CRRC (1766 HK) Accumulate (maintained) Target price: HK$8.20. Weak 1H17 results, but management s optimistic view on EMU orders eases market concern

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1 Equity Research Rail Equipment CRRC (1766 HK) Accumulate (maintained) Target price: HK$8.2 Dominic Chan, CFA, FRM SFC CE No. APP GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Weak 1H17 results, but management s optimistic view on EMU orders eases market concern 1H17 revenue in line but net profit misses our estimate 1H17 revenue declined 5.9% YoY to Rmb86.8bn, in-line with our expectation (our estimate: Rmb87.6bn), while net profit missed our forecast, coming in down 23.4% YoY to Rmb3.67bn (our estimate: Rmb4.47bn). The decline in 1H17 net profit was attributable to: 1) a 45% YoY drop in revenue in its EMU segment. 2) GPM declined from 22.4% in 1H16 to 21.4 in 1H17, on a lower contribution from its higher margin rail equipment segment and a higher contribution from its rapid transit vehicle segment. 3) 8.5% YoY increase in R&D expenses. Rapid transit vehicles segment posts fastest growth The company s rapid transit vehicles segment was the only segment to maintain momentum in 1H17, with 35.5% YoY growth during the period. Its rail equipment segment, 48.6% of total revenue, saw a 1.9% YoY drop in revenue. New business and modern services fell by 15.6% and.2% YoY respectively. Stock performance /29/216 11/29/216 2/28/217 5/31/ HK (LHS) HS Index Source: Bloomberg Key data Aug 25 close (HK$) 6.85 Shares in issue (m) 4371 Major shareholder CRRCG (54.2%) Market cap (HK$m) 313, M avg. vol. (m) W high/low 6.66/7.99 Source: Bloomberg Rmb252.8bn in orders on hand As of June 3, the company had Rmb252.8bn in orders on hand. Among these, Rmb117bn was from the rapid transit segment, the largest portion of the order backlog, Rmb52.7bn and Rmb33.9bn came from its EMU and locomotive segments respectively, Rmb21.3bn was from new business, and Rmb16.2bn and Rmb5.6bn came from freight wagons and passenger cargo respectively. Better results expected in 2H17 Based on order backlog and delivery schedule, we expect the company to achieve better results in 2H17, and see the following as growth drivers: 1) CRRC delivered 16 EMUs in 1H17, and management expects to deliver ~24 in 2H17, to meet their whole year target. 2) The company delivered 32 locomotives in 1H17, and the remaining locomotive orders obtained during Jan 217 are expected to be delivered in 2H17. Meanwhile, the company expects ~1 locomotive units to be procured soon, of which some are expected to be delivered in 2H17. 3) Its rapid transit vehicles segment should maintain faster growth in 2H17. Management optimistic on EMU procurement During the analyst briefing, management confirmed that the next round of procurement of 14 units of China Standard EMUs (CSEMUs) will begin in Sept. They also expect China Railway Corporation to place another order for CSEMUs in 4Q17 or 1Q18. In addition, management expects EMU procurement to recover, starting from next year, for three reasons: 1) CRRC expects new operating length of rail lines in China to increase from ~3,km in 217 to ~5,km in 218; 2) EMU density should increase, driven by an increase in the maximum speed for EMUs to 35km per hour; 3) More EMUs will enter stage C5 of train maintenance. Maintain Accumulate and TP of HK$8.2 The shares are down 1% YTD, underperforming the market. Even though 1H17 results came in weaker than our estimate, we expect better 2H17 results. More importantly, management s optimistic view on EMU procurement may ease investor concerns. We maintain our Accumulate rating and target price of HK$8.2, based on 16x 217E P/E, equal to the stock s average P/E valuation over the past three years. Key risks: 1) High reliance on CRC procurement; 2) lower-than-expected rail equipment FAI; 3) delays in rapid transit project construction; 4) delays in receivable collection from clients, and; 5) pressure on product ASP. Stock valuation Revenue YoY Net profit YoY EPS EPS P/E BPS P/B DPS Dividend ROE (Rmb m) (%) (Rmb m) (%) (Rmb) YoY (Rmb) (Rmb) yield (%) (%) ,785 9% 11,818 9%.43 6% ,138-6% 11,296-4%.41-4% E 239,41 7% 11,96 6%.44 6% E 269,413 13% 14,64 18%.52 17% E 33,675 13% 16,377 16%.6 16%

2 Figure 1: 1H17 segment revenue (Rmb m) 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Rapid transit vehicles and urban infrastructure New business 1H16 1H17 Figure 2: 1H17 revenue breakdown 12.% Figure 3: 1H16 revenue breakdown 11.3% 24.% 48.6% 26.7% 51.3% 15.5% 1.8% Rapid transit vehicles and urban infrastructure New businesses Rapid transit vehicles and urban infrastructure New businesses Figure 4: Length of newly operational railways (km) Figure 5: Length of rapid transit in operation (km) 12, 1, 8, 8,427 9,531 8, 1, 6, 5,389 5,586 5,5 4, 2, 2,174 3,281 2, E 218E 219E 22E 2

