20180102-中国银河国际证券-中国通号-03969.HK-Core_railway_business_growth_recovery_expected_in_2018_5页_672kb

CRSC (3969.HK) Summary

Core Content

CRSC (China Railway Signal and Communication Corporation) is expected to experience a recovery in its core railway business in 2018, driven by increased new rail line additions and ongoing railway reforms. The company is positioned to benefit significantly from the rising demand for railway and urban transit control systems, particularly as the China Railway Corporation (CRC) focuses on improving operational safety and efficiency. This is anticipated to lead to a recovery in the railway business segment, which saw a decline in 2017 due to delayed procurement tenders.

Main Points

• Revenue and Earnings Growth:

  • CRSC's revenue is forecasted to grow by 15.1% in 2017 and 19.6% in 2018.
  • Net profit is expected to rise by 17.4% in 2017 and 19.0% in 2018.
  • Earnings per share (EPS) is projected to increase from RMB 0.40 in 2017E to RMB 0.48 in 2018E.

• Earnings Growth Outlook:

  • The company is expected to show stronger growth in 2018E compared to 2017E.
  • The analyst has adjusted the target price from HK$7.64 to HK$7.90, based on a forward PER of 14x for 2018E, higher than its historical average of 12.2x.

• Valuation Metrics:

  • In 2017E, the stock trades at 12.8x forward PER and 1.8x PBR.
  • In 2018E, it trades at 10.7x forward PER and 1.6x PBR.
  • The company is considered undervalued compared to its peers, such as CRRC and CRRC Times Electric, which trade at over 16x 2018E PER.

• Dividend and M&A Potential:

  • CRSC has a strong cash position, with RMB13.4bn in cash on hand at the end of 1H17, representing 31% of its market cap.
  • The company is expected to increase its dividend pay-out ratio, from ~30% in 2016 to potentially >30% in 2017.
  • There is a possibility of M&A activity in the global railway equipment industry, with CRSC seeking to acquire overseas companies to enhance its technology and expand its international sales channels.

Key Financials

Revenue Breakdown (RMB m)

Profitability

• Gross profit margin is expected to remain stable at ~25% for 2017-2018.
• Net profit margin is forecasted to stay around 10%.
• EBIT margin is expected to be ~12.3% for both years.

EBITDA and Cash Flow

• EBITDA is projected to increase from RMB4,923m in 2017E to RMB5,749m in 2018E.
• Operating cash flow is forecasted to rise from RMB4,543m in 2018E.
• Free cash flow (FCF) is expected to be RMB3,635m in 2018E.

Balance Sheet Highlights

• Cash is expected to increase from RMB17,633m in 2017E to RMB20,215m in 2018E.
• Total assets are projected to grow from RMB57,569m in 2017E to RMB66,717m in 2018E.
• Total liabilities are expected to increase from RMB32,072m in 2017E to RMB37,887m in 2018E.
• Shareholders' Fund is forecasted to rise from RMB24,287m in 2017E to RMB27,413m in 2018E.

Investment Rating

• Investment Rating: BUY
• Target Price: HK$7.90 (up from HK$7.64)
• Reason: The company's strong earnings growth and undervaluation compared to peers, along with potential M&A activity and dividend increases, justify the Buy rating.

Analyst Notes

• The analyst team includes Kelly Zou and Wong Chi Man, CFA.
• The report highlights CRSC's unique position in the railway equipment value chain and its potential for share price re-rating in 2018.

Disclaimer and Disclosure

• The report is issued by China Galaxy International Securities (Hong Kong) Co., Limited and is not intended for distribution in certain jurisdictions.
• The analyst has no financial interest in the company and has not traded in its shares within 30 days of the report's publication.
• The report may contain confidential information and is not to be used for investment decisions without further consultation.

Equity Ratings Explanation

• BUY: Indicates the analyst believes the share price will increase by more than 20% in 12 months.
• SELL: Indicates the share price will decrease by more than 20% in 12 months.
• HOLD: Indicates no clear catalyst for change and a potential downgrade to SELL if no improvement is seen.

Copyright

• No part of this material may be reproduced or redistributed without the prior written consent of China Galaxy International Securities (Hong Kong) Co., Limited.