China Infrastructure Sector

Transcription

1 China / Hong Kong Industry Focus Refer to important disclosures at the end of this report DBS Group Research. Equity 19 July 216 2Q new contract flows accelerating Railway FAI accelerated in 2Q; construction companies secured more contracts NDRC approved some major railway and urban railway projects recently Reconstruction activities post major flooding in Yangtze River to drive general infrastructure investments CRCC (1186 HK) and CRG (39 HK) are our picks Acceleration in 2Q transportation FAI. The railway and highway fied asset investment (FAI) accelerated in 2Q at 3.8% and 15.3% y-o-y respectively. As such, 1H16 investments into both sectors posted healthy growth of 14-18%. The infrastructure sector is a critical pillar to support the economic epansion in China and therefore 216 investment targets should be achievable. The healthy FAI also translates to remarkable increase in new railway and highway projects won by infrastructure companies. CRCC and CRG reported 21% and 43% increases in new construction contracts respectively in 2Q. 3Q outlook remains positive. The NDRC has recently approved several major railway and urban railway projects, which should help to support infrastructure FAI in 3Q. Major railway projects approved are in Fujian, Beijing-Tianjin and Sanmenia-Yuzhou (Henan) and urban railways in Shaoing, Guiyang and Chengdu. In total, it amounted to approimately Rmb25bn. We reiterate that railway spending will remain stable this year (approimately Rmb82bn was spent in 215) while the urban railway sector is epected to be a fast-growing segment. Besides, we anticipate reconstruction activities post the major flood in areas along the Yangtze River will increase but the amount is hard to quantify at this point. Maintaining our picks. We like CRCC and CRG for their earnings fundamentals. In 2Q, CRCC's total new contract rose by c.2% y-o-y while CRG recorded a c.31% increase to approimately Rmb196.4bn and Rmb228.5bn respectively. Among which, the new railway project values increased by c.6% each for both companies. Valuation-wise, the infrastructure construction sector is trading at inepensive earnings multiple of 7-9 FY16F PE. The main uncertainty is the impact of the VAT implementation on the construction companies. In the short term, it could result in some earnings volatility as the ta rate could be higher but the trend should normalise in the mid-term. As such, profit margin could be slightly affected in 2Q vs 1Q following the implementation of VAT in May 216. CRCC and CRG posted GPM of 1.6% and 11% respectively in 1Q16. HSI: 21,673 ANALYST Rachel MIU rachel_miu@hk.dbsvickers.com Recommendation & valuation Company Price Target Price Recom Mkt Cap FY16F PE HK$ HK$ US$m Infrastructure construction CCC-H (18 HK) Hold 24, CCC-A (618 CH)@ Hold 24, CRCC-H (1186 HK) Buy 18, CRCC-A (61186 CH)@^ Hold 18, CRG-H (39 HK) Buy 22, CRG -A (6139 CH)@ Hold 22, CSCI (3311 HK) Buy 6, Railway equipment CRRC-H (1766 HK) Buy 35, CRRC-A (61766 CH)@ Hold 35, Zhuzhou CRRC (3898 HK)* n.a. NR 6, Midas (MIDAS SP)@@ Buy * SGD ^ TP & Rating under review Source: Thomson Reuters, DBS Vickers ed-th / sa-ah