3 Figure 6: Density of MUs in China Figure 7: Density of rapid transit vehicles in China No. of MUs per km of HSR in operation Density of rapid transit vehicles (units per km) Figure 8: No of MU in operation in China (set) Figure 9: No of rapid transit vehicles in operation in China 4,5 4, 3,5 3, 2,5 2, 1,5 1, ,38 1,411 1,883 2,586 3,46 3,151 3,551 3,951 5, 45, 4, 35, 3, 25, 2, 15, 1, 23,483 19,941 17,3 14,366 12,611 8,285 9,945 28,788 34,627 39,529 46, E 218E 219E 22E Retained number of MU sets 5, E 217E 218E 219E 22E 3

4 Figure 1: Financial statements Income Statement Balance Sheet Year-end Dec 31 (Rmb m) E 218E 219E Year-end Dec 31 (Rmb m) E 218E 219E Revenue 237, , ,41 269,413 33,675 Prepaid land lease payments YoY 8.9% -5.7% 6.6% 12.7% 12.7% Inventories 59,747 54,42 57,669 64,781 72,828 Cost of sales (191,25) (179,11) (191,356) (214,957) (241,655) Trade receivables 72,514 74,53 75,314 81,193 91,518 Gross profit 46,535 45,28 47,685 54,456 62,19 Prepayments, deposits and other receivables 18,787 3,51 29,471 29,525 29,119 GPM (%) Tax recoverable Selling expenses (7,954) (7,25) (7,649) (8,621) (9,718) Pledged deposits 4,614 4,561 4,561 4,561 4,561 Administrative expenses (22,486) (22,427) (23,426) (26,42) (29,76) Cash and cash equivalents 34,755 41,34 44,911 46,535 49,48 Other income 3,642 4,17 3,825 4,311 4,859 Total Current Asset 25,526 22, , ,969 26,857 Other gains and losses (1,695) (1,623) (1,673) (1,886) (2,126) PPP 62,18 66,364 7,57 74,534 8,26 Operating profit 18,42 17,745 18,761 21,857 25,274 Prepaid land lease payments 14,428 14,492 14,492 14,492 14,492 OPM (%) Other intangible assets 3,26 2,82 2,82 2,82 2,82 Interest income Loans & advances to customers Finance Costs (1,412) (1,264) (1,651) (1,713) (1,799) Available-for-sale investments 3,157 3,819 3,819 3,819 3,819 Share of results of an associate Deferred tax assets 2,744 3,9 3,18 3,52 3,948 Profit before taxation 17,48 16,935 17,588 2,683 24,83 Total non current assets 16, , , ,2 131,957 Income tax expense (2,951) (3,25) (3,166) (3,723) (4,335) Total Assets 311, , , ,99 392,814 Effective tax rate Non-controlling interests 2, , , , ,371.6 Trade payables 83,179 91,95 94,367 1, ,552 Net profit 11,818 11,296 11,96 14,64 16,377 Other payables 41,245 38,217 41,941 47,114 52,966 YoY 9.3% -4.4% 5.9% 17.6% 16.4% Interest bearing bank and other borrowings 15,26 27,184 27,854 29,247 3,79 Retirement benefit obligations Tax payable 1,534 1,272 1,583 1,861 2,167 Provisions for warranties 2,28 1,866 1,866 1,866 1,866 Current portion of LT payables Total current liabilites 169,91 184, ,522 27,72 23,683 Retirement benefit obligations 4,54 3,516 3,347 3,233 3,34 Deferred tax liabilities Defferred income 5,556 5,945 5,945 5,945 5,945 Cash Flow Statement Total non current liabilites 29,28 3,279 31,334 31,817 32,551 Year-end Dec 31 (Rmb m) E 218E 219E Equity 96,9 14,857 14,671 16,522 11,632 Pretax Income 17,48 16,935 17,588 2,683 24,83 Non-controlling interests 16,674 18,948 18,948 18,948 18,948 Depreciation & amortization 6,217 6,91 7,279 7,79 8,65 Total equity 113, ,85 123, ,47 129,58 Other non-cash adjustments (8,283) (2,858) 2,557 (1,364) (2,654) Total equity and liabilities 311, , , ,99 392,814 Net cash from operating activities 14,982 2,986 27,425 27,27 29,494 Capital expenditures (7,387) (1,32) (9,562) (1,777) (12,147) Financial Ratios Other investing activities 1,995 (14,677) (7,751) (7,751) (7,751) Year-end Dec E 218E 219E Net cash from investing activities (5,392) (24,79) (17,312) (18,527) (19,898) EBITDA margin (%) Dividends paid (734) (4,93) (4,186) (4,923) (5,732) EBIT margin (%) Changes in debt (1,15) 8,321 1,895 1,99 2,89 NPM (%) Changes in capital stocks ROA (%) Other financing activities (5,938) (2,921) (4,43) (4,43) (3,927) ROE (%) Net cash from financing activities (16,687) 1,36 (6,721) (7,363) (7,57) Debt/equity ratio (%) (17.2) (11.2) (13.8) (13.8) (14.2) Net change in cash (7,9) (1,93) 3,877 1,624 2,513 Account receivables turnover days Cash at beginning of year 37,34 29,944 28,14 31,892 33,515 Inventory turnover days Cash at end of year 29,944 28,14 31,892 33,515 36,28 Account payables turnover days

5 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 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% 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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