1H19 results slightly miss our forecast
CRRC Corporation announced that revenue rose 11.4% YoY toRmb96.1bn in 1H19, and net profit attributable to shareholders grew16.2% YoY to Rmb4.8bn. 1H19 results slightly miss our estimates dueto the decreased gross margin of the rail transit segment. Revenuerose 5.8% YoY to Rmb56.5bn in 2Q19, with net profit attributable toshareholders growing 5.4% YoY to Rmb3bn.
Trends to watch
Rail transit orders on hand continue to grow steadily. By month-endJune 2019, CRRC’s order book reached Rmb277bn, up 5% from 1Q19.
Specifically, the company reported Rmb48bn of orders for EMU trains（down 25% from 1Q19）， Rmb21bn of orders for locomotives （up 40%from 1Q19）， and Rmb5bn of orders for passenger trains （up 9% from1Q19）。 Also, it recorded Rmb15bn of orders for freight trains （up 83%from 1Q19）， Rmb162bn of orders for rail transit （up 8% from 1Q19），and Rmb26bn of orders for new businesses （up 24% from 1Q19）。
China Railway Corporation （CRC）’s 2H19 rolling stock tenderinvitation to begin soon, but it lowers guidance. By month-end July2019, China’s fixed-asset investment for railways edged up 3.1% YoYto Rmb386.8bn. We maintain our estimate that such investments willexceed Rmb800bn in 2019, with the CRC to purchase more thanRmb100bn of trains given the marked rise in railway completions in2019. However, we estimate that the CRC will decrease its expectedpurchases to roughly 200 EMU trains and approximately 300locomotives in 2H19, as it has delayed the tender invitation.
Financials and valuation
We cut our 2019 EPS forecast 6.1% to Rmb0.43 and our 2020 forecast3.4% to Rmb0.51, as we expect the CRC to buy fewer trains. CRRC’sA-shares are trading at 16.8x 2019e and 14.4x 2020e P/E. Thecompany’s H-shares are trading at 11.1x 2019e and 9.5x 2020e P/E.
We maintain our OUTPERFORM rating. We trim our target price forCRRC’s A-shares 14.6% to Rmb8.65 （20x 2019e and 17x 2020e P/E,offering 19% upside）， and cut our target price for the H-shares28.1% to HK$6.36 （13x 2019e and 11x 2020e P/E, offering 18%upside）， to reflect our decreased earnings forecast and a lower sectorvaluation.
Risks: CRC’s rolling stock tenders come later than expected.