.6 |
| 2018E Rev (m) |
260,205.8 |
258,142.2 |
| 2016E EPS |
0.48 |
0.47 |
| 2017E EPS |
0.55 |
0.53 |
| 2018E EPS |
0.60 |
0.59 |
| 2016E EBITDA (m) |
25,154.5 |
25,428.7 |
Conclusion
CRRC's 1Q16 results reflect a stable revenue and improved profitability, primarily driven by increased MU sales and cost optimization. The company's strategic moves, including the CSR-CNR merger, are expected to enhance its market position and margins. Despite a slight net profit growth due to FX losses, the overall financial health and growth prospects support the Buy rating, with a price objective of HK$11.20. The valuation suggests strong upside potential, particularly in overseas expansion and increased demand for MUs and RTVs.