CRRC Corporation （01766 HK） 1Q-3Q18 revenue decreased 3.8% YoY to RMB135.366 billion. Shareholders’ profit increased 10.6% YoY to RMB7.532 billion. Results were in line with expectation. Increase in investment income （up 116.2% YoY to RMB1.390 billion due to increase in disposal income） wasthe main driver for profit growth. Railway equipment revenue was down 1.1% to RMB71.717 billion; rapid transitvehicles and urban infrastructure revenue was down 2.0% to RMB20.855 billion; new business revenue wasdown 6.1% to RMB31.435 billion; and modern services revenue was down 15.0% to RMB11.359 billion. Railway equipment revenue decreased mainly due to drop in sales of locomotives and freight wagons, andmodern services revenue dropped substantially mainly due to adjustments in revenue structure and reduction ofoperating scale of logistics services. Overall gross margin increased 0.4 ppts YoY to 22.9%, mainly due toincrease in revenue contribution from higher gross margin maintenance services and decrease in contributionfrom lower gross margin logistics services. Selling expense ratio decreased 0.2 ppts YoY to 3.0%, whileadministrative expense ratio increased 0.5 ppts YoY to 7.7%; R&D expenses ratio stayed flat at 4.7% andfinance costs ratio increased 0.1 ppts YoY to 0.9%.
The Company had ample backlog. At the end of September, total backlog amounted to RMB297.5 billion,an increase of 22% compared with the beginning of the year, including RMB35.1 billion for locomotives,RMB47.4 billion for EMUs, RMB6.5 billion for passenger carriages, RMB6.1 billion for freight wagons,RMB163.9 billion for rapid transit vehicles, and RMB38.5 billion for new business. Domestic backlogamounted to RMB201.6 billion, and overseas backlog amounted to RMB95.9 billion. The Company saidthat under the policy of “Road to Railway” for freight transportation, the total amount of tenders forChina Railway Corporation for freight transportation related equipment will be doubled. In 2018, thenumber of locomotives delivered was about 800, and that for freight wagons was about 50,000. In 2019, thedelivery of locomotives will be 800 to 1,000, and the delivery of freight wagons will exceed 50,000.In addition,repair and maintenance services business grew at a fast rate with overall growth rate at about 20%. Of which,repair and maintenance services revenue of EMUs increased faster with growth rate reaching higher than 20%. In terms of product price, the pricing of EMUs and locomotives barely changed last year, except for subtlechanges as reflected in the VAT rate from 17% to 16%. Pricing for the 250 km/h and 160 km/h China-StandardEMUs is still under discussion. Freight wagons are relatively sensitive to prices of raw materials such as steel;its contract price will not remain the same, but will fluctuate, mainly based on the fluctuation of accumulated PPI.As for gross profit margin, those of locomotives and EMUs remained basically unchanged, while for freightwagons as the delivery volume decreased this year, gross profit margin deteriorated compared with last year.However, gross profit margin will increase with the increase in capacity utilization after delivery volumeincreases next year. The rapid transit vehicles gross margin was slightly higher than last year.
We will not adjust earnings forecasts at the moment, maintain "Accumulate" rating and TP of HKD8.22.