Synergy yet to be Seen, Maintain Accumulate

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1 : CRRC Corporation (1766 HK) Gary Wong 黄 家 玮 公 司 报 告 : 中 国 中 车 (1766 HK) [email protected] Synergy yet to be Seen, Maintain Accumulate 协 同 效 应 有 待 观 察, 维 持 收 集 GTJA Research 国 泰 君 安 研 究 Rating: Accumulate Maintained 评 级 : 收 集 ( 维 持 ) CRRC Corporation (1766 HK)'s revenue decreased 7.5% YoY to RMB55,54 million. Net profit dropped 8.1% YoY to RMB3,262 million. Results were in line with expectations. Gross margin increased.9 ppts YoY to 22.3% while net margin increased.5 ppts YoY to 5.9%. Revenue growth was stagnant in the first 3 quarters of 215 but is expected to rebound in 4Q15. Dispute over the ownership of intellectual property rights between CRRC and China Railway Corporation seems to have been settled. We expect the Company will have a strong recovery of revenue growth starting from 4Q15. We lower the EPS estimates of FY15-17 by 6.9%, 14.5% and 12.4% to RMB.43, RMB.495 and RMB.567, respectively. Although overseas revenue and new contracts are growing, the growth is considered moderate so far, while the synergy brought from the merging of CSR and CNR is yet to be seen. Maintain Accumulate with a TP of HKD11.36, representing 19.9x/18.2x/16.8x FY15/16/17 PER. 中 国 中 车 (1766 HK)215 年 3 季 度 收 入 同 比 降 7.5% 至 亿 元 ( 人 民 币, 下 同 ) 纯 利 同 比 趺 8.1% 至 亿 元 业 绩 与 预 期 一 致 第 3 季 度 毛 利 率 同 比 提 高.9 个 百 分 点 至 22.3%, 而 净 利 率 则 提 高.5 个 百 分 点 至 5.9% 215 年 前 3 季 度 收 入 增 长 停 滞, 但 我 们 预 计 收 入 增 长 会 于 第 四 季 回 升 公 司 与 中 国 铁 路 总 公 司 之 间 就 知 识 产 权 的 争 议 似 已 达 成 共 识 我 们 预 计 公 司 的 收 入 增 长 将 于 第 4 季 开 始 复 苏 我 们 分 别 调 低 年 的 每 股 盈 利 预 测 6.9% 14.5% 和 12.4% 至.43 元.495 元 和.567 元 海 外 收 入 和 新 签 合 同 有 所 增 长 只 属 温 和, 而 到 目 前 为 止 中 国 南 车 和 中 国 北 车 合 并 的 协 同 效 应 仍 有 待 观 察 维 持 收 集 评 级, 目 标 价 为 港 元, 对 应 19.9/18.2/16.8 的 215/216/217 年 预 期 市 盈 率 6-18m TP 目 标 价 : HK$11.36 Revised from 原 目 标 价 : HK$16. Share price 股 价 : Stock performance 股 价 表 现 % of return Change in Share Price 股 价 变 动 1 M 1 个 月 3 M 3 个 月 HK$9.64 (2.) Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 HSI index CRRC CORP LTD - H 1 Y 1 年 Abs. % 绝 对 变 动 % (1.3) (9.2) 22.2 Rel. % to HS index 相 对 恒 指 变 动 %.6 (8.5) 26.9 Avg. share price(hk$) 平 均 股 价 ( 港 元 ) Source: Bloomberg, Guotai Junan International Year End Turnover Net Profit EPS EPS PER BPS PBR DPS Yield ROE 年 结 收 入 股 东 净 利 每 股 净 利 每 股 净 利 变 动 市 盈 率 每 股 净 资 产 市 净 率 每 股 股 息 股 息 率 净 资 产 收 益 率 12/31 (RMB m) (RMB m) (RMB) ( %) (x) (RMB) (x) (RMB) (%) (%) 213A 195,587 8, A 221,82 1, F 228,378 12, F 251,31 14, F 278,97 15, Shares in issue (m) 总 股 数 (m) 27,288,8 Major shareholder 大 股 东 CRRCG 54.2% Market cap. (HK$ m) 市 值 (HK$ m) 263,64. Free float (%) 自 由 流 通 比 率 (%) month average vol. 3 个 月 平 均 成 交 股 数 ( ) 33,787.1 FY15 Net gearing (%) FY15 净 负 债 / 股 东 资 金 (%) Weeks high/low (HK$) 52 周 高 / 低 2.65 / 7.8 FY14-17 EPS CAGR 年 每 股 盈 利 复 合 年 增 长 率 (%) 12.4 Source..the Company, Guotai Junan International See the last page for disclaimer Page 1 of 6

2 net profit dropped 8.1% YoY to RMB3,262 million. Results were in line with expectation. CRRC Corporation s 3Q revenue decreased 7.5% YoY to RMB55,54 million. Net profit dropped 8.1% YoY to RMB3,262 million. Results were in line with expectation. Gross margin increased.9 ppts YoY to 22.3% while net margin increased.5 ppts YoY to 5.9%. In the first 9 months of 215, the Company s revenue increased.4% YoY to RMB148,555 million. Net profit increased.2% YoY to RMB7,961 million. Results were in line with expectation. Gross margin improved significantly from 2.6% in to 22.1% in but net margin remained at 5.4%, partly due to a of non-operating income from RMB797 