Industry China Infrastructure

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1 Deutsche Bank Markets Research Asia China Transportation Industry China Date 3 March 217 Forecast Change PPP story continues, upgrading infra FAI; CCC/CSCI Reiterating positive view on constructors in 217 We reiterate our positive view on the construction sector for the rest of this year after our recent trip and analysis of PPP projects. Domestic orders for infrastructure projects are still healthy in Jan 217. We believe healthy momentum in the coming months will continue, supported by the accelerating development of PPP projects (mainly highway and municipal projects). Management guidance on new orders in 217 looks stronger than expectation. We raise our estimate on infrastructure spending in China by 2-4% in , on our base case analysis of PPP projects. We still like constructors on the back of healthy earnings and order outlook. CCC and CSCI are top picks. Positive message from recent tour: healthy new orders growth to continue Our trip last week to Beijing, Shangdong, Jiangsu, Hubei and Hunan in relation to the infrastructure construction sector gave us the impression that sentiment in the infrastructure industry remains strong. Progress on the PPP model (especially from highway, subway and municipal projects) is ahead of our expectation, which should support infra spending in In addition, all the constructors expect positive new order growth this year after the strong growth in 216. Accordingly, we raise our new orders estimates for the constructors by 8-23% in 217. Lifting infra FAI in China, due to accelerating development of PPP projects We lift China infra spending (including railway, road and municipal projects) forecasts by 2-4% for on a base-case scenario, mainly due to higher assumption on highway and subway investment. Thus, we now forecast infra FAI in China to grow 5% CAGR in (vs. previous 3.5%), among which we expect investment via the PPP financial model to account for 2% of total in 218 (vs. previous 15%). We estimate the market size for PPP projects (mainly including transportation and municipal projects) will be more than Rmb2trn in (vs. our previous estimate of Rmb1.65trn), representing a 35% CAGR over Our blue sky scenario implies 2% and 9% potential upside from our current estimates for infra FAI and investment for PPP projects, respectively; we believe this would enhance constructors earnings by 5-1% on the back of higher construction volume and better margin expansion led by a rising portion from high-margin PPP projects. Upgrade earnings/tp; consensus estimates conservative; top pick: CCC/CSCI We raise CRCC, CRG, CCC and CSCI s earnings by 4-7% on higher infra spending assumption. Our revised earnings forecasts are 3-16% ahead of market consensus. CCC is our top pick as it is likely a mediumterm beneficiary of the OBOR initiative and has more attractive valuations then peers. It has the highest exposure to PPP projects among the big three names and strong capability to control projects. Potential SOE reforms may benefit its B/S. CCC trades at 7.9x 217E PE (3%/15% discount to CRCC/CRG s). We also like CSCI for its potential to be the biggest beneficiary of the PPP model promotion given its high exposure to the domestic infra investment business. Valuing Chinese railway companies on DCF; risks Our preferred valuation methodology for railway names is one-year forward FY17E DCF (WACC: 7.4% for CRG, 7.% for CRCC, 8.% for CCC, and 8.5% for CSCI). Risks: government spending and political risk for overseas projects. In this report we change estimates and TPs for companies under coverage. Please see Figure on page 9 for details. Phyllis Wang Research Analyst (-) - - phyllis.wang@db.com Key Changes Company Target Price Rating 18.HK 12.8 to (HKD) 3311.HK to (HKD) 1186.HK to (HKD) 39.HK 6.93 to 7.92(HKD) - Source: Deutsche Bank Top picks China Comms Construct (18.HK),HKD1.78 CSCI (3311.HK),HKD13.4 Source: Deutsche Bank Companies Featured Deutsche Bank AG/Hong Kong Distributed on: 2/3/217 21:3:35 GMT Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 57/4/216. China Comms Construct (18.HK),HKD A 216E 217E P/E (x) EV/EBITDA (x) Price/book (x) CSCI (3311.HK),HKD A 216E 217E P/E(x) EV/EBITDA(x) Price/book(x) China Rail Construction (1186.HK),HKD A 216E 217E P/E (x) EV/EBITDA (x) Price/book (x) China Railway Group (39.HK),HKD A 216E 217E P/E (x) EV/EBITDA (x) Price/book (x) Source: Deutsche Bank

2 China PPP story continues Positive message on constructors from our recent trip We took a trip last week to gain further insight into the infrastructure sector. We covered five regions in China (Beijing, Shangdong, Jiangsu, Hubei and Hunan) and visited infrastructure constructors (MCC, CSCEC, Gezhouba, and JSTI group), Jinan Development and Reform Commission and industry expert from China Railway Construction (CRC). The trip gave us the impression that sentiment in the infrastructure industry remains strong. Progress on the Public-Private Partnership (PPP) model (especially from highway, subway and municipal projects) is ahead of our expectation, which should support infrastructure spending in E. We believe railway infrastructure spending (a key driver for infrastructure spending growth in the past few years), will no longer be the catalyst in the next few years, which is also in line with industry expert s view (from CRC). 1) All the constructors we visited are positive on the outlook, given the accelerating development of PPP models. As well, they cite the continued healthy new orders growth from infrastructure projects in January 217 and expect this trend to remain for the rest of this year. 2) Jinan local government is aggressively pushing PPP project developments. 32 projects are now in their project pool, among which 1 are in execution period. They have picked up 3 projects this year, which will be put into the local governments PPP project pool. 3) The railway expert from CRC expects railway infrastructure to have no growth in 217. The development of PPP railway projects looks slow due to low returns. Good signals from PPP annual report Expanding national PPP reserves, further accelerating implementation The China Public Private Partnerships Center (CPPPC) recently released an annual report on the MoF s PPP project pool. The report notes improvement in scale and quality of reserved PPP projects. At the end of 216, total investment from 11,26 reserved PPP projects amounted to RMB13.5tr, up 8.3% from end-september 216 and 66% from end-january 216. Despite the expanding scale, the contract signing rate in terms of project number and total investment continued to rise; it jumped to 12.% from 9.% at end-september and to 16.5% from 12.5% at end-september, respectively. By percentage points, the 4Q16 contract signing rate enjoyed the fastest quarterly growth in 216. Page 2 Deutsche Bank AG/Hong Kong

