3Q results slightly lower than expected
In 3Q13, revenue -3.3% YoY to Rmb4.01bn; net profit -17.5% YoY to Rmb331mn or Rmb0.047/sh, slightly lower than expected. Over 1~3Q13, EPS -9.2% YoY to Rmb0.14 and the company remains stuck in the doldrums.
Trends to watch
Recovery in traffic volume continued. Growth of passenger traffic volume reached 4.9% in 3Q13 (vs. 1.4% in 2Q13). The decline of freight traffic volume narrowed to -2% in 3Q13 (vs. -10% in 2Q13). We expect the slight improvement to continue in 4Q13.
Cost pressure still heavy. 3Q costs rose 1.8% YoY and 3.5% QoQ,. For 2014, we expect: 1) maintenance expenses to stay flat; 2) labor costs to rise 10~15%. Overall, we expect FY13 costs to increase 6.5%.
Traffic diversion pressure in 2H14. The opening of Futian station in 2H14 is likely to see Guangzhou-Shenzhen intercity rail traffic volume drop 5% and negatively affect GSR’s earnings by ~10%,
Potential rail fare pricing reform to bring earnings upside. A Rmb0.01 hike in freight rates could enhance EPS by Rmb0.014 or 7.2%. Passenger rates are likely to change in the medium term. Under our calculations, a 1% hike would enhance earnings by 2.7%.
Acquisition of China Railway Express and China Railway Container Transport’s assets to further open upside potential. The company will spend Rmb80mn to acquire Dalang station from CRCT and Rmb103mn to acquire some of CRE’s assets.
Revised earnings forecasts
We cut our 2013 EPS forecast by 4.7% to Rmb0.19 to factor in the dismal freight volume; we maintain 2014e EPS at Rmb0.20.
Valuation and recommendation
GSR is likely to benefit from ongoing railway reform, potential diversification and external expansion opportunities. Given GSR’s strong sensitivity to railway fare reform, but noting that its stock price is near our DCF-based TP of HK$3.64, we maintain our HOLD rating, but recommend trading opportunities on rate hike expectations.