Earnings will resume growth in 2013. Thanks to capacity recovery on intercity trains, declining repair expense, GSR will see an earnings recovery in 2013 albeit declined YoY earnings in 1Q. If deducting disposal loss impact, GSR’s net profit increased 8% YoY in 1Q13. Thanks to strong cash flow, GSR will be immune to possible liquidity tightening.
GSR will benefit from railway reform. GSR will benefit from railway reform as the sole HK listed railway operator. With the progressive introduction of railway reform, GSR may enjoy more operation autonomy, including more long haul trains, flexible ticket price and possible asset injection.
Key Assumptions
Traffic growth will recover with economy development.
Valuation and Target Price
We reiterate “Outperform” on GSR with TP of HK$ 4.2, representing 0.9 times 2013 PB ratio. GSR’s stock price declined sharply recently, correction provides good entry point.
Catalysts
Progressive introduction of MOR reform earnings recovery in 2013
Risks to central scenario
Further diversion from Guangzhou-Shenzhen HSR since 2H 2014.