20180615-中国银河国际证券-广深铁路股份-00525.HK-Railway_reform_on_track,_Guangshen_Railway_is_worth_revisiting_7页_776kb

Guangshen Railway [525.HK] Summary

Core Content and Key Information

Guangshen Railway (GSR), listed on the Hong Kong Stock Exchange with ticker 525.HK, has experienced a significant share price decline of 14% year-to-date (CYTD), primarily due to increased market volatility since February and a rail passenger tariff hike that fell below market expectations. However, the stock has stabilized and rebounded since late April following the release of its Q1 2018 results, which showed strong performance.

Main Highlights:

• Q1 2018 Results:

  • Revenue rose 13.2% YoY
  • Net profit grew 57.9% YoY
  • Passenger traffic increased 2.5% YoY
  • Strong revenue growth was driven by freight transportation due to a rule change allowing GSR to book full revenue for freight originating from its own stations, which previously had restrictions.

• Railway Reform Impact:

  • The reform is aimed at boosting profitability and ROE for GSR and the broader China Railway Corporation (CRC).
  • CRC is incentivized to improve profitability to reduce leverage and resolve funding issues, which may involve asset securitization.

• Passenger Tariff Hike:

  • Although regular train tariff hikes may take longer than expected, high-speed train services have already seen increases.
  • CRC has adopted a more market-oriented pricing strategy, suggesting a long-term upward trend in rail passenger tariffs.
  • A 5% annual increase in passenger yield is expected to boost GSR’s core earnings forecast by 6–12%.

• Land Asset Sales:

  • GSR is expected to generate a one-off disposal gain of >Rmb1.3bn from land sales in Guangzhou.
  • The land has a book value of only Rmb2.2m, and GSR owns 13m sqm of land acquired from its parent company.
  • The historical cost of this land is Rmb130 per sqm, and the market value is Rmb10,000 per sqm, indicating significant hidden asset value.
  • The company is expected to see more land deals in the future, further enhancing its value.

• Valuation and Investment Outlook:

  • The target price (TP) is set at HK$6.25, with a BUY rating maintained.
  • The TP is based on a SOTP (Sum of the Parts) valuation method, which implies a 1.2x 2018E PBR.
  • The stock currently trades at 0.9x 2018E PBR, suggesting potential for valuation accretion.
  • The EV/EBITDA has dropped from 8.4x in 2015 to 4.3x in 2019E, reflecting a potential re-rating.

Financial Performance (2015–2019E)

Revenue Breakdown (2015–2019E)

Earnings Sensitivity Analysis

SOTP Valuation

Investment Highlights

• Strong Q1 2018 results driven by railway business reform.
• Passenger yield increase expected to boost earnings.
• Land asset sales could significantly enhance earnings in 2019E.
• SOTP valuation suggests a target price of HK$6.25.
• Maintain BUY rating due to strong earnings growth and valuation potential.

Conclusion

Guangshen Railway is positioned to benefit from ongoing railway reforms and the monetization of its land assets, which could significantly improve its earnings and valuation. The company's strong performance in Q1 2018 and the potential for future growth in both freight and passenger services, combined with the one-off land disposal gain, support a BUY rating and a target price of HK$6.25, based on a SOTP valuation and market-oriented pricing strategies.