1、Asia Pacific Equity Research 22 October 2010 China Infrastructure Construction Building faster links China Infrastructure Karen Li, CFAAC (852) 2800-8589 J.P. Morgan Securities (Asia Pacific) Limited Equity Ratings and Price Targets Mkt Cap Rating Price Target Company Symbol (HK$ mn) Price(HK$) Cur
2、 Prev Cur PrevChina Railway Group Limited 0390.HK 22,751 6.31 OW n/c 8.50 6.40China Railway Construction Cor 1186.HK 18,931 10.64 OW n/c 14.50 12.20China Communications Construct 1800.HK 28,683 7.56 N n/c 7.80 6.80Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as
3、 of 20 Oct 10. See page 15 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that co
4、uld affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CRG (OW) We factor in 1.5 billion new A shares, or an equity dilution of 7.1%; Our new PT translates to a target P/E of 15.7x/13.6x, EV/EBITDA of 4.9x/4.4x an
5、d PBR of 1.6x/1.4x on FY11/12E; Our net profit forecasts for CRG of Rmb8.4B/Rmb10.6B/Rmb12.2B for FY10/11/12E are +2%/+6%/+3% vs. Bloomberg consensus; CRCC (OW) We factor in 1.0 billion new A shares or an equity dilution of 8.4%; Our new PT translates to a target P/E of 15.9x/13.2x, EV/EBITDA of 6.1
6、x/4.3x and PBR of 2.4x/2.1x on FY11/12E; Our net profit forecasts for CRCC of Rmb8.2B/Rmb10.0B/Rmb12.3B for FY10/11/12E are 0%/0%/+6% vs. Bloomberg consensus; CCCC (N) CCCC has the highest exposure to road Zhenhuas turnaround is still yet to be seen; We retain our positive view on China infra constr
7、uction sector with further upside on higher spend: We expect upward revisions to railway infra spend in the upcoming 12th Five-Year Plan and increases in the MORs medium-term railway operating length target. The government has emphasized on several occasions improving transportation links, particula
8、rly the railway network, as vital to rebalancing economic growth across regions. Both CRG and CRCC are leveraged to this driver. Key sector update: (1) Spend YTD beat expectations: Railway capex rose by 27% Y/Y in 9M2010, achieving 60% of the full-year target, while nearly 90% of the spendings were
9、on civil works. (2) The MORs spending momentum is likely to be sustained: Railway new orders surged by 76% Y/Y in 9M2010 in contract amount; (3) Duopolistic structure has been maintained: Among all new contracts awarded YTD, CRG and CRCC retained the lead, forming 86% of the share; (4) Competition i
10、s not about price: Project wins to lowest bidders only formed 3% of total in 3Q10. Our top picks within the sector are CRG and CRCC. Both railway contractors trade at 90% of the target is likely be met as early as 2011/2012, in our view. Table 2: Chinas annual railway spending and progress check 200
11、5 2006 2007 2008 2009 Target By 2010E (Note 1) Target By 2020E (Note 2) Railway capex - total (Rmb billion) 136 208 255 414 701 Railway capex - civil works (Rmb billion) 88 155 179 337 601 Total operating railway (km) 75,438 76,919 77,904 79,625 86,000 90,000 120,000 Newly added lines (km) 1,030 1,4
12、81 986 1,721 5,557 Double-tracked (km) 25,566 26,400 27,100 28,925 33,054 Double-tracked as a % of total 33.9% 34.3% 34.8% 36.2% 38.8% 45.0% 50.0% Electrified (km) 20,151 24,400 25,500 27,599 36,047 Electrified as a % of total 26.7% 31.7% 32.7% 34.6% 41.7% 45.0% 60.0% Passenger turnover (billion ppl
