What's new
In the March 5 government work report, China set an Rmb800bnrailway investment target for 2019, up 9.3% YoY. Given the visiblegrowth in railway investment, we believe CRRC will be a majorbeneficiary of increasing rolling stock purchases.
Comments
Completion of new railways to grow in 2019–2020. We estimatecompletion of new railways will rise 78% and 9% YoY to 8,344km and9,096km in 2019 and 2020, and the annual railway fixed assetinvestment will exceed Rmb850bn during the same period.
Completion of new urban rail transit projects to grow in 2019–20.
We estimate completion of new subways will rise 1% and 39% YoY to999km and 1,393km in 2019 and 2020. The NDRC in the recent fourmonths approved multiple rail transit projects, translating to 860kmof subways and Rmb727.4bn worth of additional investment.
Improvement of product mix to continue. CRRC’s centralized powerelectric multiple unit （EMU） that runs at a maximum speed of160km/h will likely replace common passenger trains. In a bid toimprove its product mix, the company is developing intelligentmaglev trains that have a maximum speed of 600km/h.
SOE reform in CRRC to continue. The firm accelerated disposals ofredundant locomotive and freight car product capacities, andnon-productive assets. As CRRC was selected as one of the ten modelSOEs, we expect the firm to speed up its SOE reform and improve itsearnings. See page 3 for details.
Valuation and recommendation
We maintain our 2018 and 2019 EPS forecasts, and introduce a 2020forecast of Rmb0.67. CRRC-A is trading at 21.9x 2018e P/E and 17.1x2019e P/E. CRRC-H is trading at 12.7x 2018e P/E and 10.6x 2019e P/E.
We maintain our BUY ratings for CRRC-A and -H, and keep our TP forCRRC-A unchanged. We believe CRRC-H is undervalued, and lift ourTP by 18% to HK$9.70 based on 16x 2019e P/E and 14x 2020e P/E.
Our target prices for CRRC-A and -H offer 23% and 20% upside.
Risks
Investment in railway fixed assets lower than expected.