million in to RMB692 million in Revenue growth was stagnant in the first 3 quarters of 215 but is expected to rebound in 4Q15. According to Daily Economic News, CRRC and China Railway Corporation had a dispute over the ownership of intellectual property rights previously held by former Ministry of Railway. The dispute slowed down tenders of stock rolling contracts, especially for HSR related orders, from China Railway Corporation in the 1H15. Nevertheless, with the huge orders coming in starting July, the dispute seemed to be settled. We expect China Railway Corporation will catch up by speeding up tenders of stock rolling contracts in 2H15, implying a strong recovery of revenue growth in 4Q15 forward. Fig 1: CRRC s Corporation Quarterly Revenue Fig 2: CRRC s Corporation Quarterly Gross Profit 1, 1 16, 12 8, 6, 4, 2, , 8, 4, Revenue YoY Fig 3: CRRC s Corporation Quarterly Net Profit 4, Fig 4: CRRC s Corporation Gross Margin and Net Margin 25% Gross Profit YoY 21.2% 21.4% 22.3% 3, % 16.4% 15.1% 16.3% 18.4% 17.9% 17.2% 19.1%2.1% % 15.4% 8 15% 2, 1, 4 1 5% 4.6% 3.9% 3.8% 4.1% 4.2% 4.1% 4.6% 4.2% 4.9% 5.3% % 5.4% 5.9% 3.9% -4 Net Profit YoY Gross Margin Net Margin See the last page for disclaimer Page 2 of 6

3 Fig 5: CRRC s Corporation Quarterly New Contracts 1, 8, 9,25 6, 47,781 56,6 45,368 4, 2, 2,84 24,494 16,23 29,15 4Q15 Fig 6: CRRC s Corporation Quarterly Selling Expense as % of Revenue Fig 7: CRRC s Corporation Quarterly Administrative Expenses as % of Revenue 5% 4% 3% 2% 1% 2.2% 2.9% 1.8% 3.5% % 2.5% 2.6% 2.1% The effect on synergy from the merger between CSR and CNR had yet to be fully revealed. In, administrative expenses dropped.6 ppts QoQ to 9.5% of total revenue, which is in line with expectation. In contrast, selling and marketing expense stayed at 3.5% of total revenue in and, which seemed to contradict with the primary objective of reducing peer competition through the merger. However, we found that the quarterly selling expense indeed fell by 19.2% QoQ to RMB1,948 million in, selling and marketing expenses stayed at 3.5% for the last two quarters was mainly due to the delayed tenders from CRC and dragged down the revenue of. We expect it to decrease in the next few quarters given the aforementioned recovery of revenue growth starts to take effect in 4Q % 3.9% 3.6%3.5%3.5% 3.5% 12% 1 8% 6% 4% 2% 8.6% % 9.3% 8.8%8.6% 8.5% 8.1% 7.6% 8.1% % 1.5% 1.1%9.5% Overseas revenue surged 61. YoY to RMB11,124 million in 1H15. The Company benefited from the favourable geopolitical policies including One Belt and One Road and going global initiative of HSR advocated by the Chinese government. With the gradual construction of China-Asia railway( 中 亚 铁 路 ) and Euro-Asia railway( 欧 亚 铁 路 ), the demand for railway equipment will keep on expanding. We expect overseas sales will remain to be a consistent growth driver for the Company. See the last page for disclaimer Page 3 of 6

4 Table 1: CRRC s Overseas Revenue as a % of Total Revenue H15 CSR Corporation 3.6% 7.7% 9.5% 6.5% 8.7% n.a. CNR Corporation % 1.5% 7.9% 5.3% n.a. Combined (CRRC Corporation) 5.3% 7.4% % 7.2% 11.9% Maintain Accumulate with a TP of HKD We lower the EPS estimates of FY15-17 by 6.9%, 14.5% and 12.4% to RMB.43, RMB.495 and RMB.567 respectively. Although overseas revenue and new contracts are growing, the growth is considered moderate so far, while the synergy of merging of CSR and CNR are yet to be seen. Maintain Accumulate with a TP of HKD11.36, representing 19.9x/18.2x/16.8x PER. Table 2: Peers Comparison Company PE (fiscal year) PB (fiscal year) ROE(%) D/Y(%) Stock Code Currency Last price Market cap(mn) 14A 15F 16F 17F 14A 15F 16F 17F 15F 15F Crrc Corp Ltd - H 1766 HK HKD , Kawasaki Heavy Industries 712 JP JPY , Alstom Alo FP EUR , n.a (15.7). Hitachi Ltd 651 JP JPY ,35, Bombardier Inc-B BBD/B CN CAD ,681.6 n.a (5.7) (.9) (.8) (.9) Siemens Ag-Reg Sie GR EUR , Simple Average Weighted Average See the last page for disclaimer Page 4 of 6