13、 - km) 606 662 722 773 788 Freight turnover (billion ton - km) 2,073 2,195 2,379 2,512 2,524 Source: MOR. Note 1: Based on the “11th Five Year Plan”. Note 2: Based on the 2008 version of the Medium- and Longer-Term Railway Development Plan”. We expect contractors margin to continue stabilizing Gross
14、 margins of CRG and CRCC were rather disappointing in 2Q09 and 3Q09, primarily because: 1) the sheer number of projects that were fast-tracked by the MOR and recorded at “zero-margin“ during the period; as well as 2) delayed cost reimbursements by the MOR. Since then, the two major railway contracto
15、rs started meaningful recovery in margins, visible in the recent three quarterly reports. We expect the gross margin to remain steady in 2H10, with potential margin expansion driven by first-time profit recognition from projects fast-tracked during 1H09. For CRG, the blended gross margin stabilized
16、at 6.3% during 1H10, up c10 bps on a Y/Y basis and c50 bps on a H/H basis. In addition, CRCCs blended gross margin of 6.8% during 1H10 was also higher on both a Y/Y and H/H basis (rising c10 bps Y/Y and c30 bps H/H). 6 Asia Pacific Equity Research 22 October 2010Karen Li, CFA (852) 2800-8589 CCCC w
17、as the only odd one out; in contrast to CRG/CRCC, CCCCs gross margin of 8.1% in 1H10 was down on both a Y/Y and H/H basis, dragged by the poor financial results of Zhenhua Port Machinery. Management expects the margin to begin recovery from 2H10, albeit from a low level in 1H10, in part because the
18、majority of its higher-priced raw materials have been consumed. Figure 6: CRGGross margin trend CRG - Gross margin trend7.5%5.4%5.8%6.2%6.3% 6.3%4.0%5.0%6.0%7.0%8.0%1Q09 2Q09 3Q09 4Q09 1Q10 2Q10Source: Company reports. Figure 7: CRCCGross margin trend CRCC - Gross margin trend6.8%6.2%5.9%7.1%6.5%7.0
19、%4.0%5.0%6.0%7.0%8.0%1Q09 2Q09 3Q09 4Q09 1Q10 2Q10Source: Company reports. Figure 8: CCCCGross margin trend CCCC - Gross margin trend10.1%9.8%10.1%8.1%5.0%7.0%9.0%11.0%2H08 1H09 2H09 1H10Source: Company reports. Table 3: China infra construction contractorsRailway construction revenue historical and
20、 projections Rmb in MMs, unless otherwise stated FY05A FY06A FY07A FY08A FY09A FY10E FY11E FY12E CRG - railway construction revenue 37,891 61,373 76,105 100,929 191,765 239,706 292,442 321,686 CRCC - railway construction revenue 32,434 61,497 73,951 102,376 194,514 243,142 296,633 326,297 CCCCs rail
21、way construction revenue 88 155 4,000 8,000 42,000 56,000 67,500 70,000 Sub-total 70,413 123,025 154,056 211,305 428,279 531,848 641,575 700,483 Est. total mkrt size in railway construction in China 88,916 155,275 177,210 337,159 600,000 700,000 750,000 700,000 Capex on total railway spending 120,00
22、0 207,597 255,242 414,449 701,321 825,000 900,000 880,000 Capex on civil works 88,916 155,275 177,210 337,159 600,000 700,000 750,000 700,000 Capex on locomotives and others 31,084 52,322 78,032 77,290 101,321 125,000 150,000 180,000 % capex on civil works 74% 75% 69% 81% 86% 85% 83% 80% % capex on
23、locomotives and others 26% 25% 31% 19% 14% 15% 17% 20% Y/Y growth (capex on civil works) 75% 14% 90% 78% 17% 7% -7% Y/Y growth (capex on locomotives) 68% 49% -1% 31% 23% 20% 20% Unit construction cost (Rmb per km) 100 100 100 Ending railway length (km) 86,500 90,000 93,500 108,000 MORs railway spend
