Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
China Railway Group
Bloomberg: 390 HK | Reuters: 0390.HK
BUY HK$7.04 HSI: 21,769
Heading high growth phase
Price Target : 12-Month HK$8.40
Potential Catalyst: New contracts from the stimulus package
Analyst
Rachel Miu +852 2863 8843
rachel_miu@hk.dbsvickers.com
• Orders on hand surging to record high
• Gross margin improvement ahead
• Maintain BUY, TP HK$8.4
Price Relative
HK$
12.90
10.90
8.90
6.90
4.90
Relative Index
219
169
119
69
New contracts to be boosted by overseas projects.
A potential overseas project worth US$7.5bn from
parent should boost China Railway Group (CRG)
orderbook value. Coupled with a rapidly growing
domestic infrastructure market, we estimate backlog to
hit RMB531bn by end of the year, rising to RMB634bn
next year, which is a strong indicator to its future
earnings outlook. By 1H09, the group has secured
RMB257bn worth of new contracts.
2.90
Dec-07 May-08 Oct-08 Mar-09 Aug-09
China Railway Group (LHS) Relative HSI INDEX (RHS)
Forecasts and Valuation
FY Dec (RMB m) 2008A 2009F 2010F 2011F
Turnover 225,029 300,639 359,062 423,598
EBITDA 6,052 13,595 16,148 17,791
Pre-tax Profit 2,300 9,000 11,534 13,395
Net Profit 1,350 6,306 7,907 9,162
Net Pft (Pre Ex.) 1,350 6,306 7,907 9,162
EPS (HK$) 0.07 0.34 0.42 0.49
EPS Gth (%) (65.9) 367.1 25.4 15.9
DPS (HK$) 0.02 0.08 0.11 0.12
BV Per Share (HK$) 2.98 3.32 3.74 4.23
PE (X) 97.9 20.9 16.7 14.4
P/Cash Flow (X) 169.4 8.5 13.2 3.8
EV/EBITDA (X) 23.3 10.1 8.6 6.3
Net Div Yield (%) 0.3 1.2 1.5 1.7
P/Book Value (X) 2.4 2.1 1.9 1.7
Net Debt/Equity (X) 0.1 0.0 Cash Cash
ROAE (%) 2.4 10.7 11.9 12.3
19
Margins expansion further enhances earnings
prospects. New projects which commenced in 1H09
should start contributing to profits from 2H, thus a
positive driver to gross margins. Expansion in gross
margins to 7.1% this year and the strong orders on hand
are positive contributors to its earnings outlook. Besides,
raw material prices are still at low levels although the
RMB4tr stimulus package might result in some increase
in raw material costs. However, we believe the
magnitude of any increase should be manageable.
Reiterate BUY. We estimate net earnings CAGR at 21%
(FY09-11) based on the fast expanding infrastructure
sector in China. The growth outlook is impressive for
CRG. We maintain BUY and CRG is our top pick in the
infrastructure construction sector. The company is
diversifying its business base ahead of the possible
normalization of the infrastructure spending after the
RMB4tr budget is completed.
Earnings Rev (%) Nil Nil Nil
Consensus EPS (HK$) 0.30 0.40 0.53
ICB Industry: Industrials
ICB Sector: Construction & Materials
Principal Business: The company engages in infrastructure
construction such as railways, roads, bridges and others in China
At A Glance
Issued Capital - H shares (m shs) 4,207
- Non H shrs (m shs) 17,093
H shs as a % of total 20
H Mkt Cap (HK$m/US$m) 29,620 / 3,822
Major Shareholders (%)
CRECG 58.30
Major H Shareholders (%)
Social Security Fund 9.09
Barclays Global Investors 6.96
H Shares-Free Float (%) 83.95
Avg Daily Volume (m shrs) 30.0
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Refer to important disclosures at the end of this report
ed-SGC / sa-AH