3 China Figure 1: Contract signing rate for national PPP project reserve by number of projects # of projects 1,6 5.% 1,4 1, % 4.% 1,2 35.% 1, % 8 25.% % 12.% % % 6.7% 1.% 4.3% 4.8% 2 5.% -.% End-Jan 216 End-Mar 216 End-Jun 216 End-Sep 216 End-Dec 216 Number of contracted projects Contract signing rate Figure 2: Contract signing rate for national PPP project reserve by investment Rmbbn 2,5 2,23 5.% 45.% 2, 4.% 1,56 35.% 1,5 3.% 1,6 25.% 1, 16.5% 2.% % 51 1.% 15.% 41 5.% 5.8% 1.% 5.% -.% End-Jan 216 End-Mar 216 End-Jun 216 End-Sep 216 End-Dec 216 Contracted investment value Contract signing rate Source: CPPPC Source: CPPPC Regional and industrial distribution remains concentrated Regional distribution of the PPP project pool is still concentrated. As of end- 216, the top five provinces represented 48% of total number of projects and 42% of total project investments (with Guizhou and Shandong dominating both rankings), reflecting the differentiated attitude of local governments towards the PPP model. We note that active participants in PPP projects are mainly from provinces that have a weaker fiscal situation to boost infrastructure investment, as well as from provinces with larger population to underpin projects operational profitability. Figure 3: Regional distribution of national PPP project reserve by number of projects at end-216 Guizhou, 16% Figure 4: Regional distribution of national PPP project reserve by investment at end-216 Guizhou, 12% Shandong, 9% Others, 29% Shandong, 1% Others, 34% Yunnan, 8% Yunnan, 4% Hebei, 4% Gansu, 4% Liaoning, 4% Inner Henan, 7% Mongolia, 7% Xinjiang, 8% Sichuan, 8% Liaoning, 4% Gansu, 4% Hebei, 5% Jiangsu, 5% Henan, 7% Sichuan, 7% Inner Mongolia, 5% Source: CPPPC Source: CPPPC In terms of reserved project type, municipal (mainly subway), transportation (mainly highway) and urban comprehensive development projects occupied the top three of the reserved project number (jointly accounting for 54% of total) and project investment (68% of total) at end-216. Figure 5 and Figure 6 illustrate the overall rising trend of these three project types. Indeed, these are the major businesses of the constructors under our coverage. Business opportunities remain adequate, in our view, given the significant upside potential in contract signing rate and the sizeable municipal, transportation and urban development projects. Deutsche Bank AG/Hong Kong Page 3

4 China Figure 5: Contribution from transportation/municipal/urban development PPP projects by number 6.% Figure 6: Contribution from transportation/municipal/urban development PPP projects by investment 7.% 55.% 68.% 5.% 45.% 4.% 35.% 43.7% 52.7% 53.1% 53.7% 53.8% 66.% 64.% 62.% 63.9% 65.2% 67.2% 68.% 67.7% 3.% End-Jan 216 End-Mar 216 End-Jun 216 End-Sep 216 End-Dec % End-Jan 216 End-Mar 216 End-Jun 216 End-Sep 216 End-Dec 216 Source: CPPPC Source: CPPPC Demonstration projects leading the way Compared with the MoF s entire PPP pool, the 743 demonstration PPP projects, which have a total investment of RMB1.9tr, recorded a much higher contract signing rate at end-216 (i.e. 49%/5% in terms of number of projects/total investment). We highlight that besides the high implementation rate, there are much fewer projects in the initial recognition stage (4% of total) compared with that in the MoF entire pool (62% of total). This will enable smoother project negotiations and execution, in our view. Figure 7: Contract signing rate by number of projects at end % 48.9% 5.% Figure 8: Contract signing rate by investment at end % 5.4% 5.% 4.% 4.% 3.% 3.% 2.% 12.% 2.% 16.5% 1.% 1.%.% Demonstration projects National PPP reserve.% Demonstration projects National PPP reserve Source: CPPPC Source: CPPPC The first batch of demonstration projects, released in November 214, is finally 1% contracted, in line with the MoF s previous guidance. In the same guidance, the MoF urged all the second and third batch of demonstration projects to finish procurement (or to be contracted by definition) by end-march 217 and end-september 217. So far, the average execution period (time between project release and being contracted) of the third batch of demonstration projects (released in October 216) has shortened by four months to 11 months. If procurements could be achieved on time (which is highly likely, in our view, given stronger administrative and financial support and the need to better understand the PPP model from all related parties), the implied average execution period could decline further, and could accelerate the constructors revenue recognition from PPP projects in 217. Page 4 Deutsche Bank AG/Hong Kong

