Left Brain Right B - the DBS Vickers Securities Equities Research

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Regional Equity Strategy 4Q 2009 China Railway Group Income Statement (RMB m) Balance Sheet (RMB m) FY Dec 2008A 2009F 2010F 2011F FY Dec 2008A 2009F 2010F 2011F Turnover 225,029 300,639 359,062 423,598 Cost of Goods Sold (208,534) (279,223) (333,081) (393,060) Gross Profit 16,495 21,416 25,982 30,538 Other Opg (Exp)/Inc (13,496) (10,885) (12,940) (15,828) Operating Profit 2,999 10,531 13,041 14,710 Other Non Opg (Exp)/Inc - - - - Associates & JV Inc 92 98 104 111 Net Interest (Exp)/Inc (791) (1,630) (1,612) (1,426) Pre-tax Profit 2,300 9,000 11,534 13,395 Tax (631) (2,070) (2,768) (3,215) Minority Interest (319) (624) (859) (1,018) Net Profit 1,350 6,306 7,907 9,162 Net Profit before Except. 1,350 6,306 7,907 9,162 EBITDA 6,052 13,595 16,148 17,791 Sales Gth (%) 26.9 33.6 19.4 18.0 EBITDA Gth (%) (16.0) 124.6 18.8 10.2 Opg Profit Gth (%) (29.3) 251.2 23.8 12.8 Effective Tax Rate (%) 27.4 23.0 24.0 24.0 Cash Flow Statement (RMB m) Net Fixed Assets 22,685 27,847 30,980 32,149 Invts in Assocs & JVs 4,280 4,378 4,483 4,594 Other LT Assets 32,550 34,431 36,192 37,943 Cash & ST Invts 49,376 48,269 43,700 66,147 Other Current Assets 143,028 159,987 175,498 198,089 Total Assets 251,919 274,912 290,852 338,922 ST Debt 36,594 19,148 20,003 19,687 Other Current Liab 128,954 150,017 162,192 205,081 LT Debt 16,829 29,275 23,420 18,736 Other LT Liabilities 8,618 8,618 8,618 8,618 Shareholder's Equity 55,995 62,301 70,208 79,370 Minority Interests 4,929 5,553 6,412 7,430 Total Cap. & Liab. 251,919 274,912 290,852 338,922 Non-Cash Wkg. Cap 14,074 9,969 13,306 (6,992) Net Cash/(Debt) (4,047) (154) 277 27,724 Rates & Ratio FY Dec 2008A 2009F 2010F 2011F FY Dec 2008A 2009F 2010F 2011F Pre-Tax Profit 2,300 9,000 11,534 13,395 Dep. & Amort. 3,196 3,064 3,107 3,081 Tax Paid (886) (631) (2,070) (2,768) Assoc. & JV Inc/(loss) (92) (98) (104) (111) Non-Cash Wkg. Cap. (9,066) 2,666 (4,035) 19,850 Other Operating CF 5,328 1,630 1,612 1,426 Net Operating CF 780 15,630 10,043 34,873 Capital Exp. (net) (6,511) (8,000) (6,000) (4,000) Other Invts. (net) (6,685) (2,000) (2,000) (2,000) Invts. in Assoc. & JV (2,048) - - - Div from Assoc. & JV - - - - Other Investing CF (4,939) 1,171 1,143 1,029 Net Investing CF (20,183) (8,829) (6,857) (4,971) Div Paid (32) - - - Chg in Gross Debt 10,648 (7,801) (7,755) (7,455) Capital Issues 1,119 - - - Other Financing CF (121) (108) - - Net Financing CF 11,614 (7,909) (7,755) (7,455) Net Cashflow (7,789) (1,107) (4,568) 22,447 Gross Margin (%) 7.3 7.1 7.2 7.2 Opg Profit Margin (%) 1.3 3.5 3.6 3.5 Net Profit Margin (%) 0.6 2.1 2.2 2.2 ROAE (%) 2.4 10.7 11.9 12.3 ROA (%) 0.6 2.4 2.8 2.9 ROCE (%) 2.0 6.8 8.2 9.0 Div Payout Ratio (%) 0.3 0.2 0.3 0.3 Interest Cover (x) 3.8 6.5 8.1 10.3 Asset Turnover (x) 1.0 1.1 1.3 1.3 Debtors Turn (days) 73.9 74.0 74.0 75.0 Creditors Turn (days) 106.1 100.0 100.0 109.0 Inventory Turn (days) 25.3 21.0 21.0 21.0 Current Ratio (x) 1.2 1.2 1.2 1.2 Quick Ratio (x) 1.1 1.2 1.1 1.1 Net Debt/Equity (X) 0.1 0.0 Cash Cash Capex to Debt (%) (0.1) (0.2) (0.1) (0.1) N. Cash/(Debt)PS (HK$) (0.2) (0.0) 0.0 1.5 Opg CFPS (HK$) 0.0 0.8 0.5 1.9 Free CFPS (HK$) 0.4 1.3 0.9 2.1 Interim Income Statement (RMB m) Segmental Breakdown (RMB m) FY Dec 1H07 2H07 1H08 1H08 Turnover 73,450 103,941 93,088 131,941 Cost of Goods Sold (67,894) (96,765) (85,646) (122,888) Gross Profit 5,556 7,176 7,442 9,053 Other Oper. (Exp)/Inc (4,008) (4,480) (4,358) (9,138) Operating Profit 1,548 2,696 3,084 (85) Other Non Opg (Exp)/Inc - - - - Associates & JV Inc (8) 16 5 87 Net Interest (Exp)/Inc (347) (521) (230) (561) Pre-tax Profit 1,193 2,191 2,859 (559) Tax (378) (171) (651) 20 Minority Interest (158) (189) (289) (30) Net Profit 657 1,831 1,919 (569) Net profit bef Except. 657 1,831 1,919 (569) EBITDA 2,852 4,351 4,932 4,932 Sales Gth (%) 21.7 11.5 26.7 26.9 EBITDA Gth (%) 22.4 3.6 72.9 13.4 Opg Profit Gth (%) 27.0 (4.6) 99.2 (103.2) Net Profit Gth (%) 36.0 17.1 192.1 (131.1) Gross Margins (%) 7.6 6.9 8.0 6.9 Opg Profit Margins (%) 2.1 2.6 3.3 (0.1) Source: Company, DBS Vickers FY Dec 2008A 2009F 2010F 2011F Revenues Infrastructure construction 203,299 274,454 329,344 388,626 Survey, design and consulting services 4,354 5,443 5,987 6,585 Engineering equip & comp mfg 6,944 8,888 10,488 12,586 Property development 3,805 3,995 4,794 5,513 Other business 10,696 13,370 15,777 18,932 Inter-segment eliminations (4,069) (5,511) (7,328) (8,645) Total 225,029 300,639 359,062 423,598 Gross Profit Infrastructure construction 11,907 16,931 20,749 24,483 Survey, design and consulting services 1,207 1,633 1,796 1,943 Engineering equip & comp mfg 1,011 1,600 1,888 2,265 Property development 1,145 1,199 1,438 1,654 Other business 1,225 2,139 2,524 3,029 Inter-segment elimination (2,086) (2,414) (2,837) Total 16,495 21,416 25,982 30,538 Page 87