2 Infrastructure sector important economic driver Infrastructure FAI driving the Chinese economy. The Chinese economy remains in a challenging state. In 2Q, GDP grew at 6.7%, same as 1Q s performance. Hence, the infrastructure FAI is critical to support the Chinese economy on a stable footing. Brent Crude Oil Price Trend US$/BBL In 2Q, railway and highway investments grew at 3.8% and 15.3% to Rmb221bn and Rmb923bn respectively. For 216, the Chinese government has earmarked over Rmb8bn for railway network and Rmb1.65tn to build epressways and highways. In 1H16, railway investments have achieved about 4% of total target. Traditionally, railway investments will intensify in 4Q Besides, with a string of new projects approved by the National Development and Review Committee (NDRC), the tendering momentum should hold for the rest of the quarter. We believe transportation investments in the coming few years will focus more on urban railways as well as inter-city railway connectivity. Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Source: Thomson Reuters Jan-9 Jan-1 Jan-11 Jan-12 Jan-14 Jan-15 Jan-16 Infrastructure companies secured double-digit growth in total new contracts. In 1H16, construction companies secured good epansion in new contracts to drive earnings. CRCC reported an 18.2% increase in total new contracts to Rmb375.7bn, after securing Rmb196.4bn in 2Q. CRG s total new contracts also increased, by 26% to Rmb417.7bn and Rmb228.5bn in 2Q16. Future earnings visibility is strong, following the string of new contracts on hand. Overseas markets are important but dependent on crude oil market. Many of the overseas markets which the Chinese construction companies target are highly dependent on oil eports, such as Russia, the Middle East, African nations and Southeast Asian countries. Given the weak crude oil price, foreign revenues from oil eports of these nations have been badly affected, impacting the governments ability to finance infrastructure investments. Recently, the Chinese infrastructure companies have also faced some hiccups in the overseas markets. The most recent being the cancellation of the LA-Vegas high speed rail contract. We believe such event should not affect the Chinese infrastructure companies pursuing their overseas epansion, including the train set manufacturers. Although CRRC share price was depressed following news on their product quality issue, it is unlikely to affect the company epansion strategy. Positive sector outlook remains. We keep our positive view on the sector, as investments are still trending up. Our picks are CRCC and CRG for their strong presence in the domestic railway sector and inepensive valuations. FY15-17F earnings CAGR for construction companies are c.1%. The near-term swing factor is the impact from the VAT implementation which could result in some short-term pressure on GPM but should normalise in the mid-term. Currently, the infrastructure companies are working with the Chinese ta authority on potential impact of higher taes following the implementation of the VAT regime. Page 2

3 Total new contracts in 2Q Rmb bn CRCC (1186 HK) CRG (39 HK) CSC (3311 HK) 2Q15 2Q16 YoY growth (%) 2Q15 2Q16 YoY growth (%) 2Q15 2Q16 YoY growth (%) Construction Railway Others Non-construction (19.2) Total Source: Companies Total new contracts Total backlog RMB bn 1,2 1, CCC CRCC CRG RMB bn 2, 1,8 1,6 1,4 1,2 1, CCC CRCC CRG H15 1H Q16 Note: 1H16 figure not available for CCC Source: Companies Railway investment Source: Companies Highway investment RMB bn Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec RMB bn Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: CEIC Source: Companies Page 3

4 Share price performance Share Price Performance (%) 1-mth 3-mth 6-mth 1-year YTD Q15 China Comm. Construction 18 HK 2.4 (13.7) 27.5 (18.8) (15.1) (16.9) CRRC 1766 HK.7 (13.7) (8.8) (33.9) (26.6) 64.2 (8.2) (2.2) China Railway Construction 1186 HK. (9.7) 26.2 (15.3) (2.3) 28. (2.7) (15.6) China Railway Group 39 HK 3.4 (11.1) 18.4 (2.7) (.5) 59.5 (7.7) (16.2) Zhuzhou CRRC 3898 HK (.2) (12.2) 1.9 (29.2) (7.3) 62.2 (.4) (21.) China State Construction 3311 HK 5.9 (12.8) (11.) (11.3) (19.8) (21.6) Hang Seng Inde HSI (14.7) (1.1) 1.3 (7.2) 5.1 Source: Thomson Reuters Peers valuation Infrastructure construction FY15-17 Mkt PE PE Yield P/Bk EV /EBITDA ROE Earnings Currency Price Cap Fiscal 16F 17F 16F 16F 16F 17F 16F CAGR Company Name Code Local$ US$m Yr % % % Asia Pacific e Japan China Comms.Con.'H'* 18 HK HKD ,13 Dec China Railway Group 'H'* 39 HK HKD ,664 Dec China Railway Con.'H'* 1186 HK HKD ,219 Dec China State.Constr.* 3311 HK HKD 1.8 6,251 Dec Baoye Group 'H' 2355 HK HKD Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Beijing Urban Construction 1599 HK HKD Dec Chun Wo Dev# 711 HK HKD Mar n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. China Comm.Con.'A'* 618 CH CNY ,13 Dec China Railway Group 'A'* 6139 CH CNY 7 22,664 Dec China Railway Con.'A'* CH CNY ,219 Dec China State Con.Engr.'A' CH CNY ,667 Dec Hyundai Engr.& Con. 72 KS KRW 33,45 3,284 Dec Daewoo Engr.& Con. 474 KS KRW 5,83 2,134 Dec Cimic Group CIM US AUD ,471 Dec Ugl UGL AU AUD J un n.a. Gamuda GAM MK MYR ,969 J ul Ijm# IJM MK MYR ,142 Mar Italian-Thai Dev. (Otc) ITD TB THB ,5 Dec n.a. n.a. 3.9 n.a. Continental Holdings 373 TT TWD Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Average (H-share) Average (A-share) # FY16: FY17; FY17: FY18 Source: Thomson Reuters, *DBS Vickers Page 4