5 China Figure 9: Demonstration PPP projects released by the MoF Announcement date # of projects Total investment Deadline for finishing (Rmbbn) procurement Implied period for Contract signing rate full procurement by # of projects (month) First batch Nov Dec % Second batch Sep Mar % Third batch Oct ,17 Sep % Total 743 1,868 5% Source: MoF, CPPPC Figure 1: Average execution period for demonstration projects at end-216 Month First batch Second batch Third batch Source: CPPPC Constructors new orders: raising our estimates; solid growth may continue in E New contract growth strong in 4Q16, beating expectations Despite having a high 4Q15 base, CRG and CRCC registered higher-thanexpected new orders growth of 25% and 38% in 4Q16, respectively. Expedited rollout of PPP projects continued to drive solid growth in the urban transit and municipal segments in 4Q16 and brought strong recovery in highway construction orders too (+121% yoy for CRG and +11% for CRCC), which helped offset a weaker railway bidding market during the same period (new orders down 25%/26% for CRG/CRCC in 4Q16). In FY216, CRG and CRCC s total new contract value rose 29% yoy to RMB1.24trn and 28% yoy to RMB1.22trn, respectively (13% and 15% higher than our previous estimates for CRG and CRCC). Newly-signed PPP contract value was RMB29bn and RMB24bn for CRG and CRCC, respectively, of which RMB16bn/RMB2bn was related to construction for CRG/CRCC, respectively. CSCI s 216 new orders grew 19% yoy to HKD84bn, slightly above our previous estimate of HKD82bn and its guidance of HKD83bn. Among CSCI s 216 new orders, HKD5bn+ would be related to PPP projects, based on our estimate. Deutsche Bank AG/Hong Kong Page 5

6 China CCC s 216 new orders grew 12% yoy to Rmb73bn, slightly above our estimate. The solid growth was mainly driven by the investment (81% yoy) and overseas segments (51% yoy). Total new contract value contributed by PPP was around Rmb174bn, of which Rmb151bn was related to construction. Management guidance on 217 orders looks stronger than forecasts All the constructors we visited witnessed continued healthy new orders growth from infrastructure projects in January 217. The constructors expect the trend to continue for the rest of the year. During our Beijing conference in January 217, CRCC guided for new orders to grow c. 1% yoy. CCC gave new orders growth guidance on 28 February 217, expecting new orders to rise more than 2% in 217. The guidance provided by these companies is better than our expectations. Upgrading our new orders estimates for the constructors Based on ytd performance and management guidance, we raise our new order estimates by 18% on average for the constructors in 217 and 23% in 218. Figure 11: CCC s new orders growth Figure 12: CRCC s new orders growth Rmb bn 1,1 1, % % 12% 7% 731 1% E 218E 25% 2% 15% 1% 5% % Rmb bn 1,5 1,4 1,3 1,2 1,1 1, % 1,466 1,356 1,219 15% % 828 8% -3% E 218E 3% 27% 24% 21% 18% 15% 12% 9% 6% 3% % -3% -6% New contract value YoY chg New contract value YoY chg Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data Figure 13: CRG s new orders growth Figure 14: CSCI s new orders growth Rmb bn 1,5 1,4 1,3 1,2 1,1 1, ,453 1,358 1,235 29% % 7% 1% 2% E 218E 4% 35% 3% 25% 2% 15% 1% 5% % HK$ bn % % 16% 13% 7% E 218E 35% 3% 25% 2% 15% 1% 5% % New contract value YoY chg New contract value YoY chg Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data Page 6 Deutsche Bank AG/Hong Kong

7 China Lifting infra FAI estimates, mainly driven by higher PPP investment (mainly highway and municipal projects) We believe the promotion of PPP projects should support infrastructure investment, in turn helping to support China s economic growth. We note that municipal and transportation projects (the target market of CCC, CRCC, CRG and CSCI) account for a high proportion of total investment for the national reserve for PPP projects. Hence, the accelerating development of PPP projects should benefit all the constructors under our coverage. We lift China infrastructure spending (including railway, road and municipal projects) estimate by 2-4% in based on a base-case scenario (our assumption: all the projects in the national PPP project reserve could enter implementation period in the next three years). Consequently, we now forecast infra FAI in China to register a 5% CAGR over (vs. our previous estimates of 3.5%), among which we expect investment via the investment financing model to account for 17% of total in 218 (vs. our previous forecast of 15%). We estimate the market size for PPP projects (mainly including transportation and municipal projects) will be more than Rmb2trn in (vs. our previous estimates of Rmb1.65trn), representing a 35% CAGR over Our blue sky scenario (our assumption: PPP projects could enter implementation period in the next 2.5 years) suggests 2% and 9% potential upside from our current estimates for infra FAI and investment for PPP projects, respectively, which should enhance the constructors earnings by 5-1%. In addition, there is upside risk to our estimates on infra investment as we assume current reserved PPP projects (amounting to Rmb13.5trn) in the MoF s pool would enter implementation period and no additional PPP projects from the beginning of this year. Figure 15: DB assumption on China infrastructure spending (base case) Rmbm E 217E 218E 219E Railway 532,77 622,3 659, , ,129 68, ,664 yoy change 17% 6% 3% % -1% -1% Road 1,369,22 1,546,94 1,651,33 1,778,74 1,912,146 2,7,753 2,7,753 yoy change 13% 7% 8% 8% 5% % Water and others 184,97 171,57 19,77 189, , , ,396 yoy change -7% 12% -1% % % % Municipal (including Urban transit) 2,383,95 2,335,99 2,33,22 2,455,211 2,633,32 2,829,656 3,18,318 yoy change -2% -1% 7% 7% 7% 7% Total 4,285,94 4,675,441 4,84,958 5,99,476 5,41,73 5,635,32 5,763,131 yoy change 9.1% 2.8% 6.1% 6.1% 4.2% 2.3% Investment business 342,875 42,79 48, ,588 95,28 1,146,145 1,3,681 yoy change 23% 14% 3% 44% 27% 13% % of total 8% 9% 1% 12% 17% 2% 23% Cash construction 3,943,65 4,254,652 4,324,462 4,472,888 4,55,423 4,489,176 4,462,45 yoy change 8% 2% 3%.7% -.4% -1% % of total 92% 91% 9% 88% 83% 8% 77% Our assumption: PPP projects could be entered into implementation period in the next 3 years Source: Deutsche Bank. CRC, MoT, MOHURD Deutsche Bank AG/Hong Kong Page 7

