2018 earnings slightly lower than market expectations
CRRC announced 2018 results: its 2018 revenue grew 3.8% YoY toRmb219.08bn and net profit rose 4.8% YoY to Rmb11.3bn, slightlybelow market forecast mainly because CRRC’s gross margin slightlyfell in 4Q18 and it made provisions for goodwill impairment losses.
Railway segment maintained stable growth; revenue of otherbusiness segments fell. CRRC’s revenue from railway equipment andurban rail transit （URT） grew 11.5% and 3.5% YoY, while its revenuefrom new businesses and modern services fell 7.7% and 8.8% YoY.
Expense ratios stable; net margin roughly flat. CRRC’s sellingexpense ratio, G&A expense ratio and financial expense ratio fell0.13ppt, 0.23ppt and 0.01ppt YoY in 2018. Its net margin was 5.2% in2018, roughly flat YoY. Its operating cash flow reported a net inflow ofRmb18.87bn （up by Rmb2.66bn YoY）。
See page 3 for more details.
Trends to watch
Orders on hand slightly fell YoY and QoQ. CRCC lowered its guidancefor locomotive and freight train deliveries in 2019.
Earnings forecast
As we revise down our forecasts for the company’s revenue fromlocomotives and freight trains, we cut 2019e and 2020e EPS by 18%and 22% from Rmb0.56 and Rmb0.67 to Rmb0.46 and Rmb0.52.
Valuation and recommendation
CRRC-A is trading at 20x 2019e P/E and 17x 2020e P/E. CRRC-H istrading at 16x 2019e P/E and 14x 2020e P/E. We maintain BUY forCRRC-A and CRRC-H. As we revise down our forecasts for thecompany’s revenue from locomotives and freight trains, we cutCRRC-A’s TP by 15% to Rmb10.13 （22x 2019e P/E and 19x 2020e P/E,11% upside） and cut CRRC-H’s TP by 9% to HK$8.85（17x 2019e P/Eand 15x 2020e P/E, 10% upside）。
Risks
Railway equipment procurement falls short of expectation.