CRG Delivered Solid 1Q Result on Lower Tax; Outlook Reaffirmed by Robust New Order Growth

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Equity Bottom-Up

China Railway Group Ltd H / Equity Bottom-Up

No-moat China Railway Group reported virtually flat net income of CNY 11.8 billion, which missed our estimate by 10%, as higher material costs and delayed contract pricing adjustment led to margin erosion at the infrastructure operation. The 5.5% year-on-year top-line growth marginally missed our expectations due to the one-off impact of value-added tax reform.But with new orders rising 29% and re-acceleration in real estate market activity, we expect CRG’s 2017 net income and revenue to rise 7% and 9%, respectively. We maintain our medium-term net income and top-line growth assumptions at a 7%-8% CAGR, reflecting our view that multiyear nationwide urban rail development will generate a sustainable flow of high margin contracts to the company. We reaffirm our fair value estimate of HKD 7.5 per share, implying a 12 times price/earnings ratio and a 6.2 times price/book ratio. We consider shares fairly valued at the current price.Analyst: John Hu

No-moat China Railway Group reported virtually flat net income of CNY 11.8 billion, which missed our estimate by 10%, as higher material costs and delayed contract pricing adjustment led to margin erosion at the infrastructure operation. The 5.5% year-on-year top-line growth marginally missed our expectations due to the one-off impact of value-added tax reform.But with new orders rising 29% and re-acceleration in real estate market activity, we expect CRG’s 2017 net income and revenue to rise 7% and 9%, respectively. We maintain our medium-term net income and top-line growth assumptions at a 7%-8% CAGR, reflecting our view that multiyear nationwide urban rail development will generate a sustainable flow of high margin contracts to the company. We reaffirm our fair value estimate of HKD 7.5 per share, implying a 12 times price/earnings ratio and a 6.2 times price/book ratio. We consider shares fairly valued at the current price.Analyst: John Hu

China Railway Group's Outlook Remains Stable Amid Solid New Order Wins