5 Peers valuation Railway equipment Latest reported Mkt PE PE PEG PEG P/Bk P/Bk EV /EBITDA Gross Net Currency Price Cap Fiscal 16F 17F 16F 17F 16F 17F 16F 17F margin margin Company Name Code Local$ US$m Y r % % Asian peers Xiangtan Elec.Mnfg. 'A' 6416 CH CNY ,419 Dec n.a. n.a Guodian Nanjing 'A' 6268 CH CNY Dec n.a. n.a Zhuzhou Times 'A' 6458 CH CNY ,85 Dec Gem-Year Industrial 'A' 612 CH CNY ,43 Dec n.a. n.a. n.a. 2.4 n.a. n.a. n.a (.6) J ini Ale 'A' 6495 CH CNY ,345 Dec 46.6 n.a..5 n.a. 1.8 n.a. n.a. n.a Tianma 'A' 2122 CH CNY ,14 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Baotou Beifang 'A' 6967 CH CNY ,41 Dec n.a n.a. n.a. 1.2 (2.8) Fujian Longi 'A' 6592 CH CNY Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Taiyuan Hvy.Ind.'A' 6169 CH CNY 4.8 1,476 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a CRRC 'A'* CH CNY ,897 Dec Beijing Ctrowell Tech. 'A' 3455 CH CNY ,46 Dec (21.9) n.a. n.a Tianjin Keyvia Electric 'A' 347 CH CNY Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a Beijing Dinghan Tech.'A' 311 CH CNY ,743 Dec South Huiton 'A' 92 CH CNY ,89 Dec n.a. n.a Xiamen Sunrise Wheel 'A' 2593 CH CNY Dec n.a. n.a CRRC 'H'* 1766 HK HKD ,897 Dec Zhuzhou CRRC Times 'H' 3898 HK HKD ,327 Dec CRCC High-Tech 1786 HK HKD Dec (.3) China Railway Signal 'H' 3969 HK HKD ,514 Dec (1.8) Midas Hdg.* MIDAS SP SGD Dec Kinki Sharyo# 7122 J P J PY Mar n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1.4 (15.2) Kawasaki Heavy# 712 J P J PY 287 4,517 Mar (1.6) Average (A-share) 45~ 34.9 (1.9) Average (H-share) US/Europe Siemens SIE GR EUR ,41 Sep (.6) Bombardier 'B' BBD/B CN CAD 2.6 3,69 Dec n.a. n.a. n.a. n.a. n.a. n.a (29.6) Alstom# ALO FP EUR 29 5,239 Mar (.2) Trinity Industries TRN US USD ,161 Dec (.2) (.5).8.7 n.a. n.a Const Y Auiliar De Ferr CAF SM EUR ,213 Dec American Railcar Inds. ARII US USD Dec (.3) (.6) n.a. n.a Freightcar America RAIL US USD Dec (.2) (.5).7.7 n.a. n.a Greenbrier Cos. GBX US USD Aug (.3) (.2) 1..9 n.a. n.a V ossloh V OS GR EUR Dec Wabtec WAB US USD ,454 Dec n.a. n.a LEM 'R'# LEHN SW CHF Mar ABB 'R' ABBN V X CHF ,56 Dec Hollysys Atmtn.Techs. HOLI US USD 2.2 1,192 J un Average Grand average 25.4~ ~ Eclude Zhuzhou Times 'A' & Jini Ale 'A' # FY16: FY17; FY17: FY18 Source: Thomson Reuters, *DBS Vickers Page 5