8 China Figure 16: DB assumption on China infrastructure spending (worst case) Rmbm E 217E 218E 219E Railway 532,77 622,3 659, , ,89 66, ,361 yoy change 17% 6% 3% % -1% -11% Road 1,369,22 1,546,94 1,651,33 1,778,74 1,92,432 1,963,555 1,924,193 yoy change 13% 7% 8% 7% 3% -2% Water and others 184,97 171,57 19,77 189, , , ,396 yoy change -7% 12% -1% % % % Municipal (including Urban transit) 2,383,95 2,335,99 2,33,22 2,455,211 2,625,489 2,791,656 2,94,371 yoy change -2% -1% 7% 7% 6% 5% Total 4,47,37 4,675,441 4,84,958 5,99,476 5,393,27 5,55,838 5,595,321 yoy change 4.6% 2.8% 6.1% 5.8% 2.9%.8% Investment business 357,63 42,79 48, , ,27 1,57,3 1,127,243 yoy change 18% 14% 3% 41% 19% 7% % of total 8% 9% 1% 12% 16% 19% 2% Cash construction 4,112,434 4,254,651 4,324,462 4,472,888 4,57, 4,493,88 4,468,78 yoy change 3% 2% 3% 1% % -1% % of total 92% 91% 9% 88% 84% 81% 8% Our assumption: PPP projects could be entered into implementation period in the next 3.5 years Source: Deutsche Bank, CRC, MoT, MOHURD Figure 17: DB assumption on China infrastructure spending (best case) Rmbm E 217E 218E 219E Railway 532,77 622,3 659, , ,368 61,872 55,2 yoy change 17% 6% 3% % -1% -1% Road 1,369,22 1,546,94 1,651,33 1,778,74 1,944,182 2,11,14 2,11,3 yoy change 13% 7% 8% 9% 8% % Water and others 184,97 171,57 19,77 189, , , ,396 yoy change -7% 12% -1% % % % Municipal (including Urban transit) 2,383,95 2,335,99 2,33,22 2,455,211 2,64,575 2,869,919 3,61,525 yoy change -2% -1% 7% 8% 9% 7% Total 4,47,37 4,675,441 4,84,958 5,99,476 5,45,521 5,771,291 5,92,241 yoy change 4.6% 2.8% 6.1% 6.9% 5.9% 2.3% Investment business 357,63 42,79 48, , ,646 1,289,57 1,447,625 yoy change 18% 14% 3% 51% 36% 12% % of total 8% 9% 1% 12% 17% 22% 25% Cash construction 4,112,434 4,254,651 4,324,462 4,472,888 4,51,875 4,481,721 4,454,615 yoy change 3% 2% 3% 1% % -1% % of total 92% 91% 9% 88% 83% 78% 75% Our assumption: PPP projects could be entered into implementation period in the next 2.5 years Source: Deutsche Bank, CRC, MoT, MOHURD Page 8 Deutsche Bank AG/Hong Kong

9 China Valuations and ratings Raising earnings/target price for all the constructors Based on management guidance on new orders, our recent tour and analysis on PPP projects, we upgrade our forecasts and target prices for all the constructors, as follows. Figure 18: Forecast revisions Net profit (Rmbm) 216F 217F 218F Comment vs. Bloomberg consensus CRG Old 13,333 14,675 15,462 Higher construction revenue and better margin expansion New 13,459 15,549 17,259 % change 1% 6% 12% CRCC Old 14,62 16,35 16,557 Higher construction revenue and better margin expansion New 14,273 16,62 18,659 % change 2% 4% 13% CCC Our 216 forecast is in line with the market. Our 217 and 218 earnings forecast is 8% and 12% above Bloomberg consensus Our 216 forecast is in line with the market. Our 217 and 218 earnings forecast is 4% and 12% above Bloomberg consensus Old 18,51 19,923 21,598 Higher construction Our 216, 217 and 218 revenue and better earnings forecasts are margin expansion 6%, 11% and 16% above Bloomberg consensus New 18,21 21,311 24,345 % change 1% 7% 13% CSCI (HK$m) Old 5,132 5,514 6,611 Higher construction Our 216, 217 and 218 revenue and better margin expansion earnings forecasts are 11%, 3% and 5% above Bloomberg consensus New 5,155 5,894 7,314 % change % 7% 11% Source: Deutsche Bank, Bloomberg Finance LP Figure 19: Target price changes Target price CRG CRCC CCC CSCI Old New Reason for TP change Earnings upgrade and target price roll-over (to 217) Earnings upgrade and target price roll-over (to 217) Earnings upgrade and target price roll-over (to 217) Earnings upgrade Target 217E (x) Source: Deutsche Bank Deutsche Bank AG/Hong Kong Page 9

