2017 Railway Equipment Sector Outlook

Transcription

1 Equity Research Rail Equipment 2017 Railway Equipment Sector Outlook Demand for railway equipment remains intact Dominic Chan, CFA, FRM SFC CE No. APP GF Securities (Hong Kong) Brokerage Limited 29-30/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Sector view Neutral The China Railway Corporation announced that FAI in the railway sector will be Rmb trn during the 13 th Five-Year Plan period. We believe China will continue to boost its economy through investment in infrastructure, while thanks to the increased use of the public-private partnership (PPP) financing model, new order growth at railway equipment companies should remain robust. The NDRC has outlined its transportation infrastructure investment plan for , which will see 29 railway and 33 urban transits projects go into construction in Urban transit will be a key sub-sector, with 4,448km of new lines going into construction. Assuming a construction cost of Rmb700m per km, the market size of these lines should be around Rmb3.1trn. The replacement cycle and ongoing development of new railway projects should mean that demand in the rail equipment sector continues to pick up. Frost & Sullivan expect investment in rail control systems in China to grow at a CAGR of 13.9% during , compared with a CAGR of 5% in railway FAI. Key themes Overseas market exposure The termination of the JV between XpressWest and China Railway International may raise market concerns about the Go Out strategy among railway companies. However, several key overseas railway projects lay ahead, including the highspeed rail link between Kuala Lumpur and Singapore, the Jakarta to Bandung railway. We believe breaking through into overseas markets will be a key theme of PPP demonstration project scale in 2017 In Oct 2016, China released the third batch of PPP projects, with 516 projects and estimated investment of Rmb1.17trn. Investment value of PPP projects is expected to increase to Rmb2trn in 2017, representing a 70.9% YoY increase. Valuation analysis Rail equipment sector trading at 11.3x 2017E P/E The railway infrastructure sector is valued at 7.8x 2017E P/E, while the rail equipment sector is trading at 11.3x 2017E P/E, lower than its historical average of 15.5x. Investment strategy Prefer rail equipment sector given faster growth We suggest building positions in the rail equipment sector to benefit from the expected higher pace of growth. Top picks China CRSC (3969 HK, Buy) Beneficiary of rising demand for rail control systems in China. Risks Upside risks: China aggressively increases railway sector investment to boost the economy; potential breakthroughs in overseas business development. Downside risks: Slower-than-expected replacement cycle for rail equipment, which would result in lower demand.

2 Medium-long term rail network plan China s rail network targeted to rise to 150,000 km in 2020 China s State Council approved an updated version of the medium and long term railway network plan in China had a railway network of 121,000km by end-2015, of which 19,000km were high-speed rail lines. According to the plan, by developing eight vertical and eight horizontal rail lines, China s rail network will expand to 150,000km by 2020, of which 30,000km will be high-speed rail lines. The NDRC may increase this target further to 180,000 km by the end of Figure 1: Eight Vertical and Eight Horizontal rail lines planned under the medium-long term railway network plan Eight "Verticals" Dalian to Beihai Beijing to Shanghai Beijing to Hong Kong Harbin to Hong Kong Hohhot to Nanning Beijing to Kunming Baotou to Yinchuan Lanzhou to Xining Eight "Horizontals" Suifenhe to Manzhouli Beijing to Lanzhou Qingdao to Yinchuan Lianyunggang to Urumqi Shanghai to Chengdu Shanghai to Kunming Xiamen to Chongqing Guangzhou to Kunming Sources: State Council, GF Securities (Hong Kong) NDRC outlines transportation infrastructure investment plan for railway and 33 urban transits projects may go into construction in 2017 The NDRC has outlined its transportation infrastructure investment plan for The plan includes 303 major projects, such as railways, roads, waterways, airports and urban transit lines, and is worth Rmb4.7trn. According to the plan, 29 railway projects worth Rmb494.6bn and 33 urban transit projects worth Rmb480.4bn will go into construction in Figure 2: Key railway projects to be constructed in 2017 Project length (km) Investment (Rmb bn) 1 Chongqing to Kunming Ziling to Chengdu Guangzhou to Shanwei Xian to Tongchuan Hefei to Huaian Shanghai to Hangzhou Lang-Zhuo Intercity Railway Bazhou-Shangqiu High-speed Railway Shandong High-speed Rail P Shandong High-speed Rail P Weifang to Laixi Zhengzhou-Jinan High-speed Railway Zhangzhou to Xiamen Na Yong to Liupanshui Pingliang to Qingyang Ningbo to Jinhua SanMenXia to Yuzhou Tianjin Karamay to Tarbagatay Pingliang to Zhongwei Jiaozuo-Liuzhou Railway Tsining to Erenhot Dayunchuang railway Guangzhou Station Changchun to Jilin Guangzhou to Maoming Yulin to Wuzhou Shenyang to Dandong Nanjing to Wuhu Total Figure 3: Key urban transit projects planned for construction in 2017 Project length (km) Investment (Rmb bn) 1 Tianjin Line Z2 P Tianjin Line M8 P Tianjin Line 10 P Jinan Line R2 P Beijing Metro Changping Line Biejing CBD line Heifei Metro line Nanling Metro line 5 P Nanling Metro line Wuhan Metro Line Nanchang Metro Line Shenzhen Metro Line 5 P Shenzhen Metro Line 6 P Shenzhen Metro Line 3 P Nanjing Metro Line Nanjing Metro Line Wuxi Metro Line Nantong Metro Line Qingdao Metro Line 6 P Qingdao Metro Line 6 P Chongqing Mertro line 9 P Xian Metro line 6 P Guyang Metro line 3 P Shaoxing Metro Metro line Wuhu Metro line Luoyang Metro Line 1 P Shijiazhuang metro line Fuzhou Metro Line Fuzhou Metro Line Dalian Metro line Dalian Metro line R4 P Wuhan Metro Line Guyang line S1 P Total Sources: NDRC, GF Securities (Hong Kong) 2

