20180823-中国银河国际证券-广深铁路股份-00525.HK-Earnings_growth_accelerated_in_1H18,_attractive_valuation_based_on_a_low_PEG_ratio_6页_797kb

Guangshen Railway (525.HK) Summary

Core Content

Guangshen Railway (GSR) released its 1H18 results on 22 August 2018, showing strong earnings growth and a positive outlook for the second half of 2018. The company reported a total revenue increase of 13.3% YoY and a net profit growth of 28.6% YoY to RMB654m. The earnings growth was driven by railway reforms and improved revenue mix, with the operating profit margin expanding from 7.9% in 1H17 to 9.2% in 1H18.

The stock price had declined by 33.3% CYTD due to market volatility and the delay in approving a rail passenger tariff hike. Despite this, the analysts maintain a BUY rating, adjusting the target price to HK$5.80, a 7% reduction, to reflect the revised earnings forecast and RMB depreciation.

Main Points

• Earnings Growth:

  • 1H18: Total revenue up 13.3%, net profit up 28.6% YoY.
  • Q2 2018: Earnings growth slowed due to the one-time high-speed train refurbishment costs.
  • 2H18: Expected margin expansion and earnings acceleration to 46.1% YoY for 2018.

• Valuation:

  • Current PER: 14.6x for 2018E, 12.7x for 2019E.
  • Historical average: 18x forward PER.
  • PEG ratio is attractive, indicating potential for share price re-rating.

• Business Segments:

  • Passenger transportation: Revenue grew 3.9% YoY, with consistent traffic growth.
  • Freight transportation: Revenue fell 3.0% YoY due to rule changes in revenue booking.
  • Railway network usage: Revenue surged 63.1% YoY, driven by services provided to other railway bureaus.
  • Other business: Slight decline in revenue, but remains a stable component.

• Margin Expansion:

  • Operating profit margin expanded from 7.9% to 9.2% in 1H18.
  • Expected to rise to 9.8% in 2H18 due to reduced maintenance costs from completed refurbishment work.

• Land Resource Development:

  • GSR announced preliminary work for a new land parcel redevelopment project in Guangzhou.
  • This signals positive momentum in railway land resource development, which is aligned with broader railway reforms.
  • The Guangdong government is also accelerating land development along urban transport networks.

Key Financials (2015–2019E)

Earnings Breakdown (1H18)

SOTP Valuation

• Core railway business:

  • 2018E core EPS: RMB0.21
  • Target PER multiple: 18x
  • Core railway business value per share: HK$4.33

• Land bank:

  • Land bank (m sqm): 13
  • Historical cost (RMB/sqm): 135
  • Market price (RMB/sqm): 10,000
  • Total market value (RMB m, before-tax): 130,000
  • Discount ratio: 6%
  • Land bank mark-to-market value per share: HK$1.16

• Net cash value per share: HK$0.28

• Implied fair value per share: HK$5.80

• Implied 2018E PER multiple: 24.1x

• Implied 2018E PBR multiple: 1.22x

Investment Highlights

• Earnings growth acceleration: Expected in 2H18 due to margin expansion and reduced maintenance costs.
• Land redevelopment: A new land resource project in Guangzhou is underway, indicating a positive outlook for future value creation.
• Valuation: Attractive based on a low PEG ratio, and the company's valuation is being adjusted to reflect its land asset development.
• Target Price: HK$5.80, reflecting revised earnings and RMB depreciation.
• BUY rating: Maintained, with the rationale that the company is well-positioned for future growth and value re-rating.

Analysts

• Kelly Zou – Analyst
• Wong Chi Man, CFA – Head of Research

Disclaimer and Interests

• The report is issued by Galaxy International Securities and does not constitute an offer to buy or sell securities.
• The company may have financial interests in the subject entities, and certain individuals may be involved in investment banking or advisory services.
• All opinions and estimates are subject to change and not guaranteed.