5 Financial Statements and Ratios Income Statement Balance Sheet Year end Dec (RMB m) 213A 214A 215F 216F 217F Year end Dec (RMB m) 213A 214A 215F 216F 217F Turnover 195, ,82 228, ,31 278,97 Cash and cash equivalents 22,88 37,323 43,384 49,284 55,845 Cost of sales (161,873) (178,55) (18,494) (2,939) (225,192) Short-term investments 1,744 1,77 1,975 11,249 11,531 Gross profit 33,715 43,297 47,884 5,93 53,778 Accounts & notes receivables 72,467 68,21 7,223 77,189 85,78 Inventories 36,61 59,667 6,332 67,165 75,272 Other income and gains 399 1,44 1,544 1,776 1,954 Other current assets 21,619 25,385 29,193 33,571 38,67 Selling and administrative expenses (22,856) (29,389) (31,288) (32,132) (34,313) Total current assets 154,529 21, ,17 238, ,35 Operating profit 11,258 15,312 18,141 19,737 21,419 Long-term investments & receivables 739 1,2 1,12 1,213 1,334 Finance costs, net (1,946) (2,347) (1,643) (1,725) (1,846) Net fixed assets 68,215 73,747 79,278 85,224 91,616 Net non-operating income/expenses (1,752) (1,497) ,74 Other long-term assets 19,92 23,684 26,53 28,658 31,524 Total non-current assets 88,46 98,434 16, ,95 124,474 Profits before tax 11,64 14,463 17,363 18,976 2,646 Total assets 242, ,717 32, , ,51 Tax (1,737) (2,141) (2,65) (2,846) (3,97) Profits after tax 9,327 12,322 14,759 16,13 17,549 Accounts payables 6,14 72,21 73,552 8,945 9,126 Short-term borrowings 48,849 49,16 53,918 59,39 65,24 Equity holders 8,294 1,87 12,942 14,131 15,351 Other short-term borrowings 32,582 52,566 53,55 58,933 65,617 Minority interests 1,34 1,514 1,817 1,999 2,199 Total current liabilities 141, , ,19 199,187 22,983 EPS (RMB) Long-term borrowings 4,984 12,451 13,385 14,389 15,468 DPS (RMB) Other long-term liabilities 9,672 11,311 12,442 13,686 15,55 Cash Flow Statement Total non-current liabilities 14,655 23,762 25,827 28,75 3,523 Total liabilities 156, ,546 26, , ,56 Year end Dec (RMB m) 213A 214A 215F 216F 217F Minority interests 11,437 12,867 14,684 16,683 18,881 Share capital & APIC 25,155 27,289 27,289 27,289 27,289 Net income 8,294 1,87 12,942 14,131 15,351 Reserves 49,756 62,16 71,722 82,321 93,834 Depreciation and amortization 4,226 5,241 5,549 5,966 6,413 Total equity 86,348 12, , ,292 14,4 Net change in working capital (4,166) 12,855 (4,161) (5,42) (5,869) Others 1,987 (42) (129) (169) (163) Total liabilities & equity 242, ,717 32, , ,51 Net cash generated from operating activities 1,34 28,483 14,21 14,526 15,732 Purchase of PPE & intangibles (1,14) (9,629) (11,62) (11,892) (12,784) Others (3,46) (9,998) Net cash used in investing activities (13,6) (19,627) (1,985) (11,787) (12,648) Issue of shares 7,763 BPS (RMB) Issue / (repayment) of debt (7,776) 5,17 5,835 6,396 7,1 Financial Ratios Dividend paid (2,61) (3,328) (2,72) (3,235) (3,533) 213A 214A 215F 216F 217F Others 1,91 (2,383) (741) (112) (116) Net cash generated from financing activities 1,63 7,68 2,393 3,48 3,362 Gross margin (%) Operating margin (%) Cash at the beginning of year 22,953 21,192 37,34 42,644 48,431 Net margin (%) Foreign exchange effect (14) (83) ROA (%) Net change in cash & cash equivalents (1,657) 15,925 5,69 5,787 6,446 ROE (%) Cash at the end of year 21,192 37,34 42,644 48,431 54,877 Net gearing ratio (%) Add: Time deposit Cash at balance sheet 22,88 37,323 43,384 49,284 55,845 Source: the Company, Guotai Junan International See the last page for disclaimer Page 5 of 6