3 CRC may maintain Rmb800bn investment target for 2017 In 2016, China Railway Corporation (CRC) invested Rmb815bn in fixed assets, and increased operating length to 124,000 km, including 22,000km of high-speed rail lines by the end of the year. In 2017, CRC plans to invest Rmb800bn in fixed assets, adding 2,100 km of new rail lines, 2,500km of track doubling lines and 4,000km of electrified rail lines. According to the 13 th Five- Year Plan, the CRC plans FAI of Rmb3.5trn. Figure 4: FAI investment by the CRC during (Rmb bn) Sources: State Council, GF Securities (Hong Kong) Urban transit to be a key sub-sector China will increase investment in urban transit over the next five years. In 2015, 26 major Chinese cities had an urban transit network, with total operating length of 3,618km. According to China Association of Metros, this will increase to 50 cities by 2020, with a total operating length of 6,000km. There are currently 4,448km of urban transit lines under construction. Figure 5: China s urban transit in 2015 Ranking City length (km) Ranking City Sources: China Association of Metros, GF Securities (Hong Kong) length (km) 1 Beijing Harbin 17 2 Shanghai Suzhou 70 3 Tianjin Zhengzhou 69 4 Chongqing Kunming 59 5 Guangzhou Hangzhou 81 6 Shenzheng Foshan 27 7 Wuhan Changsha 46 8 Nanjing Ningbo 49 9 Shenyang Wuxi Changchun Nanchang Dailian Lanzhou Chengdu Qingdao Xi'an Huai'an 20 Total 3,618 3

4 Figure 6: Urban transit lines under construction in China Ranking City length (km) Ranking City Sources: China Association of Metros, GF Securities (Hong Kong) length (km) 1 Beijing Hefei 90 2 Shanghai Nanchang 89 3 Tianjin Changsha Chongqing Qingdao Guangzhou Fuzhou 60 6 Shenzheng Nanning Wuhan Shijiazhuang 43 8 Nanjing Jinan 26 9 Shenyang Taiyuan Changchun Lanzhou Dailian Guyang Chengdu Urumqi Xian Xiamen Harbin Zhuhai 9 15 Suzhou Xuzhou 0 16 Zhengzhou Changzhou Kuming Dongguan Hangzhou Wenzhou Foshan Huaian Ningbo Nanping Wuxi 56 Total 4448 Investment in urban transit has risen over the past five years. During the 12 th Five-Year plan period, total investment in urban transit reached Rmb1.23trn, with a CAGR of 22.6% over the five years. Given current construction of 4,448km, and assuming total investment of Rmb700m per km, we expect total investment value to be Rmb3.1trn. In addition, China will increase investment in modern trams in the next five years, which is expected to grow at a CAGR of 67.2% during Figure 7: Urban transit investment in China in (Rmb bn) Figure 8: Modern tram investment in China in (Rmb bn) CAGR 22.6% Investment in urban transit (Rmb bn) Sources: Frost & Sullivan, GF Securities (Hong Kong) 4

