What surprised us
After market close on March 27, Guangshen Railway reported 2013 net profit of Rmb1.27bn (-3% yoy), broadly in line with ours/Bloomberg consensus forecasts of Rmb1.24bn/1.32bn, with net profit reversing the declining earnings trend in 9M 2013, up 23% yoy in 4Q13. Dividends were flat yoy at Rmb0.08 per share, representing a payout ratio of 44%. Highlights and takeaways from briefing: (1) Passenger volumes were up 8% to 91mn in 2013, with management targeting 93.5mn (+3%) for 2014. (2) Decline in cargo volumes moderated in 2H13 (-3% yoy, vs. -8% in 1H13), helped by cargo reform initiatives since July 2013. Cargo revenues surged 43% yoy in 2H13, contributed from businesses that it took over from China Railway Express and China Railway Container since the reforms. Management expects yields to benefit from the recent special/ normal freight rate hike and alignment. (3) Revenue from railway operation services increased by 28% yoy as it expanded management services to new HSR lines, and it expects the recently opened Shenzhen-Xiamen line to contribute to further increases in 2014. (4) Management confirmed it is studying the potential for integrated development of railway land/stations, including its Dongguan and SZ East stations.
What to do with the stock
We adjust our 2014-16E earnings by -6% to 3% on latest traffic trends and lift our 12-m Director’s Cut based TP prices for Guangshen H/A to HK$4.50/Rmb3.60 (from HK$4.40/Rmb3.50), based on 0.60X 2014E EV/GCI (from 0.64X 2013 EV/GCI) as we roll our valuation to 2014, underpinned by 2014-15E CROCI of 9.4% (from 9.9%). Maintain Buy as we see Guangshen as a beneficiary of ongoing railway reforms and potential tariff increases. Risks: Diversion risks; pricing increases/reform; costs.