Zhuzhou CRRC Summary: 1H16 Performance and Valuation
Core Content
Zhuzhou CRRC (ZZ CRRC) reported a 1H16 net profit increase of 5.5% YoY, reaching RMB1,286mn, slightly above the estimated figure. This was driven by a 14% YoY revenue growth, primarily due to increased sales of traction systems for Multiple Units (MUs) and Rapid Transit Vehicles (RTVs). However, the gross margin declined by 1.6ppt YoY to 37.6%, attributed to a shift in product mix and higher R&D costs.
Main Points
- Traction System Growth: Sales for traction systems in MUs and RTVs rose by 19‰ and 39‰ YoY, respectively, due to increased demand and secured backlogs.
- Locomotive Decline: Locomotive traction system sales decreased by 13‰ YoY, due to a drop in exports to South Africa and weak railway freight demand expected in 2H16.
- R&D Cost Increase: The rise in R&D expenses reflects the development of traction systems for China Standard MUs and fast-speed locomotives, expected to drive growth from FY17.
- Earnings Outlook: Despite a slow growth year in FY16, the firm expects 12–13% annual EPS growth in FY17–18E, fueled by traction system supply to CNR, overseas demand, and expansion of IGBT sales.
- Valuation: The Price Objective (PO) remains at HK$60.6, with the stock currently trading at a discounted valuation based on projected earnings and potential for growth.
Key Financial Metrics
| Metric |
2014A |
2015A |
2016E |
2017E |
2018E |
| Net Income (Adjusted - mn) |
2,395 |
2,959 |
3,024 |
3,426 |
3,851 |
| EPS |
2.04 |
2.52 |
2.57 |
2.91 |
3.28 |
| EPS Change (YoY) |
52.9% |
23.5% |
2.2% |
13.3% |
12.4% |
| Dividend / Share |
0.400 |
0.450 |
0.510 |
0.730 |
0.980 |
| Free Cash Flow / Share |
1.47 |
0.247 |
0.334 |
1.35 |
1.57 |
Valuation Metrics
| Metric |
2014A |
2015A |
2016E |
2017E |
2018E |
| P/E |
18.88x |
16.01x |
15.99x |
14.12x |
12.56x |
| Dividend Yield |
1.04% |
1.12% |
1.24% |
1.77% |
2.38% |
| EV / EBITDA* |
15.29x |
12.20x |
11.64x |
10.25x |
9.44x |
| Free Cash Flow Yield* |
3.57% |
0.600% |
0.812% |
3.27% |
3.81% |
*For full definitions of iQ method measures, see page 13.
Key Changes
| Metric |
Previous |
Current |
| 2016E Rev (m) |
14,291.9 |
14,587.4 |
| 2017E Rev (m) |
15,799.5 |
16,166.7 |
| 2018E Rev (m) |
17,612.2 |
18,129.0 |
| 2016E EPS |
2.62 |
2.57 |
| 2017E EPS |
2.95 |
2.91 |
| 2018E EPS |
3.32 |
3.28 |
| 2016E EBITDA (m) |
3,759.4 |
3,755.6 |
| 2017E EBITDA (m) |
4,332.5 |
4,264.2 |
| 2018E EBITDA (m) |
4,702.1 |
4,632.2 |
| 2016DPS |
0.52 |
0.51 |
Investment Rationale
- Buy Rating: The firm maintains a Buy rating, citing expected traction system supply to CNR, overseas expansion, and IGBT sales growth.
- Risks: Potential risks include weaker railway freight demand and lower-than-expected high-speed railway passenger transport growth.
SOTP-Based Valuation
| Segment |
Est. EV (HK$m) |
Net Debt (HK$m) |
Minority Interest (HK$m) |
Minority Stake (%) |
Est. NAV (HK$m) |
% of Total (%) |
NAV/sh Valuation Basis (HK$) |
| Train-born systems and components |
64,289 |
4,047 |
-1,230 |
1.80% |
67,106 |
94.2% |
57.1 (13.5x 17E EV/EBITDA) |
| JCEs & associates |
- |
- |
- |
- |
691 |
1.0% |
0.6 (12x 17E P/E) |
| Financial assets |
- |
- |
- |
- |
3,451 |
4.8% |
2.9 (1x P/B) |
| Total NAV (YE17 PO) |
64,289 |
4,047 |
-1,230 |
1.80% |
71,248 |
100.0% |
60.6 |
Valuation Comparison
| Company |
B'berg Code |
BofA ML Rating |
Last Price |
Mkt. Cap (US$ m) |
Trading Curr. |
EPS CAGR (%) |
EV/EBITDA (x) |
P/E (x) |
P/B (x) |
ROE (%) |
Div Yield (%) |
Net Gearing YE15 (%) |
| CSCI |
3311 HK |
BUY |
9.34 |
5,407 |
HKD |
7% |
11.9x |
8.8x |
9.6x |
1.8x |
20.8% |
17.4% |
| CCCC |
1800 HK |
NEUTRAL |
9.36 |
19,526 |
HKD |
16% |
9.4x |
7.5x |
6.6x |
0.9x |
11.1% |
11.4% |
| CRCC |
1186 HK |
BUY |
10.00 |
17,514 |
HKD |
8% |
5.3x |
8.4x |
7.5x |
1.0x |
12.5% |
11.8% |
| CRG |
390 HK |
BUY |
6.15 |
18,120 |
HKD |
8% |
7.8x |
9.8x |
8.7x |
1.0x |
10.7% |
9.9% |
| Average |
- |
- |
- |
- |
- |
- |
8.6x |
9.1x |
1.2x |
13.8% |
12.6% |
2.4% |
Stock Data
| Metric |
Value |
| Price |
48.10 HKD |
| Price Objective |
60.60 HKD |
| Date Established |
19-May-2016 |
| Investment Opinion |
C-1-7 |
| 52-Week Range |
33.55 HKD–59.30 HKD |
| Market Value (mn) |
56,540 HKD |
| Free Float |
46.4% |
| BofAML Ticker / Exchange |
ZHUZF / HKG |
| Bloomberg / Reuters |
3898 HK / 3898.HK |
| ROE (2016E) |
20.6% |
| Net Dbt to Eqty (Dec-2015A) |
-16.9% |
Company Overview
Zhuzhou CRRC is a leading provider and integrator of train-borne electrical systems in China, engaged in the development, manufacturing, and sales of train power converters, auxiliary power supply equipment, control systems, and electrical components for the PRC railway industry, urban rail systems, and non-railway applications. It is a 52% subsidiary of CRRC.
Conclusion
Zhuzhou CRRC's 1H16 performance was positive, with net profit growth slightly exceeding expectations, driven by traction system sales. However, gross margin contraction and higher R&D costs were noted. The firm is expected to recover growth from FY17E, with potential for EPS growth and valuation upside. The Buy rating is maintained, with a Price Objective of HK$60.6, indicating attractive valuation based on future earnings and potential overseas expansion.