5 Increased use of PPP business model In 2014, China announced the first batch of PPP demonstration projects with a total investment value of Rmb180bn, and announced a total investment value of Rmb658.9bn for PPP projects in In Oct 2016, the third batch of PPP projects was announced, with a total of 516 projects and estimated investment value of Rmb1.17trn. Investment value of PPP projects is expected to increase to Rmb2trn in 2017, representing a 70.9% YoY increase. Figure 9: Distribution of third batch of PPP demonstration projects (according to investment value) Sources: China s Ministry of Finance, GF Securities (Hong Kong) Faster growth in railway equipment sector than infrastructure The railway sector consists of the following three sub-sectors: fixed asset investment, trains (rail equipment), and rail control systems (rail equipment). Growth in the rail control systems sector is expected to outpace fixed asset investment growth, with Frost & Sullivan seeing investment in rail control systems growing at a CAGR of 13.9% during , compared with a CAGR of 5% for railway FAI. Figure 10: Market size of China s rail control systems industry during (Rmb bn) Figure 11: Railway FAI in China during (Rmb bn) Sources: Frost & Sullivan, GF Securities (Hong Kong) The rail control systems market in China can be divided into three segments: new system installation, system maintenance and system upgrades. All three segments should post strong growth given the continued expansion of the domestic rail network. According to Frost & Sullivan, these new segments will grow at CAGRs of 11.7%, 11.4% and 22.5% respectively during

6 Figure 12: Market size of China s rail control system industry based on segments during (Rmb bn) Sources: Frost & Sullivan, GF Securities (Hong Kong) The rail control system market in China is currently dominated by several Chinese companies. Below are breakdowns of the high-speed rail and urban transit control systems markets. Figure 13: China s HSR control systems market (2014) Figure 14: China s urban transit control systems market (2014) 2.3% CRSC (3969 HK) 32.5% 65.2% 3.9% 20.1% 4.1% 5.4% 11.8% 14.6% 40.1% Thales SAIC Transportation System Beijing Traffic Control Tech CREC ( CH, 390 HK) Fiberhome Tech ( CH) ZTE ( CH, 763 HK) China CRSC (3969 HK) CRCC ( CH, 1186 HK) CREC ( CH, 390 HK) Others Sources: Frost & Sullivan, GF Securities (Hong Kong) Overseas market investment a key theme China s Go Out strategy represents another key development for the railway sector. In June 2016, US railway company XpressWest announced that it had terminated its JV with China Railway International, which had previously been formed to participate in overseas high-speed railway projects. However, several key overseas projects are on track, including the Kuala Lumpur to Singapore high speed rail link, and the Jakarta to Bandung railway. We believe overseas market breakthroughs will be a key theme of Figure 15: Several key overseas projects ahead Country Railway length (km) Indonesia Jakarta to Bandung 150 Hungary and Serbia Budapest to Belgrade 350 Brazil and Peru Twin Ocean Railway 3000 UK High Speed 2 project 540 Russia Moscow to Kazan 770 Singapore Kuala Lumpur Railway 350 Other countries 7000 Total Sources: CRSC, GF Securities (Hong Kong) 6

7 2016 railway equipment sector performance Hong-Kong listed railway equipment names underperformed the HSI by 22.4% in 2016, mainly due to delayed procurement of trains. However, railway control systems player China CRSC (3969 HK, Buy) outperformed the market by 8.5% during Figure 16: Railway equipment names performance in 2016 Ytd One month CRCCE (34.53) CRRC Times Elec (12.76) (6.65) CRRC (27.35) (9.14) CRSC (9.84) % Sources: Bloomberg, GF Securities (Hong Kong) Figure 17: Valuation comparison EPS EPS P/E P/B Market cap Ticker Name Ccy Price E 2017E CAGR E 2017E E 2017E (US$ m) HK peers 3969 HK CHINA RAILWAY SIGNAL & COM-H HKD % HK CRRC CORP LTD - H HKD % HK ZHUZHOU CRRC TIMES ELECTRIC HKD % HK CHINA RAILWAY GROUP LTD-H HKD % HK CHINA RAILWAY CONSTRUCTION-H HKD % HK CHINA COMMUNICATIONS CONST-H HKD % Average A-share peers CH CRRC CORP LTD-A CNY % CH BEIJING DINGHAN TECH-A CNY % CH GEM-YEAR INDUSTRIAL CO -A CNY CH HENAN SPLENDOR SCIENCE&TEC-A CNY % CH BEIJING CENTURY REAL TECHN-A CNY % CH JINXI AXLE CO LTD-A CNY CH NANJING KANGNI MECHANICAL -A CNY % CH ZHEJIANG YONGGUI ELECTRIC-A CNY % CH UNITED SCIENCE & TECHNOLOG-A CNY % Average International peers ALO FP ALSTOM EUR STS IM ANSALDO STS SPA EUR BDRBF US BOMBARDIER INC-B USD SIEGY US SIEMENS AG-SPONS ADR USD Average Sources: Bloomberg, GF Securities (Hong Kong) Note: Updated as of Dec 30,

