20180102-广发证券_香港_-中国中车-01766.HK-Strong_4Q17_new_orders__maintain_Buy_5页_600kb

CRRC (1766 HK) Equity Research Summary

Core Content

This report provides an equity research analysis of CRRC (1766 HK), focusing on its performance, future outlook, and valuation. The report maintains a Buy rating with a target price of HK$9.9, based on DCF valuation and the company's strong 4Q17 new orders.

Key Highlights

• Strong 4Q17 Performance:
  CRRC announced key orders worth Rmb68bn in 4Q17, with Rmb30.45bn in EMU orders and Rmb22.17bn in urban transit vehicle orders.
  The company's total 2017 key orders reached Rmb163.8bn, with 47.4% of the orders coming from the fourth quarter.
  There was a significant rebound in new orders, especially in EMU orders, which increased from Rmb3.95bn in 2016 to Rmb66.4bn in 2017.
  Urban transit vehicle orders saw a 69.1% YoY growth in 2017.

• 2018 Outlook:
  China Railway Corporation (CRC) is targeting a Rmb73.2bn rail FAI budget for 2018, a 8.5% YoY decrease.
  The company expects 35 rail projects to start construction and 4,000 km of new rail lines to be operational, including 3,500 km of high-speed rail lines.
  Despite the reduced budget, the report reiterates a positive view on the rail equipment sector, as the goal of 150,000 km of rail lines by 2020 will drive demand.

• Valuation and Financial Performance:
  The stock is currently trading at 13.7x 2018E P/E.
  The report maintains a Buy rating and a target price of HK$9.9, which represents a 17x 2018E P/E.
  Free cash flow is expected to increase significantly, with Rmb14,676m in 2018E and Rmb27,601m in 2025E.
  Net profit is forecasted to grow 22% YoY in 2018E to Rmb14,121m.

• WACC and Valuation Assumptions:
  The WACC is calculated at 9.8%, based on a long-term debt/equity structure of 50.0%, a risk premium of 10.0%, and a risk-free rate of 3.7%.
  The sustainable growth rate is 3%, and the 2020-2025 CAGR is 5%.
  The value of the company is estimated at HK$288,997m, based on DCF valuation.

Financial Metrics

Key Risks

• High reliance on CRC procurement.
• Lower-than-expected rail equipment FAI.
• Delays in rapid transit project construction.
• Delays in receivable collection from clients.
• Pressure on product ASP (Average Selling Price).

Peer Comparison

Analyst Rating Definitions

• Buy: Stock expected to outperform the Hong Kong Hang Seng Index by more than 15%.

• Accumulate: Stock expected to outperform the benchmark by more than 5% but not more than 15%.

• Hold: Expected stock relative performance ranges between -5% and 5%.

• Underperform: Stock expected to underperform the benchmark by more than 5%.

• Sector Ratings:

  • Positive: Sector expected to outperform the benchmark by more than 10%.
  • Neutral: Expected sector relative performance ranges between -10% and 10%.
  • Cautious: Sector expected to underperform the benchmark by more than 10%.

Summary of Key Takeaways

• CRRC's 4Q17 new orders were Rmb68bn, significantly higher than the previous quarter.
• Despite a 8.5% YoY decrease in 2018 rail FAI budget, the report believes the rail equipment demand will remain strong.
• The Buy rating is maintained with a target price of HK$9.9, based on DCF valuation and a 17x 2018E P/E.
• Positive outlook on the rail equipment sector due to the 13th FYP targets.
• Key risks include dependency on CRC and potential delays in project execution.
• The company is expected to see strong net profit growth in 2018 and beyond.