6 Company Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Buy Relative Performance >15%; or the fundamental outlook of the company or sector is favorable. Accumulate Relative Performance is 5% to 15%; or the fundamental outlook of the company or sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the company or sector is neutral. Reduce Relative Performance is -5% to -15%; or the fundamental outlook of the company or sector is unfavorable. Sell Relative Performance <-15%; or the fundamental outlook of the company or sector is unfavorable. Sector Rating Definition The Benchmark: Hong Kong Hang Seng Index Time Horizon: 6 to 18 months Rating Definition Outperform Relative Performance >5%; or the fundamental outlook of the sector is favorable. Neutral Relative Performance is -5% to 5%; or the fundamental outlook of the sector is neutral. Underperform Relative Performance <-5%; or the fundamental outlook of the sector is unfavorable. DISCLOSURE OF INTERESTS (1) The Analysts and their associates do not serve as an officer of the issuer mentioned in this Research Report. (2) The Analysts and their associates do not have any financial interests in relation to the issuer mentioned in this Research Report. (3) Except for SMI Holdings Group Limited (198), China Fire Safety Enterprise Group Limited (445), Guangshen Railway Company Limited-H shares (525), China All Access (Holdin gs) Limited (633), Guotai Junan International Holdings Limited (1788), Binhai Investment Company Limited (2886) and Link Holdings Limited (8237), Guotai Junan and its group companies do not hold equal to or more than 1% of the market capitalization of the issuer mentioned in this Research Report. (4) Guotai Junan and its group companies have not had investment banking relationships with the issuer mentioned in this Research Report within the preceding 12 months. DISCLAIMER This Research Report does not constitute an invitation or offer to acquire, purchase or subscribe for securities by Guotai Junan Securities (Hong Kong) Limited ("Guotai Junan"). Guotai Junan and its group companies may do business that relates to companies covered in research reports, including investment banking, investment services and etc. (for example, the placing agent, lead manager, sponsor, underwriter or invest proprietarily). Any opinions expressed in this report may differ or be contrary to opinions or investment strategies expressed orally or in written form by sales persons, dealers and other professional executives of Guotai Junan group of companies. Any opinions expressed in this report may differ or be contrary to opinions or investment decisions made by the asset management and investment banking groups of Guotai Junan. Though best effort has been made to ensure the accuracy of the information and data contained in this Research Report, Guotai Junan does not guarantee the accuracy and completeness of the information and data herein. This Research Report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Investors should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. This Research Report is not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Guotai Junan and its group companies to any registration or licensing requirement within such jurisdiction. 215 Guotai Junan Securities (Hong Kong) Limited. All Rights Reserved. 27/F., Low Block, Grand Millennium Plaza, 181 Queen s Road Central, Hong Kong. Tel.: (852) Fax: (852) Website: See the last page for disclaimer Page 6 of 6