8 China CRSC (3969 HK) Buy (maintained) Target price: HK$6.90 Beneficiary of accelerating growth in the railway control systems market Figure 18: Stock performance /31/2015 3/31/2016 6/30/2016 9/30/ HK HS Index (RHS) Figure 19: Key data Dec 30 close (HK$) 5.59 Share in issue (m) 1969 Major shareholder CRSC Group (75.1%) Market cap (HK$m) 49, M avg. vol. (m) W high/low 3.4/6.55 Sources: Bloomberg Figure 20: Stock valuation Revenue YoY Net Profit YoY EPS EPS P/E BPS P/B DPS Dividend ROE (Rmb m) (%) (Rmb m) (%) (Rmb) YoY (Rmb) yield (%) (%) ,329 33% 2,033 61% % ,952 38% 2,496 23% % E 28,801 20% 3,098 24% % E 34,145 19% 3,654 18% % E 39,854 17% 4,299 18% % Sources: Company data, GF Securities (Hong Kong) Beneficiary of accelerating growth in the railway control systems market We expect revenue, net profit and EPS to grow at CAGRs of 17.6%, 17.8% and 16.9% respectively during We estimate 2016 revenue and net profit will rise by 20% and 24% to Rmb28.8bn and Rmb3.1bn respectively with EPS of Rmb0.35. We maintain our Buy rating and target price of HK$6.90, based on a 17x 2016E target P/E, equal to 1x PEG. Rail investment in China very likely to exceed expectations during 13 th FYP period The China Railway Corporation expects total rail FAI to be as high as Rmb3.8trn during the 13th FYP period, translating into average annual investment of ~Rmb800bn. However, we believe actual investment will very likely exceed this level, as the government intends to boost the economy by strengthening rail investment. According to the NDRC and the Ministry of Transport, China will invest Rmb1trn in rail and urban transit projects during China s rail control systems market to grow at a CAGR of 20.8% during Investment in rail control systems typically accounts for 5-10% of overall rail investment. Demand for these systems will continue to pick up, driven by the equipment replacement cycle as well as ongoing development of new railway projects. Frost & Sullivan expects investment in rail control systems in China to grow at a CAGR of 20.8% during Leading position in China s rail control systems industry China CRSC is the largest rail transportation control systems manufacturer in China. It has a 65.2% share of the high-speed rail control systems market, with large SOEs such as China Railway Group and China Railway Construction Corp as its major competitors; the company also has a 40.1% share of the urban transit control systems market, where its main competitors are Thales SAIC Transportation System and Beijing Traffic Control Technology. Opportunities from overseas markets Revenue from overseas markets contributed just 2.8% of total revenue in 1H16, but its value rose 211% YoY. China CRSC signed overseas contracts worth Rmb1.4bn during 1H16, including one in Pakistan and one in India, exceeding the full-year amount of Rmb1.1bn for last year. We believe overseas business development will provide momentum for the company given: 1) the demand for new railway lines across the globe (e.g. potential contracts from the Jakarta-Bandung rail project in Indonesia, and rail projects in Thailand); 2) system upgrades on existing rail lines in developing countries. We expect the company s overseas revenue mix to rise from 2.2% in 2015 to 7.1% in GPM expected to rise steadily GPM rose from 25.4% in 1H15 to 26.2% in 1H16. Management guided that 3Q16 GPM was similar to 1H16, which is expected to be ~26%. We believe GPM 8

9 improved YoY in 3Q16 due to an improvement in cost controls, especially in its railway and urban transit segments. We forecast a full-year 2016 GPM of 26%, versus market consensus of 25.6%. Rmb50bn new contract target but may be a challenge The company previously guided for 25-30% growth in new contracts in 2016, meaning new contracts would reach Rmb46-48bn. New contracts totaled Rmb25.4bn in 1H16, which is around 54% of its full-year target. During our conversation with management, they reiterated that 25-30% growth is highly achievable, and that it is targeting as much as Rmb50bn in new contracts this year. However, they also said that this figure may be a challenge. Key risks: 1) Risks tied to overseas business development, 2) slower-than-expected infrastructure investment in China, 3) the still underdeveloped nature of the company s new businesses, and; 4) potential stake reductions by cornerstone investors upon lockup expiry. Figure 21: GPM during H16 Figure 22: New contracts during H16 (Rmb m) ,000 35,000 30,000 25,000 20,000 22,038 25,530 37,820 18,540 25, ,000 10, , H2015 1H H15 1H16 GPM (%) New contracts (Rmb m) Sources: Company data, GF Securities (Hong Kong) 9