6 China Railway Construction (1186 HK) PE chart China Railway Construction (1186 HK) PB chart SD: SD: SD: 15.9 Avg: SD:.7 +2SD: 2 +1SD: 1.6 Avg: SD: SD:.3 Jan-9 Aug-9 Mar-1 Sep-1 Jan-9 Aug-9 Mar-1 Sep-1 China Railway Construction-A (61186 HK) PE chart China Railway Construction-A (61186 HK) PB chart Mar-8 May-9 Jul-1 +1SD: 19.8 Avg: SD: 5.5 Oct-11 Dec-12 Feb Mar-8 May-9-1SD:.7 Jul-1 Oct-11 +1SD: 2 Avg: 1.4 Dec-12 Feb-14 China Comm Construction (18 HK) PE chart China Comm Construction (18 HK) PB chart SD: SD: SD: 1.1 Avg: SD:.7 +2SD: SD: Avg: SD: SD:.4. Jan-9 Aug-9 Mar-1 Sep-1 Jan-9 Aug-9 Mar-1 Sep-1 Source: Thomson Reuters, DBS Vickers Page 6

7 China Comm Construction-A (618 CH) PE chart China Comm Construction-A (618 CH) PB chart SD: SD: Avg: 8.4-1SD: Avg: 1.1-1SD:.5 Mar-12 Sep-12 Feb-13 Feb-14 Aug-14 Feb-15 Jul-15 Jan-16 Mar-12 Sep-12 Feb-13 Feb-14 Aug-14 Feb-15 Jul-15 Jan-16 China Railway Group (39 HK) PE chart China Railway Group (39 HK) PB chart SD: 6.4-2SD: 3 +2SD: SD: 13.1 Avg: SD:.6-2SD:.3 +2SD: SD: 1.4 Avg: 1 Jan-9 Feb-1 Jul-13 Sep-14 Nov-15 Dec-16 Jan-9 Feb-1 Jul-13 Sep-14 Nov-15 Dec-16 China Railway Group-A (6139 CH) PE chart China Railway Group-A (6139 CH) PB chart SD: Avg: SD: SD: 2.3 Avg: -1SD:.6-5 Dec-7 Aug-9 May-11 Source: Thomson Reuters, DBS Vickers Feb-13 Dec-7 Aug-9 May-11 Feb-13 Page 7

8 CRRC (1766 HK) PE chart CRRC (1766 HK) PB chart SD: SD: 2.8 Avg: SD: SD: SD: -2SD:.8 +2SD: SD: 2.9 Avg: 2.2 Jan-9 Aug-9 Mar-1 Sep-1 Jan-9 Aug-9 Mar-1 Sep-1 CRRC-A (61766 CH) PE chart CRRC-A (61766 CH) PB chart SD: SD: 3.7 Avg: SD: SD: 3.9 Avg: 2.6 Aug-8 Dec-9 Aug-12 Nov-13 Mar-15 Aug-8 Dec-9 Aug-12 Nov-13 Mar-15 China State Construction (3311 HK) PE chart China State Construction (3311 HK) PB chart SD: SD: 14.6 Avg: SD: 8.6-2SD: SD: SD: 2.6 Avg: 2.1-1SD: 1.6-2SD: 1.2 Jan-9 Aug-9 Mar-1 Sep-1 Jan-9 Aug-9 Mar-1 Sep-1 Source: Thomson Reuters, DBS Vickers Page 8

9 Zhuzhou CRRC (3898 HK) PE chart Zhuzhou CRRC (3898 HK) PB chart Dec-6 +1SD: 21.6 Avg: SD: 9.3 Jul-8 Feb-1 Oct-11 May-13 Dec Dec-6 +1SD: 3.6 Avg: 2.7 Jul-8 Feb-1-1SD: 1.9 Oct-11 May-13 Dec-14 Source: Thomson Reuters, DBS Vickers Page 9

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