10 China Figure 2: Valuation comparables Stock name Stock code Rating TP (HK$) Price (March 1) Upside to TP P/E (x) EPS growth P/B (x) ROE (%) Dividend yield (%) new new old HK$ % FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY17E CCC 18.HK % % 19% % 12.8% 2.6% CSCI 3311.HK % % 34% % 18.6% 3.% CRCC 1186.HK % % 16% % 12.7% 1.9% CRG 39.HK % % 15% % 11.7% 1.8% Source: Deutsche Bank, Bloomberg Finance LP, Company data 216 earnings preview All the construction companies under our coverage are scheduled to release 216 results in mid- to end-march 217. We forecast CRG, CCC, CRCC and CSCI s 216 core earnings to increase 15%, 15%, 13% and 1% yoy, respectively. Our earnings estimate for CCC and CSCI is 6% and 11% ahead of market consensus. Our forecasts for the other two names are largely in line with market expectations. Figure 21: 216 earnings calendar Ticker 216 result date CRG 39.HK 3-Mar-217 CRCC 1186.HK 3-Mar-217 CCC 18.HK 28-Mar-217 CSCI 3311.HK 21-Mar-217 Source: Company data Our top picks CCC and CSCI CCC (18.HK,, target price HK$13.71) Investment thesis CCC is a leading state-owned company, engaged primarily in infrastructure construction (mainly ports, roads, bridges, and railways), dredging, port machinery, and road/bridge/port design. CCC is our top pick in the sector mainly due to the following reasons. 1) In our opinion, CCC is the largest prospective beneficiary from the OBOR plan in the medium term. 2) It has the highest exposure to investment business among big three constructors. PPP projects account for 21% of CCC s new orders in 216, vs % for CRG and CRCC. 3) It has strong capability to control overseas and investment-business projects considering its good track record. 4) Potential SOE reforms may benefit its B/S. We believe it is possible for CCC to introduce forecast strategic investors and optimize its business this year. 5) CCC is trading at 8x 217E PE, at a 4% and 15% discount to CRCC and CRG s, respectively. Page 1 Deutsche Bank AG/Hong Kong

11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 3 March 217 China Valuation Our preferred valuation method for CCC is DCF (WACC of 8.%, COE of 9.5%, COD of 5%, and ND/E of 5%), with 22 as the terminal year and a.5% terminal growth rate (based on potentially lower railway infrastructure spending in China). Our COE of 9.5% uses Deutsche Bank s guided 3.9% riskfree rate and 5.6% risk premium. Risks Key downside risks include worse-than-expected growth in the heavy machinery business, lower margin expansion; lower government infrastructure spending, interest rate hikes, weaker-than-expected overseas business, and VAT reform. Figure 22: CCC s rolling forward PE band HK$ x 12x 8x 4x EPS growth(%) 3% 25% 2% 15% 1% 5% % -5% Figure 23: CCC s PB vs. ROE Average P/B.5. P/B (LHS) ROE (RHS) 2% 15% 1% 5% % Source: Deutsche Bank, Bloomberg Finance LP, Company data Source: Deutsche Bank, Bloomberg Finance LP, Company data CSCI (3311.HK,, target price HK$16.6) Investment thesis We estimate the market size of infrastructure projects via the PPP financing model (mainly including transportation and municipal projects) will be Rmb2trn in , representing a 35% CAGR over We believe CSCI will be the largest beneficiary of this acceleration among the constructors due to its high exposure (+4% of total backlog) to the investment business for infrastructure projects, which would be its major target market in mainland China in the coming years. Armed with a distinct platform supported by parent company CSCEC, coupled with a steadier financial position and good risk management, we believe CSCI will be able to explore rising business opportunities stemming from infrastructure PPP projects in mainland China. We estimate CSCI will report a 32% core earnings CAGR in on healthy revenue growth and margin expansion. Our rating reflects our view on the company's healthy earnings outlook and solid financial position. Valuation We use DCF as our primary tool to value CSCI, with reference to a relative valuation based on P/E multiples. Our target price is based on a WACC of 8.5% and terminal growth rate of.5%. This implies a 217 P/E of 12x, higher than that of its Chinese peers at 1x. We believe this is justifiable, as CSCI offers potential stronger earnings growth than peers. Deutsche Bank AG/Hong Kong Page 11

12 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 3 March 217 China Risks Key down risks include: 1) slower-than-expected promotion of PPP model; 2) lower-government spending in public housing and infrastructure projects; 3) a sharp increase in raw materials prices; and 4) worse-than-expected margin performance. Figure 24: CSCI s rolling forward PE band Figure 25: CSCI s PB vs. ROE HK$ EPS growth (%) 6. 25% 35 5% 5. 2% x 16x 12x 8x 4x 4% 3% 2% 1% % Average P/B 15% 1% 5% % -1% P/B (LHS) ROE (RHS) Source: Deutsche Bank, Bloomberg Finance LP, Company data Source: Deutsche Bank, Bloomberg Finance LP, Company data Other Names: China Railway Group (39.HK) Valuation: Our preferred valuation method for CRG is DCF (WACC of 7.4%, COE of 9.3%, COD of 5.% and ND/E of 5%), with 22 as the terminal year and.5% terminal growth (average growth rate for the companies in the sector). Our COE of 9.3% uses Deutsche Bank's guided 3.9% risk-free rate and 5.6% risk premium. Our target price implies PEs of 1x for 217E. Risks: Downside risks: rising raw material costs; slowdown in the property market; political instability overseas; and lower margin performance. China Rail Construction (1186.HK) Valuation Our preferred valuation methodology for CRCC is a DCF valuation (WACC of 7.%, COE of 8.7%, COD of 5.% and ND/E of 3%), with 22 being the terminal year, and terminal growth of.5% (average growth rate for the companies in the sector). Our COE of 8.7% uses Deutsche Bank's guided 3.9% risk-free rate and 5.6% risk premium. Our target price implies a PE of 1x for 217E. Risks Downside risks: lower infrastructure capex; political instability overseas; rising raw material costs; margin performance; weaker overseas demand; and VAT reform. Page 12 Deutsche Bank AG/Hong Kong

