20170731-广发证券_香港_-中车时代电气-03898.HK-Stable_growth_ahead_prefer_stake-holding_companies_instead_initiate_with_Accumulate_and_TP_of_HK_42.0_12页_1mb

Summary of CRRC Times Electric (3898 HK) Equity Research

Core Content

CRRC Times Electric (CRRC TE), a subsidiary of CRRC Corp (1766 HK), is a leading company in the train-borne electrical systems sector in China. The company generates revenue from seven key business segments, including train-borne systems for locomotives, EMUs, urban rail vehicles, railway maintenance vehicles, signal & communication products, key electric parts and components, and marine engineering products.

Key Points

• Target Price and Rating: GF Securities (Hong Kong) initiates coverage with an Accumulate rating and a target price of HK$42.0, based on a 14.5x 2017E P/E multiple, which matches its historical average.
• Share Price Performance: The stock has declined 6% YTD due to delays in MU (Electric Multiple Unit) orders, but is expected to recover with an anticipated 14% revenue growth in 2018.
• Revenue and Profit Growth:
  • Revenue is forecasted to grow from Rmb14.66bn in 2016 to Rmb17.53bn in 2018, with a CAGR of 10.5%.
  • Net profit is expected to increase from Rmb2.90bn in 2016 to Rmb3.32bn in 2018, with a CAGR of 8.8%.
  • EPS is estimated at Rmb2.51 (2017E) and Rmb2.82 (2018E).
• Segment Analysis:
  • Locomotive segment: Expected to rebound due to a 700-unit procurement plan, contributing to the company's overall growth.
  • EMU segment: Likely to face pressure due to procurement delays.
  • Railway maintenance vehicles segment: Set to grow significantly, expected to account for 19% of revenue in 2018, with a CAGR of 25% from 2016–2019.
  • Signal & Communication products: Represented 3.7% of revenue in 2016, and is expected to see modest growth.
  • Key electric part and component products: Benefiting from the push for import substitution, particularly in IGBT modules, which are crucial for traction systems.
• GPM Trends:
  • Overall GPM declined slightly from 38.3% (2015) to 38.2% (2016), and is expected to decrease further to 37.5% (2019E).
  • The shift towards lower-margin railway maintenance vehicles will likely cause a decline in GPM, although the locomotive segment currently has the highest margin.
• Investment Comparison: While both CRRC Corp and CRRC TE benefit from the recovery in the railway equipment sector and increased overseas opportunities, CRRC Corp is preferred due to:
  • Stronger growth momentum.
  • Better GPM trend.
  • Resolution of intragroup competition issues.

Key Risks

• High dependence on CRC procurement: Delays in rolling stock procurement can negatively impact the company.
• Smaller-than-expected FAI: If railway equipment investment falls short of expectations, it could hurt revenue.
• Delays in rapid transit project construction: Affects demand for rapid transit vehicles.
• Delays in receivable collection: The company's accounts receivable turnover days increased from 189 to 237 in 2016, impacting cash flow.
• Pressure on product ASP (Average Selling Price): With the popularization of the China Standard Electric Multiple Unit (CSEMU), CRC may reduce purchasing prices, affecting margins.

Financial Highlights (2015–2019E)

Valuation

• The company's stock is currently trading at 12.8x 2017E P/E, below its historical average of 14.5x.
• A better recovery in MU orders is expected in 2018, which would lead to higher revenue and EPS growth.
• The company is seen as a good investment for those looking to benefit from the recovery in rolling stock investment.

Market Position

• CRRC TE is one of the key component providers in China, with over 50 years of experience in train-borne electrical systems.
• It has expanded into non-railway businesses, including IGBT modules for new energy vehicles.
• The company has acquired SMD, a deep sea robot and high-end equipment company, enhancing its marine engineering capabilities.

Conclusion

CRRC TE is positioned to benefit from the recovery of the railway equipment sector in China, with growth in railway maintenance vehicles and IGBT modules. However, its performance is heavily influenced by CRC's procurement schedule, and it faces risks from margin compression and delays in order execution. Despite these challenges, the company's current valuation is seen as attractive, and GF Securities (Hong Kong) recommends an Accumulate rating with a target price of HK$42.0.