China Railway Group Limited (390.HK) Summary
Core Content and Outlook
China Railway Group Limited (CRG) is a central state-owned enterprise (SOE) construction company with a strong presence in the domestic construction market. The report highlights the positive outlook for CRG's earnings growth in 2019E, driven by increased exposure to the higher-margin Public-Private Partnership (PPP) investment business and the acceleration of railway infrastructure investment, particularly in Q4 2018.
- Earnings Growth: CRG reported a net profit growth of 18.2% YoY in 9M18, fueled by margin expansion and strong performance in its PPP-related construction business.
- Railway Investment: Railway Fixed Asset Investment (FAI) growth reversed from a 1.4% YoY decline in 7M18 to a 4.9% YoY increase in 9M18. The company expects railway FAI in 2018E to reach RMB800bn, 9.3% above the initial full-year target, and to exceed RMB800bn in 2019-2020E.
- Market Share: With a 45% share of the railway construction market, CRG is well-positioned to benefit from the rising railway investment in 2019E.
Key Financial Highlights
Revenue and Profitability
| Metric |
2015 |
2016 |
2017 |
2018E |
2019E |
| Revenue (RMB m) |
599,942 |
632,856 |
688,773 |
742,544 |
808,235 |
| Net Profit (RMB m) |
11,786 |
12,703 |
14,204 |
19,250 |
22,284 |
| Net Profit Margin (%) |
1.9 |
1.9 |
2.2 |
2.4 |
2.6 |
| EPS (RMB) |
0.53 |
0.52 |
0.67 |
0.79 |
0.86 |
EBIT and EBITDA
| Metric |
2015 |
2016 |
2017 |
2018E |
2019E |
| EBIT (RMB m) |
19,941 |
21,617 |
21,994 |
30,138 |
34,924 |
| EBITDA (RMB m) |
27,754 |
30,378 |
31,051 |
40,206 |
45,528 |
| EBITDA Margin (%) |
4.6 |
4.8 |
4.5 |
5.4 |
5.6 |
Investment Highlights
- Strong Earnings Momentum: Earnings growth in 9M18 was supported by margin expansion, especially from the PPP-related construction business, which contributed to a 0.7ppt increase in gross profit margin to 9.5%.
- Debt-to-Equity Swap: CRG is set to complete a debt-to-equity swap in 2018, which is expected to reduce its net debt/equity ratio from 33.8% to 25.8%.
- Target Price Increase: The target price (TP) for CRG was lifted from HK$7.90 to HK$8.30, reflecting a 15.4% upside to the current price of HK$7.19 (Nov 30, 2018).
- Valuation Adjustments: The target EV/EBITDA multiple was raised from 5.7x to 6.0x, based on 2019E EBITDA and net debt forecasts.
Financial Ratios and Metrics
Valuation Metrics
| Metric |
2015 |
2016 |
2017 |
2018E |
2019E |
| PE (x) |
12.0 |
12.3 |
9.5 |
8.1 |
7.4 |
| PB (x) |
1.1 |
1.0 |
0.9 |
0.9 |
0.8 |
| EV/EBITDA (x) |
8.4 |
6.7 |
6.5 |
5.5 |
5.2 |
| Net Debt/Equity (%) |
62.6 |
38.6 |
33.8 |
41.5 |
45.2 |
Operational Metrics
| Metric |
2015 |
2016 |
2017 |
2018E |
2019E |
| Revenue Growth (%) |
1.7 |
5.5 |
8.8 |
7.8 |
8.8 |
| EBIT Margin (%) |
3.3 |
3.4 |
3.2 |
4.1 |
4.3 |
| Net Profit Margin (%) |
1.9 |
1.9 |
2.2 |
2.4 |
2.6 |
| ROE (%) |
9.0 |
8.4 |
9.8 |
10.0 |
10.6 |
Revenue Breakdown (RMB m)
| Segment |
2015 |
2016 |
2017 |
2018E |
2019E |
| Construction |
544,207 |
559,223 |
611,095 |
647,761 |
699,582 |
| Design |
10,711 |
12,312 |
13,761 |
15,137 |
17,408 |
| Machinery |
15,782 |
17,063 |
18,521 |
20,373 |
22,410 |
| Real Estate |
29,260 |
32,976 |
30,951 |
34,665 |
38,132 |
| Other Business |
40,044 |
42,671 |
53,074 |
63,689 |
73,242 |
| Elimination |
-40,062 |
-31,389 |
-38,629 |
-39,081 |
-42,539 |
Key Financials Overview
- EBITDA: Increased significantly in 2018E to RMB40,206m, up from RMB31,051m in 2017.
- Net Finance Costs: Rose by 55.0% YoY in 9M18, reflecting increased debt leverage due to exposure to PPP projects.
- Profit from Associates and JCEs: Increased from RMB409m in 9M17 to RMB1,266m in 9M18, contributing to higher net profit.
- Profit After Tax (PAT): Rose to RMB13,199m in 9M18, up from RMB11,081m in 9M17, with a 19.1% YoY increase.
Strategic Implications
- PPP Exposure: The company's growing involvement in PPP projects has improved its margins and profitability.
- Debt Reduction: The debt-to-equity swap is expected to reduce leverage and provide more room for future growth in the PPP business.
- Infrastructure Investment: The central government's push for infrastructure FAI growth, particularly in railways, is anticipated to further boost CRG's earnings and share price.
Conclusion
CRG is maintaining a BUY rating due to its strong earnings growth, margin expansion, and strategic exposure to the PPP investment business. The company's ability to capitalize on the accelerated railway investment and its improved financial position through the debt-to-equity swap positions it well for continued growth in 2019E. The target price increase reflects confidence in its future performance and valuation potential.