24、ing during the year 177,210 337,159 600,000 700,000 750,000 700,000 Source: MOR, J.P. Morgan estimates. Table 4: China infra construction contractorsValuation Summary CCCC (1800 HK, N) CRCC (118t HK, OW) CRG (390 HK, OW) 2009A 2010E 2011E 2012E 2009A 2010E 2011E 2012E 2009A 2010E 2011E 2012E Sales 2
25、26,920 311,548 337,005 355,161 344,976 397,463 461,056 501,153 333,486 399,686 459,155 496,049 EBITDA 17,068 22,449 25,334 27,734 15,006 17,260 22,512 25,797 18,703 21,568 26,154 29,252 Net profit 7,200 8,656 9,629 10,412 6,599 8,192 10,019 12,301 6,887 8,403 10,589 12,347 Net profit growth % 19 20
26、11 8 81 24 22 23 410 22 26 17 EPS (Rmb/share) 0.49 0.58 0.65 0.70 0.53 0.66 0.78 0.94 0.32 0.39 0.46 0.54 EPS growth % 19 20 11 8 69 24 17 20 410 22 18 17 Operating CF 14,599 12,479 16,350 17,940 14,350 18,287 22,723 26,375 18,862 21,263 16,240 17,874 EBITDA margin % 7.52 7.2 7.5 7.8 4.3 4.3 4.9 5.1
27、 5.6 5.4 5.7 5.9 New WC to sales ratio (%) 4.9 2.9 2.7 2.7 (5.3) (2.9) (1.4) (5.3) 1.3 (0.3) 0.2 0.8 Net gearing (%) 66.3 66.9 58.7 48.0 (72.0) (49.8) (51.2) (79.0) 6.9 (3.9) (11.3) (10.4) PER - headline (x) 13.3 11.1 10.0 9.2 18.5 14.9 12.2 9.9 17.7 14.5 11.5 9.9 EV/EBITEDA (x) 8.0 6.1 5.4 4.9 6.1
28、5.3 4.1 3.6 6.4 5.5 4.6 15.2 PBR - (x) 1.8 1.6 1.4 1.3 2.1 1.9 1.6 1.4 1.9 1.7 1.5 1.3 EV/Order back-log (x) 1.1 0.9 0.6 0.4 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 Order back-log/Sales (x) 1.5 1.3 1.6 1.9 2.0 2.6 3.0 3.5 2.0 2.2 2.5 3.0 Source: Company reports, Bloomberg, J.P. Morgan estimates. 7 Asia Paci
29、fic Equity Research 22 October 2010Karen Li, CFA (852) 2800-8589 Table 5: China infra construction contractorsFinancial Summary CCCC CRG CRCC Revenue growth % 2009A 2010E 2011E 2012E 2009A 2010E 2011E 2012E 2009A 2010E 2011E 2012E Construction 76.1% 12.1% 14.3% 4.9% 48.5% 19.9% 17.0% 8.7% 57% 15% 1
30、7% 9% Design 12.0% 12.0% 7.0% 2.0% 46% 20% -1% -6% 25% 15% 17% 9% Machinery execution risk with overseas projects; potential corporate governance issues; CRCC (1186 HK) OW 14.5 SOTP We assume a WACC of 10.9%, driven by cost of equity of 11.7% (5% risk free rate, 7% market risk premium, 0.95x beta),
31、cost of debt of 5%, target D/E of 10% and 2% terminal growth Lower-than-expected railway construction revenue execution risk with overseas projects; potential corporate governance issues; CCCC (1800 HK) N 7.8 DCF We assume a WACC of 10.8%, driven by cost of equity of 13.4% (5% risk free rate, 7% mar
32、ket risk premium, 1.2x beta), cost of debt of 5%, taret D/E of 30% and 2% terminal growth Lower-than-expected railway construction revenue execution risk with overseas projects; potential corporate governance issues; Source: J.P. Morgan research. 9 Asia Pacific Equity Research 22 October 2010Karen L
33、i, CFA (852) 2800-8589 China Railway Group: Summary of financials Profit and loss statement Cash flow statement Rmb in millions, year-end December Rmb in millions, year-end December FY09 FY10E FY11E FY12E FY09 FY10E FY11E FY12E Revenues 333,486 399,686 459,155 496,049 EBIT 11,849 16,393 20,526 23,1
34、36 % change Y/Y 48.2 19.9 14.9 8.0 Depreciation and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Lead or Co-manager: J.P.
