1H19delivered solid net profit growth of 14%
Total revenue in 1H19grew 8.5% yoy, driven only by its core railway business (Fig 1). Itsgross profit margin expanded by 1.3ppt yoy to 23.3% in 1H19, because of an improvedrevenue mix. The Company scaled down its lower-margin cash construction business,while its higher-margin core railway business growth further accelerated in 1H19. Itsurban transit business also saw gross profit margin expansion due to the increasingadoption of its own CBTC technology in its projects. SG&A costs rose more than revenuegrowth in 1H19. Its net profit margin expanded by 0.7ppt yoy in 1H19. Net profit grew14.3% yoy in 1H19to Rmb2,268m, equivalent to 56% and 53% of our and consensusfull-year earnings estimates, respectively.
2H19earnings growth expected to further accelerate
We expect its urban transit business growth to recover in 2H19, which will further drive itsearnings growth acceleration. CRSC remains confident that it can deliver double-digitrevenue and earnings growth in 2019. CRSC expects its railway business revenuegrowth to continue in 2H19. Railway equipment demand growth will be driven byincreases in new rail line additions in the 13th FYP and the deepening of railway operationreforms. CRSC reported that its railway business contract wins in 1H19grew 30.1% yoy.The central government has been promoting the development of urban transit networksto support economic growth and facilitate the development a few city clusters; hence,investment in the urban transit network development started to reaccelerate in 2018. Wetrim our earnings forecast for the Company in 2019–2020by only 2–4% to reflectweakness of the non-railway business. Overall, we expect its 2019F/2020F net profit togrow 15.0%/23.7%.
A-share listing to enhance R&D and bring new income streams
The Company listed its A-shares on the SSE STAR Market in July. Proceeds from its Asharelisting will be used in 1) the R&D of advanced intelligent rail transportation, 2) thedevelopment of an advanced rail electrification system manufacturing base in Changsha,3) the development of IT projects, and 4) the replenishment of working capital. Theseinvestments should produce new income streams for CRSC for its long-term businessgrowth. With its strong position in the rail transportation control system market, theCompany can leverage its technology and expertise to expand its product offerings alongthe smart rail transportation industry value chain. With more income coming from latecyclerailway operations, CRSC’s earnings growth should become more sustainable.
Initiate with HOLD
We initiate coverage on CRSC-A with a HOLD rating and TP of Rmb9.60. Our TP isbased on a target PER multiple of 21.5x, which is the average 2020P/E of domesticpeers. Our A-share TP represents a 55.3% premium to ourH-share TP. We think its Asharevaluation fully reflected its earnings growth potential in 2019-2020, but its listing inSSE STAR Market will make its share price more resilient.