10 Figure 23: Financial statements Income Statement Balance Sheet Year-end Dec 31 (Rmb m) E 2017E 2018E Year-end Dec 31 (Rmb m) E 2017E 2018E Revenue 17,329 23,952 28,801 34,145 39,854 Non-current asset held for sale YoY 33% 38% 20% 19% 17% Prepaid land lease payments Cost of Sales (13,134) (17,937) (21,299) (25,203) (29,376) Inventories 2,861 2,689 2,918 3,452 4,024 Gross Profit 4,195 6,015 7,503 8,943 10,478 Trade and bills receivables 7,324 8,285 9,469 11,226 13,103 GPM (%) Prepayments, deposits and other receivables 1,960 2,466 2,683 3,181 3,712 Selling expenses (459) (647) (778) (922) (1,076) Amounts due from contract customers 3,111 5,905 5,129 6,081 7,097 Administrative expenses (2,158) (2,827) (3,370) (3,961) (4,503) Tax recoverable Other income Pledged deposits Other gains and losses (29) (118) (86) (102) (80) Cash and cash equivalents 6,346 14,340 16,996 17,718 17,778 profit 2,305 3,131 3,874 4,572 5,376 Total Current Asset 21,827 33,973 37,505 42,014 46,121 OPM (%) PPP 2,750 3,109 4,099 5,232 6,503 Interest income Prepaid land lease payments 2,012 2,278 2,278 2,278 2,278 Finance Costs (15) (52) (30) (39) (42) Goodwill Share of results of an associate Other intangible assets Profit before taxation 2,473 3,144 3,921 4,625 5,442 Investment in joint ventures Income tax expense (433) (521) (667) (786) (925) Investment in associates Effective tax rate Available-for-sale investments Non-controlling interests Deferred tax assets Net profit 2,033 2,496 3,098 3,654 4,299 Trade reveivables ,123 1,310 YoY 61.3% 22.8% 24.1% 17.9% 17.7% Prepayments, deposits and other receivables Total non current assets 6,750 8,020 9,127 10,631 12,298 Total Assets 28,577 41,992 46,632 52,645 58,419 Trade and bills payables 6,986 10,954 11,087 12,429 14,487 Amounts due to contract customers 3,136 3,999 4,376 5,179 6,036 Other payables, advances from customers and accruals 4,417 5,501 5,835 6,905 8,048 Interest bearing bank and other borrowings Provisions for supplementary retirement benefits Tax payable Government grants Provisions Total current liabilites 14,994 21,193 22,081 25,401 29,572 Trade payables Interest bearing bank and other borrowings Provisions for supplementary retirement benefits Cash Flow Statement Deferred tax liabilities Year-end Dec 31 (Rmb m) E 2017E 2018E Government grants Provisions Pretax Income 2,473 3,144 3,921 4,625 5,442 Total non current liabilites 1,107 1,064 1,309 1,396 1,470 Depreciation & Amortization Other Non-Cash Adjustments (1,661) (865) (416) (2,617) (2,740) Equity 11,664 18,843 22,350 24,956 26,485 Net cash from operating activities 1,191 2,763 4,014 2,641 3,487 Non-controlling interests Capital Expenditures (1,491) (1,057) (1,440) (1,707) (1,993) Total equity 12,475 19,735 23,241 25,848 27,377 Other Investing Activities 2,995 (1,961) (423) Total equity and liabilities 28,577 41,992 46,632 52,645 58,419 Net cash used in investing activities 1,504 (3,018) (1,179) (1,276) (2,416) Dividends Paid 0 (3,305) (465) (731) (1,075) Financial Ratios Changes in debt (34) Year-end Dec E 2017E 2018E Changes in capital stocks 0 8, EBITDA margin (%) Other Financing Activities 86 (52) (6) EBIT margin (%) Net cash from financing activities 52 5,699 (178) (644) (1,011) NPM (%) Net change in cash 2,746 5,502 2, ROA (%) Cash at beginning of year 3,171 5,918 11,420 14,076 14,798 ROE (%) Cash at end of year 5,918 11,420 14,076 14,798 14,858 Debt/Equity ratio (%) Sources: Bloomberg, GF Securities (Hong Kong) 10

11 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between -10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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