35、 Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for China Railway Construction Corporation Limited, China Railway Group Limited within the past 12 months. Client of the Firm: China Railway Construction Corporation Limited is or was in the past 12 months a cl
36、ient of JPM; during the past 12 months, JPM provided to the company investment banking services. China Railway Group Limited is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services. Investment Banking (past 12 months): J.P.
37、Morgan received, in the past 12 months, compensation for investment banking services from China Railway Construction Corporation Limited, China Railway Group Limited. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services
38、in the next three months from China Railway Construction Corporation Limited, China Railway Group Limited. 010203040Price(HK$)Dec06Sep07Jun08Mar09Dec09Sep10China Communications Construction Co. Ltd. (1800.HK) Price ChartN HK$9.7N HK$7.9N HK$8.4N HK$13.8N HK$13.8 N HK$8.6N HK$6.8Source: Bloomberg and
39、 J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Sep 04, 2008. This chart shows J.P. Morgans continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underwei
40、ght.Date Rating Share Price (HK$) Price Target (HK$) 04-Sep-08 N 10.74 13.80 18-Sep-08 N 7.58 7.90 22-Jan-09 N 7.10 13.80 23-Jan-09 N 7.02 8.40 15-Apr-09 N 9.59 9.70 17-Jan-10 N 7.87 8.60 27-May-10 N 6.17 6.80 16 Asia Pacific Equity Research 22 October 2010Karen Li, CFA (852) 2800-8589 06121824Pric
41、e(HK$)Mar08Jun08Sep08Dec08Mar09Jun09Sep09Dec09Mar10Jun10Sep10China Railway Construction Corporation Limited (1186.HK) Price ChartOW HK$13OW HK$12OW HK$14 OW HK$14.2 OW HK$13.6 OW HK$12.2Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Aug 22, 2
42、008. This chart shows J.P. Morgans continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.Date Rating Share Price (HK$) Price Target (HK$) 22-Aug-08 OW 11.14 14.00 31-Oct-08 OW 9.
43、30 12.00 11-Nov-08 OW 10.70 13.00 28-Aug-09 OW 11.30 14.20 17-Jan-10 OW 10.40 13.60 27-May-10 OW 8.89 12.20 06121824Price(HK$)Dec07Mar08Jun08Sep08Dec08Mar09Jun09Sep09Dec09Mar10Jun10Sep10China Railway Group Limited (0390.HK) Price ChartN HK$8.4 N HK$5.5N HK$8.783 N HK$5 N HK$7.2 N HK$6.9 OW HK$6.4Sou
44、rce: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Jan 24, 2008. This chart shows J.P. Morgans continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neut
45、ral, UW = Underweight.Date Rating Share Price (HK$) Price Target (HK$) 24-Jan-08 N 9.00 8.78 25-Apr-08 N 7.66 8.40 31-Oct-08 N 4.40 5.00 11-Nov-08 N 4.98 5.50 28-Aug-09 N 6.89 7.20 17-Jan-10 N 5.99 6.90 27-May-10 OW 4.82 6.40 Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J
46、.P. Morgan uses the following rating system: Overweight Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe. Neutral Over the next six to twelve months, we expect this stock will per
47、form in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe. Underweight Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.
48、 J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on reque
49、st. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Karen Li, CFA: Anhui Expressway (0995.HK), Beijing Capital International Airport (0694.HK), COSCO Pacific (1199.HK), CSR Corp Ltd. (1766.HK), China Communications Constructi
