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雷达卡
Starting coverage with OVERWEIGHT. With its high earnings visibility and
duopolistic nature, China’s railway construction sector is on the right track. We
begin coverage of the sector with an OVERWEIGHT stance. We also initiate
coverage of China Railway Construction (CRCC) and China Railway Group
(CRG) with Outperform calls on the potential re-rating catalysts of higher-thanexpected
contract awards and a recovery in gross margin. CRCC is our top pick
as it has stronger cashflows, a solid foothold in the overseas market and
businesses that are more geared towards infrastructure construction.
• Margin compression will be short-lived. The railway construction sector has
underperformed the HSI since early 09 and has corrected approximately 20%
from its peak in early Aug. We attribute the underperformance to 1) the earnings
setback in FY08 due to higher raw material prices and exceptional forex losses for
CRG, and 2) a subpar margin in 9M09, caused by a timing mismatch between
profit recognition and actual construction, which quickened its pace. We believe
these overhangs will fade away as raw material prices have dropped and the
gross margin will improve when the pace of commencement of new contracts
slows down.
• Accelerating FAI to revitalise underdeveloped railway system. China’s
Ministry of Railway (MOR) is expanding the railway network from 80,000km in
2008 to 110,000km in 2012. This means that 7,500km of new railway tracks will
be laid every year in 2008-12, which is eight times the rate of construction in
2004-08. China’s fixed asset investment (FAI) in railway infrastructure is set to
jump 77% to Rmb600bn in 2009 and 17% to Rmb700bn in 2010-2011.
• Sustainable FAI due to population growth and traffic congestion. We expect
China’s railway FAI to be maintained at Rmb700bn after 2012. As the country’s
railway density is only 11.5km/thousand sq km compared with 23.5km/thousand
sq km for the US, there will be continued demand for new railway lines, speed
upgrades and electrification, driven by traffic congestion as the urban population
grows, and higher freight and passenger volume due to domestic and
international trade, passenger comfort and safety concerns. These factors should
support railway FAI after 2012. We also believe China’s railway construction
companies have strong growth potential in other developing countries where
railways remain underdeveloped.
• 77% growth in FAI underpins strong earnings in 2009. Taking our cue from
the MOR’s projection of a 77% jump in railway FAI in 2009, we forecast a revenue
surge of 55-56% for railway construction companies, leading to core net profit
growth of 71% for CRG and 61% for CRCC in FY09. We expect the growth
momentum at both the top and bottomlines to be a rapid 30-40% in FY10-11 as
more FAI will be earmarked for railway construction works in FY10 onwards.
• Cashflow has improved. Both CRG and CRCC saw improvements in their
cashflows in 9M09 due to stronger operating cashflow. CRCC is expected to
maintain a healthy positive cashflow due to better working capital management
and CRG’s cashflow should turn positive in FY11.
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