CRRC released its 1H19 results and hosted a results conference call after marketclose on 29 August 2019.
The 1H19 results were largely in line with our and consensus earnings estimates.
Total revenue in 1H19 rose 11.4% YoY, while net profit grew 16.2% YoY. The growthwas driven mainly by its core railway and urban transit vehicle segments.
We remain positive on its core business growth outlook in 2H19. We maintain ourearnings forecast for the Company in 2019–2020. We cut our target price（TP） onlyfrom HK$9.30 to HK$8.20 to reflect our lower target PER multiple and RMBdepreciation. We think the current CRRC-H valuation is unjustified by its double-digitearnings growth potential. We reiterate our ADD rating on the stock.
Solid 1H19 results
Total revenue rose 11.4% YoY in 1H19, with growth seen mainly in its core railway andurban transit vehicle segments （Fig 1）。 Its core railway business （56% of total revenue in1H19） had revenue growth of 20.3% YoY vs. 11.5% YoY growth in 2018. This was ledmainly led by the locomotive, passenger carriage and MU segments. Its urban transitvehicle business growth also accelerated 37.7% YoY in 1H19 vs. 3.6% YoY growth in2018. The new business segment reported revenue that was largely flat YoY in 1H19,with growth in its new energy equipment segment offsetting a revenue decline in its newmaterials and auto parts business. CRR further scaled down its lower-margin modernservice business in 1H19. The gross profit margin contracted by 0.8ppt YoY to 22.5% in1H19 due to changes in the revenue mix. But SG&A costs as a percentage of sales fellfrom 15.5% in 1H18 to 14.7% in 1H19 due to effective cost control. With the decrease infinancing costs, its net profit margin expanded by 0.1ppt YoY and its net profit grew16.2% YoY in 1H19.
Core business growth outlook intact
We remain positive on the railway equipment demand growth outlook in 2H19. RailwayFAI will remain a key measure to help the central government ensure steady economicgrowth. At the results meeting, management suggested that railway FAI in 2019F willreach more than Rmb800bn, with railway equipment investment reaching no less thanRmb100bn, implying >10% YoY growth. China Railway Corporation （CRC） gave priorityto its corporate restructuring and business reforms in 1H19; hence, it has barely madeany tenders on MUs CYTD. But management expects CRC to win new tenders on MUs,freight wagons, etc. in 2H19. We expect its revenue growth in 2H19 to be driven by itsMU, passenger carriage, freight wagon and urban transit vehicle segments. We expect itsrevenue to grow 12.8% and 14.0% YoY in 2019F and 2020F, respectively.
Margin expansion to continue in 2H19
The gross profit margin contraction in 1H19 was mainly due to changes in the revenuemix. We expect its gross profit margin to remain stable in 2019–2020, given an improvingrevenue mix. We expect its SG&A costs as a percentage of sales to further fall in 2019–2020, led by cost control from its continuous business streamlining. Considering itsmargin expansion potential, we expect net profit to grow about 20% p.a. in 2019–2020F.
High earnings growth visibility to drive valuation recovery
We reiterate our ADD rating for CRRC-H. We cut our TP from HK$9.30 to HK$8.20 toreflect our lower target PER multiple （14x, previously 15x） and RMB depreciation. Wethink the market was previously too bearish on CRRC’s earnings growth outlook. Thecurrent valuation is unjustified by its double-digit earnings growth potential in 2019. Weexpect its share price to react positively to the solid 1H 19 results.