Regional Equity Strategy 4Q 2009 MTR Corporation Bloomberg: 66 HK | Reuters: 0066.HK BUY HK$27.35 HSI: 21,769 Price Target : 12-Month HK$30.65 Potential Catalyst: Favourable land supply, project tender, significant network expansion Analyst Jeff Yau CFA· (852) 2820 4912 · Jeff_yau@hk.dbsvickers.com Ken Chen · (852) 2863 8923 · ken_chen@hk.dbsvickers.com Price Relative HK$ 36.80 31.80 26.80 21.80 16.80 11.80 2005 2006 2007 2008 Relative Index MTR (LHS) Relative HSI INDEX (RHS) Forecasts and Valuation FY Dec (HK$m) 2007A 2008A 2009F 2010F Turnover 10,690 17,628 17,747 18,125 EBITDA 5,912 9,325 9,257 9,542 Pre-tax Profit 10,254 9,173 8,432 9,292 Underlying Profit * 8,571 8,185 7,068 7,787 EPS (HK$) 1.54 1.45 1.25 1.36 EPS Gth (%) 42.1 (5.5) (14.1) 9.3 DPS (HK$) 0.45 0.48 0.48 0.48 PE (X) 17.8 18.8 21.9 20.1 P/Cash Flow (X) 25.5 16.2 17.0 16.2 EV/EBITDA (X) 31.0 19.6 19.8 19.2 Net Div Yield (%) 1.6 1.8 1.8 1.8 Net Debt/Equity (X) 0.4 0.3 0.2 0.2 ROAE (%) 10.2 8.7 7.0 7.4 NAV (HK$) 30.0 31.9 Disc. To NAV (%) -9% -14% Earnings Rev (%) Nil Nil Consensus EPS (HK$) 1.23 1.30 209 189 169 149 129 109 * Excluding fair value change on investment properties ICB Industry : Consumer services ICB Sector : Travel & Leisure Principal Business: Operate pre-dominantly a rail-based transportation system in HK with exposure to residential and commercial markets 89 69 Defensive growth stock • Network expansion to boost railway earnings, it had been resilient amid the economic downturn • Large land bank to drive development earnings, which are secured in the near term • Valuation remains attractive; Maintain BUY Railway earnings – “Defensive growth”. Patronage of domestic and cross boundary services was stable YTD despite a slower local economy and swine flu. The drop in Airport Express passenger volume has moderated since August. These imply resilient fare revenue. Significant network expansion in the coming decade should widen its catchment area, and hence, competitive edge over other public transport operators. This should cement its market dominance and provide room for long-term railway earnings growth. Secured near-term development earnings. In 1H09, MTRC recognized HK$2.15bn property development earnings, mainly relating to provision write-back for The Palazzo and The Capitol and final profit split for The HarbourSide. Lake Silver, which has been substantially sold, should take centre stage in 2H09. Profit sharing of Le Prestige, based on “sharing in kind” will be accounted for upon project completion either in late 2009 or early 2010. Profits from these two projects, which represent the bulk of near-term development profits, are well secured. Sizeable land reserve to support growth. Armed with a large development land bank mainly for residential use, MTRC will be a prime beneficiary of the government’s favourable land policy. With an improving balance sheet, it can afford to exploit the potential of its future property projects by increasing capital contribution in return for higher profit share. Attractively valued. The stock is now trading at 9% discount to our appraised current NAV. This remains attractive given its defensive railway earnings and long-term growth prospects. In the next six months, MTRC plans to offer Kowloon Southern Link Sites C&D for tender. If it secures favourable terms, there could be upside to the stock. We re-iterate our BUY call and HK$30.65 target price. At A Glance Issued Capital (m shrs) 5,713 Mkt Cap (HK$m/US$m) 156,239 / 20,159 Major Shareholders (%) The Financial Secretary Incorporated 76.75 Free Float (%) 23.25 Avg Daily Volume (m shrs) 4.3 Page 88 www.dbsvickers.com Refer to important disclosures at the end of this report ed-SGC / sa- RM
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