20161228-招商证券_香港_-铁建装备-01786.HK-Bullish_on_the_large_Chinese_railway_maintenance_machinery_leader_for_the_long_term_11页_1mb_1mb

CRCC High-Tech Equipment (1786 HK) Summary

Core Content

CRCC High-Tech Equipment (1786 HK) is identified as a leading Chinese supplier of large railway maintenance machinery, with 83.1% of the Chinese market share and 22.6% globally, ranking second in the world and first in Asia. The company is expected to benefit significantly from industry growth over the next three years, driven by new products, overhaul services, and connected transactions with its parent company, China Railway Construction (CRCC).

The report highlights that the company is bullish for long-term growth, despite a bleak 2016E due to delayed tenders and revenue decline. The stock is currently trading at 7.9x 2017E PE, which is 35% below the industry average, and the analyst believes this valuation is priced in for current results, with a target price of HK$3.90 (23% upside) based on 9.7x 2017E PE.

Main Business and Growth Drivers

1. Market Leadership

• China's largest railway maintenance machinery supplier with over 80% market share in China.
• Global market share of 22.6%, second only to Austria's Plasser & Theurer.
• Historical sales from 1989 to 2014 accounted for 81.5% of the total number of large-scale railway maintenance machines in China.
• Sales volume dominance at 83.5% / 82.0% / 83.1% in 2012–2014.

2. Growth Drivers

• New Products: The company is actively developing new products such as catenary inspection and maintenance vehicles, winter service vehicles, sand removal vehicles, and suction sewage vehicles.
• Overhaul Services: With a peak overhaul period coming, the company is expected to benefit from overhaul services as revenue from this segment is projected to rise to 13% of total revenue.
• Expansion of Production Capacity: The company will expand production capacity to meet growing demand.
• Connected Transactions with CRCC: The transaction cap with CRCC was increased to RMB1bn in 2016E, with RMB600mn for overseas orders. This is expected to significantly boost revenue.

Financial Highlights (2014–2018E)

Metric	2014	2015	2016E	2017E	2018E
Revenue (RMB mn)	3,477	3,973	4,117	4,589	5,121
Revenue CAGR	9.7%	14.3%	3.6%	11.4%	11.6%
Net Profit (RMB mn)	355	456	480	544	615
Net Profit CAGR	23.7%	28.6%	5.2%	13.5%	13.0%
EPS (RMB)	0.36	0.45	0.32	0.36	0.40

Key Metrics and Valuation

• 2016E P/E: 8.94x
• 2017E P/E: 7.88x
• 2017E P/B: 0.72x
• 2016-18E EPS CAGR: 13.2%
• 2016E Gross Margin: 24.3%
• 2016E Net Margin: 11.7%
• 2016E ROE: 8.6%
• 2016E ROA: 6.7%
• 2016E Debt to Assets: 0.0%
• 2016E Dividend Yield: 2.3%
• 2016E PEG: 0.67x

Market Outlook

• China's Ballasted Track Expansion: Expected to add over 20,000 km by 2020.
• Ownership Ratio: 30.5 units per km by 2020.
• Penetration Rate: Expected to reach 60%.
• Market Growth (2016–2020E):
  • Large Railway Maintenance Machinery: 10% CAGR
  • Overhaul Market: 19% CAGR

Investment Theme

• The company is a direct beneficiary of the growth in the railway maintenance machinery industry.
• It has a unique business model, focusing on sales and services to CRCC, which is a major customer.
• Small market cap compared to peers and narrow market focus are key factors affecting valuation.

SWOT Analysis

Strengths

• Absolute market leadership in China's large railway maintenance machinery.
• Complete product and service coverage across the entire life cycle.
• Active R&D in new product development.

Weaknesses

• Reliant on China Railway for orders.
• Main products are ballasted track-related.

Opportunities

• Rapid growth in the overhaul service market.
• Urban rail transit and high-speed ballastless track markets.
• Increased orders from CRCC's overseas projects.

Challenges

• Overseas revenue may fall below expectations.
• New markets may not meet performance targets.
• Macroeconomic conditions may impact growth.

Key Risk Factors

• Decline in China Railway tenders could significantly impact revenue.
• Underperformance in overseas operations or new markets could affect growth.
• New product penetration may not meet expectations, leading to reduced market share.

Conclusion

The report initiates a BUY recommendation with a target price of HK$3.90, citing long-term growth potential and undervaluation relative to industry peers. Despite weak 2016E performance, the company is well-positioned to benefit from market expansion, product innovation, and increased connected transactions with CRCC. The analyst believes the current valuation reflects pessimism about 2016E results, but long-term fundamentals are strong.