13 China Deutsche Bank AG/Hong Kong Page 13 Figure 26: construction peer valuation Company Name Bloomberg Curr DB rating Price Market Cap Avg trading value March 1, 217 Ticker (local) (US$ m) (US$ m) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E Chinese construction competitors China Railway Group * 39 HK HK$ , % 16% 11% China Railway Construction * 1186 HK HK$ , % 16% 12% China Communications Construction * 18 HK HK$ , % 19% 16% China State Construction Int'l * 3311 HK HK$ , % 34% 24% China Machinery Engineering 1829 HK HK$ n/a , % 7% 5% China Oilfield Services Limited 6188.SH Rmb n/a , n/a n/a 57.6 n/a n/a 497% (23.1) (.) 3.1 Offshore Oil Engineering 6583.SH Rmb n/a 8.2 5, % 5% 26% China Gezhouba Group 668.SH Rmb n/a , % 24% 25% Sinoma International Engineering 697.SH Rmb n/a , % 21% 16% Shanghai Construction 617.SH Rmb n/a 5.4 5, % 12% 9% Shanghai Tunnel Engineering 682.SH Rmb n/a , % 16% 17% Shanghai Pudong Road & Bridge Construction P/E (X) EPS Chg(%) 6284.SH Rmb n/a , n/a -34% -3% n/a Simple average for Chinese peers % 15% 6% Simple average for Chinese peers (listed on HK market) P/B (X) ROE (%) % 18% 14% Regional construction competitors Shimizu Corporation * 183 JP JPY Hold 1,45. 7, % 29% -14% KAJIMA Corporation * 1812 JP JPY Hold , % 23% -7% Hyundai Engineering&Construction 72 KS KRW n/a 47,8. 4, % 25% 5% Daewoo Engineering & Construction 474 KS KRW n/a 6,13. 2, % 177% 1% GS E&C 636 KS KRW n/a 29,8. 1, % 562% 28% Hyundai Dev. Co KS KRW n/a 43,8. 2, % 2% 1% Samsung Eng. 285 KS KRW n/a 12,4. 2, n/a 98% 26% Daelim Industrial 21 KS KRW n/a 83,6. 2, % 17% 3% Sino-Thai Engineering STEC TB THB n/a , % 32% 29% Larsen & Toubro Ltd * LT IN INR Hold 1, , % 32% 1% BHEL * BHEL IN INR , n/a n/a n/a 84% (2.7) Gamuda GAM MK MYR n/a , % 12% 12% IJM Corp IJM MK MYR n/a , % -5% 17% Simple average for regional peers % 85% 15% Source: Deutsche Bank estimates for companies with *, Bloomberg Finance LP estimates for all others

14 China Page 14 Deutsche Bank AG/Hong Kong Figure 27: construction peer valuation (continued) Company Name Bloomberg Curr DB rating Price Market Ave trading Cap value March 1, 217 Ticker (local) (US$ m) (US$ m) FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E FY16E FY17E FY18E Europe and US construction competitors VINCI SA DG FP EUR n/a , % 11% 8% Bouygues SA EN FP EUR n/a , % 18% 12% EIFFAGE SA FGR FP EUR n/a , % 15% 15% ACCIONA S.A.* ANA SM EUR , % 13% 16% STRABAG SE * STR AV EUR Hold , % 4% 2% Skanska AB SKAB SS SEK n/a , % -9% -6% NCC AB NCCB SS SEK n/a , % 37% 5% Fluor Corporation * FLR US USD , % 5% 12% Jacobs Engineering * JEC US USD Hold , % -2% 16% Enka Insaat * ENKAI TI TRY Hold , % 4% 4% Simple average for international peers % 23% 8% P/E (x) (F) EPS chg (%) (F) P/B (x) ROE (%) Overall average % 43% 28% Source: Deutsche Bank estimates for companies with *, Bloomberg Finance LP estimates for all others

15 China Model updated:2 March 217 Running the numbers Asia China China Comms Construct Reuters: 18.HK Bloomberg: 18 HK Price (2 Mar 17) HKD 1.78 Target Price HKD Week range HKD Market Cap (m) HKDm 174,364 Company Profile USDm 22,46 CCC is a leading state-owned company, engaged primarily in infrastructure construction (mainly ports/roads/bridges/railways), dredging, port machinery, and road/bridge/port design. CCC is the third-largest railway construction company in China and the the largest dredging company, with a 7-8% market share. It conducts a port machinery manufacturing business through SZHI, which is the largest container crane producer in the world. Price Performance Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16 Margin Trends China Comms Construct HANG SENG INDEX (Rebased) E 17E 18E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E 18E Sales growth (LHS) ROE (RHS) E 17E 18E Fiscal year end 31-Dec E 217E 218E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 16,175 16,175 16,175 16,175 16,175 Average market cap (CNYm) 76, , ,51 154,51 154,51 Enterprise value (CNYm) 232,358 35, , , ,68 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm nm nm nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 366,42 43, , ,569 52,139 Gross profit 47,163 58,551 63,29 71,31 8,223 EBITDA 31,676 34,595 38,61 44,223 49,954 Depreciation 7,211 7,839 8,712 9,584 1,457 Amortisation ,182 1,369 1,549 EBIT 23,785 25,798 28,77 33,27 37,948 Net interest income(expense) -6,52-6,511-4,895-5,325-5,968 Associates/affiliates Exceptionals/extraordinaries Other pre-tax income/(expense) Profit before tax 17,64 19,671 24,196 28,329 32,364 Income tax expense 3,721 3,758 5,897 6,94 7,887 Minorities Other post-tax income/(expense) -3-1,736-1,736-1,736 Net profit 13,985 15,528 16,465 19,575 22,69 DB adjustments (including dilution) DB Net profit 13,985 15,528 16,465 19,575 22,69 Cash Flow (CNYm) Cash flow from operations -6,256 18,465 3,12 4,36 2,153 Net Capex -42,255-51,267-34,555-35,21-35,21 Free cash flow -48,511-32,82-31,435-3,85-33,57 Equity raised/(bought back) Dividends paid -3,116-3,195-3,265-3,882-4,483 Net inc/(dec) in borrowings 38,246 26,862 1, 15, Other investing/financing cash flows 4,85 31,999-1,736-1,736-1,736 Net cash flow -9,296 22,864-36,436-26,468-24,276 Change in working capital -2,65 17,55-24,688-27,634-33,945 Balance Sheet (CNYm) Cash and other liquid assets 78,4 98,77 61,641 35,173 1,897 Tangible fixed assets 63,377 67,973 61,227 58,842 55,585 Goodwill/intangible assets 9, , , , ,36 Associates/investments 9,73 12,589 12,973 13,357 13,741 Other assets 388, , ,75 52, ,986 Total assets 63,18 731, , , ,57 Interest bearing debt 228, , , ,183 28,183 Other liabilities 269,733 37,124 32, , ,514 Total liabilities 498, ,37 575, , ,697 Shareholders' equity 116, , , , ,248 Minorities 15,81 22,282 22,38 22,494 22,625 Total shareholders' equity 131, ,6 167,89 183,617 21,873 Net debt 15, ,16 193,542 23,1 269,286 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Phyllis Wang phyllis.wang@db.com Deutsche Bank AG/Hong Kong Page 15

