China Railway Group’s (00390 HK) 1H2021 revenue increased 19.7% YoY to RMB498.2 billion. Shareholders’ net profit increased 12.0% YoY to RMB13.1 billion. Results were in line with expectation. Overall gross margin was down 0.3 ppts YoY to 8.4%. During 1H2021, the Company received RMB1,033.7 billion in new contracts, up 18.8% YoY. As at end of June 2021, the Company had a total backlog of RMB4,166.0 billion, up 11.8% compared with end of 2020.
We expect total revenue to increase at a CAGR of 10.7% in 2020-2023 and expect overall gross margin to be maintained between 9.0% and 9.1% in 2021-2023. In addition, we expect the Company’s total expenses ratio to decline from 3.9% in 2021 to 3.7% in 2023, and ROE to slightly improve from 9.5% in 2021 to 9.9% in 2023.
Our EPS estimates for 2021/ 2022/ 2023 are RMB1.018, RMB1.131 and RMB1.273, respectively. We expect that the government will continue to increase fixed assets spending in the 14th Five-Year Plan period, especially in transportation infrastructure, to maintain stable economic growth. The Company’s more focused approach in urban rail transit infrastructure construction business should benefit the most from the expected investment boom in the urban rail transit market. Maintain the TP at HK$6.70, representing 5.0x/ 4.7x/ 4.4x 2021/ 2022/ 2023 EV/EBITDA. Reiterate "Buy".