CRRC Times Electric [3898.HK] Summary
Core Content
CRRC Times Electric, a subsidiary of CRRC, reported its first-half 2018 (1H18) financial results, which were below market expectations. However, the company showed signs of improvement in Q2 2018, with earnings growth beginning to recover. The report highlights the company's financial performance, market outlook, and valuation metrics, along with the analysts' view on the stock.
Key Financials
Revenue and Profit Trends
- Total Revenue (1H18): Fell by 3.0% YoY to RMB 6,320 million.
- Net Profit (1H18): Declined by 7.2% YoY to RMB 1,055 million due to margin contraction.
- Gross Profit Margin (1H18): Contracted to 38.5% (down 0.5ppt YoY).
- Operating Profit Margin (1H18): Contracted to 19.3% (down 0.5ppt YoY).
- Net Profit Margin (1H18): Contracted to 16.5% (down 0.7ppt YoY).
- SG&A Expenses (1H18): Increased to 19.1% of total sales from 18.1% in 1H17.
Earnings Forecast
- 2018E Revenue: Expected to reach RMB 16,730 million.
- 2018E Net Profit: Forecasted at RMB 2,689 million.
- 2019E Revenue: Expected to rise to RMB 19,448 million.
- 2019E Net Profit: Forecasted at RMB 3,140 million.
- EPS (2018E): Estimated at RMB 0.88 (adjusted).
- EPS (2019E): Estimated at RMB 1.40 (adjusted).
Valuation Metrics
- Forward PER (2018E): 17.2x.
- Forward PER (2019E): 14.7x.
- Historical Average Forward PER: 16.6x.
- Target Price (TP): Raised from HK$36.40 to HK$40.50.
- PER Multiple: Adjusted from 12x to 14x due to improved market sentiment.
Main Points
- 1H18 Results: Unexciting, with revenue and net profit both declining YoY.
- Q2 Improvement: Earnings growth picked up in Q2, with net profit rising 2.6% YoY.
- Market Outlook: Core railway business growth is expected from the release of new locomotive orders, especially from 2H18 onwards.
- Reforms and Demand: Railway freight business reforms are anticipated to boost demand for locomotives and freight wagons.
- New Business Impact: New business segments, such as IGBT, reported revenue decline in 1H18 and may not significantly contribute to earnings growth in the short term.
- Investment Recommendation: Maintain a HOLD rating, but increase the target price due to the improved PER multiple.
- Valuation Comparison: Current stock price is trading at a discount relative to the forward PER multiple, suggesting potential for growth.
Key Revenue Segments (1H18)
| Segment |
Revenue (RMB m) |
YoY Change (%) |
| Locomotive |
745 |
-13.0% |
| MU |
1,393 |
-11.1% |
| Urban rail equipment |
1,642 |
+28.8% |
| Train power converters and control systems |
3,780 |
+2.2% |
| Train operation safety equipment |
231 |
-2.5% |
| ECS for large railway maintenance vehicles |
1,302 |
-6.7% |
| Train-borne electrical systems |
5,312 |
-0.3% |
| Key electric part and component products |
623 |
-11.2% |
| Marine engineering products and others |
385 |
-20.6% |
| Total Revenue |
6,320 |
-3.0% |
Financial Ratios
| Metric |
1H18 |
YoY Change (%) |
| Gross Profit Margin |
38.5% |
-0.5% |
| EBITDA Margin |
22.7% |
-1.4% |
| EBIT Margin |
19.3% |
-0.5% |
| Net Profit Margin |
16.5% |
-0.7% |
| Current Ratio |
3.0 |
+0.2x |
| Quick Ratio |
2.5 |
+0.1x |
| Net Debt/Equity |
-21.8% |
- |
| ROE |
13.5% |
- |
Analysts' View
- Investment Highlights:
- Unexciting 1H18 results but earnings growth is gradually improving.
- The core railway business is expected to recover as new locomotive orders are anticipated.
- New business diversification is still too early to significantly impact earnings.
- Recommendation: Maintain HOLD rating, but raise target price due to improved market sentiment and higher PER multiple.
- Price Performance: The share price has rallied since July, but the analysts believe the core growth story has largely been factored into the current price.
Summary of Financial Statements
Balance Sheet (2018E)
| Item |
Value (RMB m) |
| Cash |
4,644 |
| Trade and Bill Receivables |
12,383 |
| Inventories |
3,897 |
| Total Current Assets |
24,034 |
| Long-term Equity Investment |
257 |
| PPE, net |
3,005 |
| Total Non-current Assets |
5,059 |
| Total Assets |
29,093 |
| Total Liabilities |
8,870 |
| Shareholders Fund |
20,223 |
| Total Liab & S/H Fund |
29,093 |
Cash Flow Statement (2018E)
| Item |
Value (RMB m) |
| EBITDA |
3,454 |
| Operating Cash Flow |
1,860 |
| Investing Cash Flow |
-460 |
| Financing Cash Flow |
-564 |
| Net Change in Cash/Debt |
837 |
| Free Cash Flow (FCF) |
1,400 |
Conclusion
The report indicates that while CRRC Times Electric's 1H18 results were disappointing, there is potential for recovery in the core railway business starting from 2H18. The analysts maintain a HOLD rating but increase the target price due to improved market sentiment and valuation metrics. New business segments are still in early stages and may not contribute significantly to earnings growth in the short term. The company's financial ratios and balance sheet suggest a stable financial position, with improving liquidity and operational efficiency.
