20180102-中国银河国际证券-广深铁路股份-00525.HK-Riding_the_railway_reform_wave__benefits_from_tariff_hike_and_property_development_6页_879kb

Guangshen Railway [525.HK] Summary

Core Content

Guangshen Railway (GSR) is expected to benefit from railway reforms, particularly in land resource development and passenger tariff hikes. The company's share price has seen a rally due to market expectations of these reforms, especially the potential for a modest passenger tariff increase and land asset monetization.

Main Points

• Earnings Outlook:

  • GSR's core earnings are expected to fall by 5.9% YoY in 2017 due to cost pressures.
  • In 2018, core earnings are projected to grow by 19.0% YoY, driven by a 4–5% increase in passenger yield.
  • Including the disposal gain from land sales, total earnings for 2018 are forecasted to rise by 72.1% YoY.

• Passenger Yield Impact:

  • A 5ppt increase in passenger yield growth assumption can boost core earnings by 7–13% for 2018.
  • The last passenger tariff hike was over 20 years ago, and the current level is well below other transportation modes, suggesting room for improvement.

• Land Resource Development:

  • GSR has 13 million square meters of land, with a historical cost of RMB135 per square meter and a current market value of >RMB10k per square meter, indicating significant hidden value.
  • The company has sold a land parcel in Guangzhou under the urban renewal initiative, and the disposal gain is estimated to be 50% of its 2016 net profit.
  • Further land sales are anticipated to unlock more value in the coming years.

• Valuation:

  • The target price (TP) is raised from HK$5.40 to HK$6.40, implying a 21.9% share price upside.
  • The SOTP valuation method is applied, with a fair value of HK$6.40 per share based on the potential value of its land bank.
  • The implied 2018E PER multiple is 20.1x, and the PBR multiple is 1.28x.

Key Financials

Revenue and Earnings (RMB m)

EBITDA and Margins

Revenue Breakdown (% of Total)

Investment Highlights

• Buy Rating Maintained: The company is recommended as a Buy due to its railway reform benefits and land development potential.
• Earnings Sensitivity: Earnings are highly sensitive to passenger yield changes, with 5ppt increases leading to 7–13% earnings growth.
• Land Disposal Gain: The disposal of a land parcel in Guangzhou is expected to provide a pre-tax gain of RMB770m, contributing significantly to 2018 earnings growth.
• Valuation: The SOTP valuation suggests a fair value of HK$6.40 per share, based on the land bank's market value and the potential for future asset sales.

Summary of Financial Ratios

Conclusion

Guangshen Railway is poised to benefit significantly from ongoing railway reforms, particularly through passenger tariff hikes and land resource development. The SOTP valuation method highlights the potential for unlocking hidden asset value, which is expected to drive substantial earnings growth in 2018. The target price of HK$6.40 reflects this upside potential and is based on modest land value assumptions and anticipated progress in land development. Despite current earnings pressure, the company's future outlook is positive, supported by revenue growth and increased profitability from its core railway operations and land sales.