20160422-美银美林-中车时代电气-03898.HK-1Q16_results_beat_for_more_MU_delivery,higher_gross_margin_and_more_VAT_refund_17页_983kb

Zhuzhou CRRC 1Q16 Performance and Investment Summary

Core Content

Zhuzhou CRRC (ZZ CRRC) reported strong 1Q16 results, with net profit reaching RMB567mn, a 42% YoY increase and 35% above estimates. This was driven by increased delivery of MU traction systems, higher gross margin (GM), and higher VAT refunds.

Despite a 60% YoY drop in locomotive traction system sales to RMB140mn, MU traction system sales rose by 50% YoY to RMB1.2bn, and RTV traction system sales continued solid growth at 30% YoY to RMB390mn, leading to a 20% YoY increase in total revenue.

The GM improved by 1ppt YoY to 39%, primarily due to the higher contribution from MU traction systems, which had a GM above the blended average. The non-operating income surged by 262% YoY to RMB193.4mn, mainly because of delayed VAT refunds from 4Q15 to 1Q16.

Main Points

• 1Q16 Net Profit: RMB567mn, +42% YoY, +35% above estimates.
• Revenue Growth: 20% YoY increase, driven by MU traction systems and RTV traction systems.
• Gross Margin: Improved to 39% in 1Q16.
• Non-operating Income: Rose by 262% YoY to RMB193.4mn due to delayed VAT refunds.
• Investment Rationale:
  • ZZ CRRC will supply traction systems to CNR's locomotives and MUs, previously sourced from third parties.
  • The company will benefit from CRRC's overseas expansion.
  • Potential upside from increased sales to CNR and faster market and margin expansion of IGBT products.
• Major Risks:
  • Weaker railway freight transport.
  • Lower-than-expected high-speed railway passenger transport volume growth.

Key Financial Metrics (Estimates and Valuation)

Investment Recommendation

• Rating: Buy
• EPS Increase: Raised FY16-18E EPS by 2-3%.
• Outlook:
  • FY16: Slight increase in MU traction system sales and solid growth in RTV traction system sales.
  • FY17-18: Expected EPS growth due to bulk supply of traction systems to CNR, overseas demand, and expansion of IGBT sales.

Key Changes in Estimates

Company Overview

• Sector: Rail Equipment
• Description: Leading train-borne electrical system provider and integrator for the PRC railway industry. Engaged in developing, manufacturing, and selling train power converters, auxiliary power supply equipment, and control systems for urban rail systems.
• Parent Company: CRRC, holding 51.8% stake.

R&D and Product Development

• CNR Collaboration: Started R&D and trial run of traction systems for CNR's locomotives and MUs, including a new 200km/h passenger locomotive.
• IGBT Sales: Realized sales for RTV traction systems, conducting trial runs for locomotives, and in-house testing for MUs. Increasing IGBT sales will lead to less loss in FY16-17E.

Financial Highlights

• 1Q16 Revenue: RMB2,403mn (excluding business tax), +20% YoY.
• Gross Profit: RMB939mn, +23% YoY.
• Gross Margin: 39.1%, +1.0ppt YoY.
• EBIT: RMB691mn, +62% YoY.
• EBIT Margin: 28.7%, +7.5ppt YoY.
• Non-operating Income: RMB147mn, +418% YoY.
• Profit Pretax: RMB661mn, +40% YoY.
• Net Margin: 23.6%, +3.6ppt YoY.
• Basic EPS: RMB0.48, +42% YoY.

Risk and Outlook

• Risks:
  • Weaker railway freight transport.
  • Lower-than-expected growth in high-speed railway passenger transport.
• Outlook:
  • Expected EPS growth in FY17-18E due to bulk traction system supply to CNR, increased overseas demand, and IGBT sales expansion.
  • Maintain Price Objective at HKD60.20.

Stock Data

• Price: HKD46.05
• Price Objective: HKD60.20
• Investment Opinion: C-1-7
• 52-Week Range: HKD33.55 - HKD69.75
• Market Value / Shares Out: USD6,978 / 1,175.5
• Market Value: HKD54,131
• Average Daily Value: USD16.17
• Free Float: 46.6%
• BofAML Ticker / Exchange: ZHUZF / HKG
• Bloomberg / Reuters: 3898 HK / 3898.HK
• ROE (2016E): 21.2%
• Net Debt to Equity (Dec-2015A): -16.9%

Valuation and Performance Metrics

• Return On Capital Employed: 21.3% (2014A), 20.9% (2015A), 17.9% (2016E), 17.5% (2017E), 16.8% (2018E).
• Return On Equity: 23.9% (2014A), 24.2% (2015A), 21.2% (2016E), 20.0% (2017E), 19.2% (2018E).
• Operating Margin: 20.6% (2014A), 23.5% (2015A), 24.1% (2016E), 24.5% (2017E), 24.3% (2018E).
• EBITDA Margin: 22.7% (2014A), 25.5% (2015A), 26.1% (2016E), 27.8% (2017E), 27.0% (2018E).
• Cash Realization Ratio: 0.9x (2014A), 0.6x (2015A), 0.6x (2016E), 0.6x (2017E), 0.7x (2018E).
• Asset Replacement Ratio: 1.3x (2014A), 4.8x (2015A), 6.3x (2016E), 0.7x (2017E), 0.7x (2018E).
• Tax Rate (Reported): 13.2% (2014A), 13.8% (2015A), 13.7% (2016E), 13.7% (2017E), 13.7% (2018E).
• Net Debt-to-Equity Ratio: -23.5% (2014A), -16.9% (2015A), -11.6% (2016E), -11.8% (2017E), -8.1% (2018E).
• Return on Equity: 21% (2014A), 28% (2015A), 24% (2016E), 20% (2017E), 21% (2018E).
• Net Gearing: -25% (2014A), -17% (2015A), -17% (2016E), -17% (2017E), -12% (2018E).
• Receivable Days: 225 (1Q16), 207 (2Q16E), +38days YoY.
• Inventory Days: 142 (1Q16), 153 (2Q16E), +11days YoY.
• Creditor Days: 226 (1Q16), 204 (2Q16E), -22days YoY.
• Free Cash Flow: RMB1,728mn (2014A), RMB290mn (2015A), RMB-51mn (2016E), RMB1,861mn (2017E), RMB2,227mn (2018E).
• Cash Flow from Operating: RMB1,799mn (FY16E), +5% YoY.
• Cash Flow from Investing: RMB-1,685mn (FY16E), +1% YoY.
• Cash Flow from Financing: RMB-566mn (FY16E), -1% YoY.

Conclusion

Zhuzhou CRRC's performance in 1Q16 exceeded expectations, driven by increased traction system deliveries, higher GM, and more VAT refunds. The company is expected to benefit from CNR's procurement and overseas expansion, with continued growth in IGBT sales. The investment recommendation remains Buy, with a raised Price Objective of HKD60.20. Key financial metrics indicate a positive outlook, though risks related to railway freight and passenger transport volume growth should be considered.