20180830-中国银河国际证券-中国通号-03969.HK-Weak_1H18_results,but_favorable_valuation_with_earnings_growth_potential_in_2H18_6页_1mb

CRSC [3969.HK] Summary

Core Content

CRSC (China Railway Signal and Communication Corporation) reported its first-half of 2018 (1H18) results, which were below market expectations. Despite the disappointing performance, the company's share price showed positive momentum, indicating potential for future recovery. The company's core railway and urban transit business is expected to drive earnings growth in the second half of 2018 (2H18) and onwards.

Main Points

• 1H18 Performance:

  • Total revenue increased by 14.1% YoY, primarily due to the urban transit and construction contracting businesses.
  • Railway business revenue declined YoY due to execution delays in projects.
  • Gross profit margin contracted by 3.5 percentage points to 21.7%.
  • SG&A costs fell by 4.4% YoY due to reduced equipment sales.
  • Earnings grew by 10.1% YoY, aided by a reversal of bad debt provisions and a decline in the effective tax rate.

• Earnings Growth Outlook:

  • Earnings are expected to grow by 15.3% YoY in 2018 and 19.9% YoY in 2019, driven by recovery in the core railway business.
  • The company's order backlog as of 1H18 reached RMB73bn, which is 1.9 times the forecasted 2018E revenue.

• Business Strategy:

  • The company is reducing its exposure to the low-margin construction contracting business.
  • New business strategies in areas like trams and smart cities are still in a wait-and-see phase and may not yield meaningful results in the short term.
  • The margin and cash flow performance of these new segments remain uncertain.

• Investment Rating:

  • The analysts maintain a BUY rating on the stock.
  • The target price (TP) was revised from HK$8.00 to HK$6.80, reflecting a more conservative target PER multiple of 12x instead of the previous 13x.

Key Financials

Revenue and Profit Trends

Earnings Growth

Margins and Ratios

Valuation Metrics

Conclusion

CRSC is expected to benefit from a recovery in its core railway business and potential government stimulus for infrastructure investment in 2H18. Although its 1H18 results were below expectations, the company's valuation remains favorable with a target price of HK$6.80. The analysts maintain a BUY rating, highlighting the company's earnings growth potential and its strategic shift towards more profitable segments.