德银-中国-制造业（个股-中国中车）-回归正轨，买入中国中车H股-20171028-Deutsche_Bank-CRRCBack_on_track；Buy_CRRC-H_12页_878kb

CRRC Summary: 3Q 2017 Results and Outlook

Core Content

CRRC (China Railway Rolling Stock Corporation), formed by the merger of CSR and CNR in June 2015, is the world's largest rolling stock manufacturer and solutions provider. The company reported a positive earnings recovery in 3Q 2017, with net profit increasing by 15% year-over-year (YoY) to Rmb3.1bn, ending a four-quarter decline. This marked a key turning point, reinforcing the multi-year recovery trend in rolling stock demand. The company's earnings growth is expected to continue into 4Q 2017, with a projected 25% YoY increase.

Key Highlights

• Earnings Recovery:

  • 3Q 2017 net profit rose 15% YoY to Rmb3.1bn.
  • 9M 2017 net profit reached Rmb6.8bn, achieving 56% of the full-year forecast.
  • Management maintained full-year guidance of flattish net profit growth for 2017 and a 25% YoY increase in 4Q.

• EMU Deliveries:

  • EMU deliveries increased by 13% YoY in 3Q 2017, reversing the -55% decline in the first half of the year.
  • Full-year EMU volume guidance was maintained at 350 standard sets, with a projected 15% YoY increase in 4Q to 143 sets.
  • EMU order backlog stood at Rmb36bn as of end-3Q17, supporting the projected sales growth.

• Segment Performance:

  • Locomotive deliveries rose 34% YoY.
  • Freight wagon deliveries surged 115% YoY.
  • RTV segment saw a 42% YoY increase in profit.
  • Modern services experienced an 83% YoY decline due to scaling back of low-margin logistics and trading operations.

• Margin Improvements:

  • Gross profit margin expanded by 1.9 percentage points (ppt) YoY to 23.4%.
  • The improvement was driven by the RTV segment and cost control measures.
  • Management indicated no further pricing pressure for the 350km/h CEMU model.

Analyst Insights

• Analyst Call Highlights:

  • Management is confident in solid rolling stock demand for the next 3-5 years.
  • Target for EMU deliveries in 2018 is maintained at 350-400 standard sets.
  • Railway length target of 150,000km by 2020 is achievable.
  • Progress on new EMU models, particularly the 250km/h and 160km/h push-pull models, is on track.

• Recommendations:

  • CRRC-H (Hong Kong): Maintain Buy with a target price of HKD9.00.
  • CRRC-A (A-shares): Maintain Sell with a target price of Rmb8.20 due to overvaluation.

Valuation Metrics

Financial Overview

Income Statement (CNYm)

Cash Flow (CNYm)

Balance Sheet (CNYm)

Key Company Metrics

Price Performance

• CRRC-H (Hong Kong):

  • Price (27 Oct 2017): HKD 7.56
  • Target Price: HKD 9.00
  • 52 Week Range: HKD 6.80 - 7.91
  • Market Cap (HKDm): 216,963
  • USDm: 27,806

• CRRC-A (A-shares):

  • Price (27 Oct 2017): CNY 10.68
  • Target Price: CNY 8.20
  • 52 Week Range: CNY 9.25 - 11.98
  • Market Cap (CNYm): 306,504
  • USDm: 46,206

Analyst Certification

• Nick Zheng, CFA is the lead analyst.
• The report reflects personal views and does not involve compensation for specific recommendations.
• Deutsche Bank may have a conflict of interest due to ownership of equity securities or trading activities.

Risk Factors

• Key Risks:
  • Unexpected slowdown or acceleration in China's rail investment.
  • EMU procurement by CRC (China Railway Corporation) may be worse or better than expected.

Historical Recommendations

• CRRC-H:

  • 07/30/2017: Upgraded to Buy, Target Price HKD 8.30
  • 10/24/2017: Buy, Target Price HKD 9.00

• CRRC-A:

  • 07/30/2017: Upgraded to Buy, Target Price CNY 8.20
  • 10/24/2017: Sell, Target Price CNY 8.20

Conclusion

CRRC is showing signs of recovery in its earnings and EMU deliveries, with management confident in the long-term demand for rolling stock. The company's margin expansion and cost control efforts are positive indicators. Despite the strong outlook, the A-shares are considered overvalued, leading to a Sell recommendation. The H-shares are viewed as a better investment opportunity with a Buy recommendation. Investors are advised to monitor the company's performance closely and consider the valuation risks.