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雷达卡
China Infrastructure Construction
Focus on Growth of Core Business; Buy CRCC and CCC; Hold CRGL
Initiating on 2 big-cap infrastructure construction companies — We are positive
about the outlook for railway investment in 08E-10E. In terms of stock picks,
we prefer companies that have large exposure to the railway construction
market, visible construction business revenue growth, high operating leverage,
and evident margin improvement. Our top pick is CRCC (1186.HK). We initiate
on CCC (1800.HK) at Buy/Low Risk and CRGL (390.HK) at Hold/Medium Risk.
Our top pick is CRCC — 1) Duopoly position in the railway construction
industry; 2) Visible top line growth of 20% CAGR in 07-09E; 3) High operating
leverage (08E) of 4X on construction; 4) EBIT margin improvement from 2.5%
in 07 to 3% in 09E; and 5) strong int’l revenue CAGR of 110% in 07-09E.
Buy CCC — We like CCC’s diversification, operating environment and
management team. We forecast 41% pre-excep. earnings CAGR in 07-09E,
mainly driven by product mix upgrade (from road to railway, int’l and BOT
projects). Our margin improvement expectation is less than the Street's and
management's estimates as we believe margins will likely to be suppressed in
its machinery and dredging businesses. However, we think the stock offers
value post recent share price pullback (~19% upside to our target price).
Hold CRGL — While we recognize its similarities to CRCC, we think CRGL is
less attractive than CRCC for the following: 1) Non-core business (property and
mining) which accounts for 25% of total EBIT in 09E should deserve much
lower multiples than the core business; 2) Lack of margin improvement track
record and heavy historical burden; 3) Less international market exposure; and
4) Less cash than CRCC (14% net cash/equity vs. CRCC’s 70% in 09E). Our
12-month SOTP-based TP of HK$7.1 implies only 13% upside.
Potential catalysts — 1) Announcement of any large construction project wins;
and 2) Positive earnings announcement and margin improvements.
Valuation — We use DCF to value the construction and ancillary businesses
(i.e. design, manufacturing, dredging), and P/E for non-core businesses. We
think fast earnings growth can justify the high valuation for this sector.
Risk — Raw material overrun and heavy reliance on gov’t planning/spending.
Upside exists in unexpected upward adjustment in railway construction
reference prices and railway investment and better-than-expected margins.
目录
Industry View 5
CRCC and CRGL are the key railway builders 5
CRCC and CCC have more visible revenue growth in the
construction business 6
CRCC and CRGL have high operating leverage, but CRCC is in a
better position to capture the opportunity 7
Valuation 10
Risks 16
Raw materials cost volatility 16
Heavy reliance on government planning/spending 16
Risks in foreign business 16
Foreign exchange risks 17
Lack of diversification – a long-term risk 17
China Communications Construction (1800.HK) 18
China Railway Group (0390.HK) 42
Appendix: Transportation Infrastructure Investment
Estimate 63
Appendix A-1 65
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