16 China Model updated:2 March 217 Running the numbers Asia China Property CSCI Reuters: 3311.HK Bloomberg: 3311 HK Price (2 Mar 17) HKD 13.4 Target Price HKD Week range HKD Market Cap (m) HKDm 6,141 Company Profile USDm 7,747 China State Construction International Holdings Limited began operations in Hong Kong in It engages in housing/infrastructure construction and civil engineering operations as well as other peripheral operations such as foundation work, site investigation, mechanical and electrical engineering, highway and bridge construction, ready-mixed concrete, pre-cast production and infrastructure investment. China State Construction was listed on the Main Board of The Hong Kong Stock Exchange in July 25. Price Performance Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16 CSCI Margin Trends HANG SENG INDEX (Rebased) E 17E 18E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E 18E Sales growth (LHS) ROE (RHS) E 17E 18E Fiscal year end 31-Dec E 217E 218E Financial Summary DB EPS (HKD) Reported EPS (HKD) DPS (HKD) BVPS (HKD) Weighted average shares (m) 3,896 4,26 4,272 4,488 4,488 Average market cap (HKDm) 49,755 48,73 6,141 6,141 6,141 Enterprise value (HKDm) 51,282 5,976 57,749 59,232 6,82 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm 2. nm nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (HKDm) Sales revenue 34,44 37,913 46,491 54,4 61,34 Gross profit 5,63 5,362 6,563 8,523 1,291 EBITDA 4,74 4,439 5,248 7,44 8,69 Depreciation Amortisation EBIT 3,754 4,17 4,886 6,652 8,186 Net interest income(expense) Associates/affiliates ,246 Exceptionals/extraordinaries Other pre-tax income/(expense) , Profit before tax 4,48 4,756 6,121 7,158 8,992 Income tax expense ,253 1,663 Minorities Other post-tax income/(expense) Net profit 3,457 4,153 5,155 5,894 7,314 DB adjustments (including dilution) -953 DB Net profit 3,457 4,153 4,22 5,894 7,314 Cash Flow (HKDm) Cash flow from operations -1, , Net Capex Free cash flow -2, , Equity raised/(bought back) 1 1 4,81 Dividends paid -91-1,216-1,547-1,768-2,194 Net inc/(dec) in borrowings 4,74 3, Other investing/financing cash flows -2,346-1, Net cash flow ,447-2,371-2,82 Change in working capital -5,461-3,958-3,711-5,567-6,677 Balance Sheet (HKDm) Cash and other liquid assets 7,452 8,15 12,462 1,92 7,29 Tangible fixed assets 2,827 2,772 2,835 2,867 2,87 Goodwill/intangible assets Associates/investments 6,7 7,613 8,265 9,165 1,411 Other assets 5,292 51,664 61,534 71,997 83,554 Total assets 66,579 7,65 85,96 94,12 14,125 Interest bearing debt 14,82 17,774 18,248 18,248 18,248 Other liabilities 31,762 31,43 37,196 42,83 46,953 Total liabilities 46,581 48,818 55,444 6,331 65,21 Shareholders' equity 19,83 21,147 29,565 33,691 38,81 Minorities Total shareholders' equity 19,998 21,247 29,652 33,79 38,924 Net debt 7,367 9,759 5,786 8,156 1,958 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Phyllis Wang phyllis.wang@db.com Page 16 Deutsche Bank AG/Hong Kong

