20180907-中国银河国际证券-中国铁建-01186.HK-Strong_earnings_growth_momentum_expected_to_continue_in_2H18_6页_758kb

China Railway Construction Corporation (1186.HK) Summary

Core Content

China Railway Construction Corporation (CRCC) has demonstrated strong earnings growth in the first half of 2018, with net profit increasing by 22.8% YoY. This growth is attributed to business diversification and increased exposure to Public-Private Partnership (PPP) projects, which have contributed to margin expansion. The company's gross profit margin improved from 8.8% in 1H17 to 9.7% in 1H18, indicating enhanced profitability.

Despite the improved earnings, operating cash flow deteriorated in 1H18 due to the deleveraging environment, with a cash outflow of RMB45.9bn compared to RMB25.5bn in 2H2017. The net gearing increased to 38.0% as of 1H18, up from 7.3% at the end of 2017, reflecting a higher debt forecast.

The central government is expected to increase infrastructure investment in 2H18, driven by concerns over economic growth due to the US-China trade dispute. This is likely to benefit CRCC, as railways are a key focus area for infrastructure stimulus. China's railway investment in 2018E is projected to reach RMB800bn, exceeding the initial target of RMB732bn.

Key Financial Highlights

Earnings and Revenue Growth

• 1H18 Revenue Growth: 6.9% YoY, with growth across all business segments.
• 1H18 Net Profit Growth: 22.8% YoY.
• Recurring Net Profit (2018E): RMB19,502m, showing a 21.5% YoY increase.
• Adjusted Earnings (2018E): RMB19,502m.
• Recurring EPS (2018E): RMB1.32, up by 21.5% YoY.
• Adjusted EPS (2018E): RMB1.32.
• Net Profit Margin (2018E): 2.6%, expected to rise to 2.7% in 2019E.

EBITDA and Profitability

• EBITDA (2018E): RMB43,717m, up by 12.6% YoY.
• EBITDA Margin (2018E): 5.9%.
• EBIT Margin (2018E): 4.3%.
• Gross Profit (2018E): RMB72,021m, up by 14.5% YoY.
• Gross Profit Margin (2018E): 8.9%.
• Pre-Tax Profit (2018E): RMB26,924m, showing a 30.8% YoY increase.
• Net Profit After Tax (2018E): RMB21,431m, up by 21.5% YoY.

Valuation Metrics

• Target Price: Trimmed from HK$11.60 to HK$10.90, a 16.3% increase over the current price.
• Target EV/EBITDA Multiple: Raised from 3.8x to 4.0x.
• EV (2018E): RMB174,869m.
• Net Debt (2018E): RMB46,406m.
• Target Fair Value: RMB128,463m.
• Forward P/E (2018E): 6.2x, down from 8.3x in 2015.
• Forward P/B (2018E): 0.7x, showing a downward trend from 1.0x in 2015.
• Forward PEG (2018E): 0.3x, indicating a low growth valuation.

Key Financial Ratios

Revenue Breakdown (2018E)

Investment Outlook

• Investment Rating: BUY
• Reason: Strong earnings growth momentum and expected benefits from increased infrastructure investment.
• Key Catalyst: Growing market confidence in local governments' ability to fund infrastructure projects.
• Debt Concerns: Higher debt forecast led to a moderate downward revision in the target price.
• Market Cap: US$19,058m
• Shares Outstanding: 13,580m
• Free Float: 44.3%
• 52-Week Range: HK$7.53–HK$10.36
• Auditor: Ernst & Young

Analysts

• Kelly Zou—Analyst: (852)3698-6319, kellyzou@chinastock.com.hk
• Wong Chi Man, CFA—Head of Research: (852)3698-6317, cmwong@chinastock.com.hk

Summary of Key Points

• Strong Earnings Growth: CRCC's 1H18 results exceeded expectations, with a 22.8% YoY increase in net profit.
• PPP Exposure: Increasing involvement in PPP projects is expected to further improve margins and earnings.
• Government Stimulus: The central government's increased infrastructure investment is a key driver for CRCC.
• Valuation Adjustments: The target price was revised downward due to higher debt expectations, but the EV/EBITDA multiple was increased.
• Financial Health: The company has a current ratio of 1.2x and quick ratio of 1.0x in 2018E, indicating moderate liquidity.
• Debt Levels: Net gearing is expected to rise to 38.0% in 2018E, up from 7.3% in 2017.
• Dividend Policy: DPS is expected to increase from RMB0.18 in 2018E to RMB0.21 in 2019E.

Conclusion

CRCC is well-positioned to benefit from increased infrastructure investment in 2018 and beyond, with its diversified business model and growing PPP exposure. While the company's debt levels have risen, the strong earnings growth and government support continue to reinforce its investment potential. The BUY rating remains in place, with a target price of HK$10.90 and a revised EV/EBITDA multiple of 4.0x. Investors should monitor the company's financial health and the broader economic environment for continued growth.