20180530-中国银河国际证券-中国中车-01766.HK-Earnings_bottoming_out_makes_CRRC_a_defensive_stock_in_2018_6页_657kb

CRRC [1766.HK] Summary

Core Content

CRRC (China Railway Rolling Stock Corporation) is identified as a defensive stock in 2018 due to its earnings bottoming out and the potential for earnings recovery. The report highlights that while the company's core railway business growth remains uncertain and dependent on railway reforms, other segments such as the MU (Multiple Units) and urban transit vehicle businesses are expected to drive revenue and margin improvements.

Key Financial Highlights

• Earnings Recovery: The report forecasts a 15.4% YoY increase in net profit for 2018 and a 17.1% YoY increase in 2019, with an overall CAGR of 16.2% from 2017 to 2019.
• Margin Expansion: The gross profit margin is expected to increase from 22.1% in 2017 to 22.4% in 2018, and the operating profit margin is projected to rise from 7.7% to 8.2% in the same period.
• Revenue Growth: Revenue is expected to grow by 7.4% in 2018 and 12.1% in 2019, with the MU business expected to offset declines in locomotive and freight wagon segments.
• Segment Performance:
  • Locomotives: Expected to decline in 2018 but show growth in 2019.
  • Passenger Carriages: Expected to show modest growth in 2018 and 2019.
  • Freight Wagons: Expected to decline in 2018 but show a decrease in the rate of decline in 2019.
  • Multiple Units: Expected to grow by 8.0% in 2018 and 14.1% in 2019.
  • Railway Equipment: Expected to show slight decline in 2018 but growth in 2019.
  • Modern Service: Expected to grow by 10.0% in 2018 and 10.0% in 2019.

Valuation Metrics

• Current Price: HK$7.10 (May 29, 2018)
• Target Price: HK$9.10 (+28.2%)
• PER (2018E): 13.4x, near the low end of its 7-year range (HK$6.46–8.82)
• PBR: 1.3x (2018E), declining from 1.6x in 2015
• EV/EBITDA: 5.9x (2018E), decreasing from 6.5x in 2015
• Net Profit Margin: Expected to increase from 4.9% in 2017 to 5.6% in 2018 and 5.9% in 2019
• EBITDA Margin: Expected to increase from 10.0% in 2017 to 11.3% in 2018 and 11.3% in 2019

Investment Viewpoint

• Buy Rating Maintained: The analyst maintains a Buy rating on CRRC, citing its potential for earnings recovery and margin expansion.
• Business Restructuring: CRRC has already made progress in restructuring, including a severance payment of RMB1.1bn and reducing staff by 7,000 in 2017. The restructuring is expected to continue in 2018 with a smaller scale.
• Core Railway Business: Growth in this segment is dependent on railway reforms, and while it is expected to be lackluster in 2018, upward demand trends are anticipated from new rail line additions and rising maintenance demand.
• Earnings Forecast: The report has fine-tuned its earnings forecast for 2018–2019, with the new estimates slightly lower than the consensus and old estimates.

Risk and Outlook

• Downside Risk Limited: The share price is expected to have limited downside risk as earnings are anticipated to bottom out in 2018.
• Re-rating Opportunity: The company is viewed as a re-rating opportunity due to its reduced valuation and positive earnings outlook.
• Liquidity Constraints: The tightening liquidity in the market is a factor that makes CRRC a safe investment for avoiding market volatility in 2018.

Summary Table

Analyst Information

• Kelly Zou – Analyst
  • Contact: (852)3698-6319
  • Email: kellyzou@chinastock.com.hk
• Wong Chi Man, CFA – Head of Research
  • Contact: (852)3698-6317
  • Email: cmwong@chinastock.com.hk

Disclaimer

This report is issued by China Galaxy International Securities and is not directed at any person or entity in jurisdictions where it would be illegal or require registration. The report is based on reliable information sources but does not guarantee accuracy. No representation or warranty is made regarding the report's accuracy or future performance. Investors are advised to consult their own financial advisors.

Disclosure of Interests

• China Galaxy Securities Co., Ltd. is the parent company of China Galaxy International, which includes Galaxy International Securities.