20160725-兴证国际证券-中车时代电气-03898.HK-The_Leader_of_Railway_Transit_Electric,Strategic_layout_in_diversified_industries_29页_2mb

Equity Research Report Summary: CRRC Times Electric (3898.HK)

Core Content

CRRC Times Electric (3898.HK) is a leading electrical equipment manufacturer for rail transit in China, with a strong position in the domestic and international markets. The report initiates the stock with an Outperform rating and a target price of HK$48.20, projecting a 13.7% growth over the next 12 months. This reflects the company's potential to benefit from the continued development of the domestic railway industry and the expansion of Chinese high-speed rail exports.

The current price is HK$42.40, and the projected P/E ratios for 2016-2018 are 15.3X, 14.1X, and 13X, respectively. The company has a solid financial foundation with a market cap of HK$49,841 million, a market float of HK$23,207 million, and net assets of CNY 13,472 million. Its BVPS (Book Value per Share) is CNY 11.46, indicating strong asset backing.

Main Points

• Market Position: TEC is the largest electrical equipment provider for rail traffic in China, with a 60%+ market share in high-speed rail, high-power electric locomotives, and urban rail vehicles.
• Strategic Diversification: The company has expanded into marine engineering through the acquisition of SMD, a British deep-sea robot company, and has also developed IGBT technology, which is crucial for the performance of high-speed rail systems.
• IGBT Development: TEC has the second 8-inch IGBT production line in the world and is the only Chinese company fully mastering IGBT chip technology in research, module packaging, testing, and system application.
• Growth Drivers:
  • Domestic Railway Development: Macroeconomic growth, urbanization, and government policy are key factors.
  • High-Speed Rail Exports: China's high-speed rail equipment exports are a new growth point, with significant international contracts.
• Financial Performance:
  • Revenue growth from 2015A to 2016E is 3.09%, and net profit growth is 7.61%.
  • TEC has maintained strong CAGR in revenue and net profit since 2007, at 31.85% and 30.76%, respectively.
  • Gross margin and net margin have remained stable, with net margin increasing slightly from 20.91% to 22.48%.

Key Opportunities

2.1 Rail Introduction and Classification

• Rail transport includes national railways (high-speed and common) and urban rail transit (subway, light rail, etc.).
• High-speed rail is defined as 300km/h+, while EMUs (Electric Multiple Units) operate at 200-300km/h.
• The CRH brand represents China's high-speed rail system, with various models developed by different manufacturers.

2.2 High-Speed Development in National and City Railways

• By 2015, China's total railway operating mileage was 121,000 km, with 19,000 km of high-speed rail, the highest globally.
• Sullivan forecasts that total railway operating mileage will grow to 158,000 km by 2020, and high-speed rail to 19,000 km.
• Intercity rail is expected to grow from 500 km to 18,000 km in 2020, with a CAGR of 69.8%.

2.3 Thriving in Urban Rail

• Urban rail transit operating mileage in China is 3,618 km as of 2015, with subway being the dominant mode.
• The urbanization rate in China reached 56.10% in 2015, much lower than developed countries, indicating strong growth potential.
• Sullivan predicts urban rail investment will grow at a CAGR of 9.7%, and operating mileage at CAGR of 23.5% over the next five years.

2.4 Drivers of Sustainable Development

• Macro Trends: Economic development, urbanization, and government policy are the main drivers.
• Overseas Expansion: Chinese high-speed rail is expanding to over 100 countries, with major projects in Russia, Vietnam, Indonesia, Brazil, and Thailand.
• Belt and Road Initiative: China plans to invest $1.2 trillion over the next decade in infrastructure, including rail, providing a significant opportunity for TEC.

Risks

• Economic Decline: Potential slowdown in China's economy may affect infrastructure investment.
• Order Decline: Reduced demand for rail equipment could impact revenue.
• Lower Exports: Slower-than-expected growth in high-speed rail exports may affect performance.

Strategic Overview

CRRC Times Electric is a subsidiary of CRRC, which is formed by the merger of CSR and CNR in 2015. The company is led by CRRC Electric Locomotive Research Institute (CELRI), which owns 50.16% of TEC's shares directly and 0.14% indirectly through its Hong Kong subsidiary.

Conclusion

TEC is well-positioned to benefit from the growth of domestic rail traffic and the expansion of Chinese high-speed rail exports. With a strong financial foundation, diversified business segments, and strategic international expansion, the company is expected to deliver consistent revenue and profit growth. The Outperform rating and target price reflect the analysts' confidence in the company's long-term prospects.