Following a recent update from management, we believe CRRC has gonepast its bad 2017 and may now begin to recover slowly. We forecast 3-year CAGRs of 10.8% and 9.3% for revenue and earnings respectively,driven by a good backlog of urban rail works. We maintain our NEUTRALcall with a higher HKD7.02 TP （from HKD6.70, 7% upside） to reflectpositive growth going forward. Our new TP is based on an FY18F P/E of15x, or 0.5SD below its 5-year historical forward mean. This is backed byour DCF valuation of HKD6.30.
Tuning positive, but slowly. We believe that, going into 2018, CRRC Corp’s（CRRC） business may recover from a low base of 2017. We forecast revenueand earnings growth at 3-year CAGRs of 10.8% and 9.3% respectively, with therelatively slower earnings due to the fast increase in the urban rails segment.
This sector has relatively low margins. CRRC’s stable revenue growth is to bedriven by its strong CNY243.4bn backlog, 28.23% YoY growth （especiallymultiple units （MUs） of CNY5.3bn, up 70.7% YoY）， and urban rail projectstotalling CNY138.3bn （+33.2% YoY）。
Main customer China Railway Co （CRC） has guided down its 2018 tendersto CNY80bn. Although some of CRC’s tenders in 1Q18 have already exceededits guidance for this year – eg freight wagons and locomotives – we areconservative on its full-year guidance, as the firm’s orders usually come inunevenly. As a result, we adjusted down CRRC’s 2018 and 2019’s earningsforecasts by 13% and 10% respectively, but adjust up our TP （see relevantsection below） as we believe the company is starting to slowly recover.
MUs back on track. 2017 MU tenders are back of on track and CRRC hasguided for 340 tender sets for 2018. This is up from 110 sets in 2016. Therecovery of MU contracts may drive up 2018-2019 revenues, and CRRC has aMU backlog of CNY50.7bn – 320 sets of Fuxing high-speed trains – in 1Q18,which are slated for delivery this year. The only concern is that the ASP for theFuxing may be under some small pressure, as per requests by CRC.
Maintain NEUTRAL with a higher HKD7.02 TP （from HKD6.70, 7% upside）。
We cut our revenue forecast due to contract issues and slow tenders in 2017,as well as a further slowdown in tenders from CRC. Our new TP is based onFY18F P/E of 15x, or 0.5SD below the 5-year historical forward mean. Ourcorroborative DCF valuation is HKD6.30.
Key upside risks to our recommendation includes higher-than-expected MUorders from CRC. Key downside risks include softer-than-expected internationalbusinesses.