17 China Model updated:1 March 217 Running the numbers Asia China China Rail Construction Reuters: 1186.HK Bloomberg: 1186 HK Price (2 Mar 17) HKD 11.2 Target Price HKD Week range HKD Market Cap (m) HKDm 138,18 Company Profile USDm 17,8 CRCC is the largest railway construction company in China in terms of 215 new contract wins. It is an integrated construction group that encompasses infrastructure construction, survey, design and consulting services, engineering equipment and component manufacturing, property development and other businesses. Its subsidiary CRCCE, with major business of manufacturing of large railway maintenance machinery, has been listed on Hong Kong Exchange since December 215. Price Performance Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16 Margin Trends China Rail Construction HANG SENG INDEX (Rebased) E 17E 18E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E 18E Sales growth (LHS) ROE (RHS) E 17E 18E Fiscal year end 31-Dec E 217E 218E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 12,338 12,855 13,58 13,58 13,58 Average market cap (CNYm) 71, , , , ,447 Enterprise value (CNYm) 14, ,11 169,25 172, ,28 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm 17.3 nm nm.6 Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 575,26 582,522 62,289 65,356 78,295 Gross profit 57,55 61,78 64,516 71,231 78,11 EBITDA 3,524 32,416 34,758 39,98 43,114 Depreciation 1,444 1,828 11,644 12,614 13,585 Amortisation EBIT 19,94 21,42 22,832 26,1 29,45 Net interest income(expense) -4,46-3,741-2,692-2,742-2,786 Associates/affiliates Exceptionals/extraordinaries ,55 Other pre-tax income/(expense) Profit before tax 15,532 17,113 19,354 22,537 25,3 Income tax expense 3,472 3,739 4,258 4,958 5,566 Minorities ,76 Other post-tax income/(expense) Net profit 11,735 12,645 14,273 16,62 18,659 DB adjustments (including dilution) DB Net profit 11,735 12,645 14,273 16,62 18,659 Cash Flow (CNYm) Cash flow from operations ,58 23,413 23,877 24,825 Net Capex -2,467-25,87-24,6-24,6-24,6 Free cash flow -19,734 2, Equity raised/(bought back) 1,275 Dividends paid -2,2-2,691-2,251-2,621-2,943 Net inc/(dec) in borrowings 17,84-2,12 Other investing/financing cash flows 8,555-2,497 Net cash flow 4,623 23,713-2,898-2,84-2,177 Change in working capital -19,47 18,178-3,513-6,63-8,882 Balance Sheet (CNYm) Cash and other liquid assets 98,47 121, ,36 116, ,55 Tangible fixed assets 44,45 45,4 42,161 38,346 33,561 Goodwill/intangible assets 17,216 3,758 45,735 6,612 75,388 Associates/investments 8,191 1,924 11,2 11,116 11,212 Other assets 455,33 487,477 54, , ,646 Total assets 623, ,96 722, ,62 825,862 Interest bearing debt 163,65 158, , , ,837 Other liabilities 355,317 48,44 422,24 454, ,611 Total liabilities 518, ,277 58, ,98 652,448 Shareholders' equity 92, , , , ,43 Minorities 12,415 17,154 17,977 18,935 2,11 Total shareholders' equity 15, , , , ,413 Net debt 64,658 36,93 39,81 42,66 44,783 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Phyllis Wang phyllis.wang@db.com Deutsche Bank AG/Hong Kong Page 17

18 China Model updated:2 March 217 Running the numbers Asia China China Railway Group Reuters: 39.HK Bloomberg: 39 HK Price (2 Mar 17) HKD 7.16 Target Price HKD Week range HKD Market Cap (m) HKDm 152,57 Company Profile USDm 19,645 CRG is the second largest railway construction company in China in terms of 215 new contract value. CRG is an integrated construction group that encompasses infrastructure construction, survey, design and consulting services, engineering equipment and component manufacturing, property development and other businesses (such as mining and merchandise trading). Price Performance Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16 Margin Trends China Railway Group HANG SENG INDEX (Rebased) E 17E 18E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 17E 18E Sales growth (LHS) ROE (RHS) E 17E 18E Fiscal year end 31-Dec E 217E 218E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 21,3 22,23 22,844 22,844 22,844 Average market cap (CNYm) 7,84 134, , , ,142 Enterprise value (CNYm) 173, , , ,77 228,83 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm nm.3 Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 59, , ,79 681, ,97 Gross profit 55,259 56,13 6,77 67,345 73,721 EBITDA 25,532 25,556 29,17 32,998 36,31 Depreciation 6,82 6,734 7,41 8,64 8,728 Amortisation EBIT 18,788 18,112 2,851 24,116 26,71 Net interest income(expense) -4,275-3,172-1,615-1,7-1,792 Associates/affiliates Exceptionals/extraordinaries 1,45 1, Other pre-tax income/(expense) 11 Profit before tax 16,233 15,188 19,484 22,663 25,156 Income tax expense 5,557 5,231 6,3 6,967 7,733 Minorities Other post-tax income/(expense) Net profit 1,262 11,592 13,459 15,549 17,259 DB adjustments (including dilution) DB Net profit 1,262 11,592 13,459 15,549 17,259 Cash Flow (CNYm) Cash flow from operations 9,6 27,385 1,494 9,835 11,24 Net Capex -6,774-11,681-1,82-1,82-1,82 Free cash flow 2,826 15, Equity raised/(bought back) 12, Dividends paid -1,46-2,5-2,311-2,67-2,964 Net inc/(dec) in borrowings -5,685-2,492-5, -5, Other investing/financing cash flows -2,714 1,418 Net cash flow -6,979 24,625-2,62-8,638-7,562 Change in working capital -7,196 11,935-11,11-14,497-15,571 Balance Sheet (CNYm) Cash and other liquid assets 68,679 93,34 9,684 82,47 74,485 Tangible fixed assets 48,166 51,765 49,26 48,641 47,413 Goodwill/intangible assets 35,45 38,376 4,76 42,37 44,485 Associates/investments 23,852 23,654 23,654 23,654 23,654 Other assets 56,731 56,46 534, , ,238 Total assets 682, ,55 738, , ,275 Interest bearing debt 182,914 18,422 18, ,422 17,422 Other liabilities 391,7 393,845 41, , ,86 Total liabilities 573, , , , ,228 Shareholders' equity 95,47 118,3 126,76 138, ,669 Minorities 13,424 2,938 21,66 21,214 21,378 Total shareholders' equity 18, , , , ,47 Net debt 114,235 87,118 89,738 93,375 95,937 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Phyllis Wang phyllis.wang@db.com Page 18 Deutsche Bank AG/Hong Kong