STRATEGY
24 February 2010 HINA C
/
ONG K High-Speed Rail in China
On the right high-speed track ONG H
Alice Chong +852 2532 1117 - [email protected], Rebecca Tang +852 2532 1150 – [email protected]
• High-speed rail bodes well for construction and property sectors. The recent official opening of two high-speed railways in China, the Wugang Passenger Railway and Xizheng Passenger Railway, lays another track for the emergence of the world’s biggest high-speed rail network. The construction and completion of this mega project by phases over the next few years will, in our view, benefit both the construction and property sectors given the handsome budget for railway construction, the opening up of remote areas and rising property transactions in the 2nd and 3rd tier cities. We reiterate our OVERWEIGHT stance on both the construction and China property sectors, with China Railway Construction (CRCC), China Overseas (COLI), Shimao and Sino-Ocean being our top picks. • China is building the biggest high-speed rail network. In total, China now has around 3,300km high-speed railway lines which can be operated at speeds of 200/hr or higher. Under the government’s Mid-to-Long Term Railway Development plan, China will add another 10,000km of high-speed railway lines, mainly passenger dedicated line (PDL) by 2012. This will make the country’s network the largest and fastest high-speed railway system in the world. • CRCC and CRG – the main winners among the contractors. Assuming a construction cost of Rmb120m/km, the construction of another 10,000km of high- speed rails by 2012 will cost Rmb1.2tr in total or Rmb300bn per year in 2009-12. Obvious winners are the railway construction companies, mainly CRCC and CRG, as both of them have similar market share in high-speed rail construction. Another beneficiary is China South Locomotive (CSR) (1766.HK, Not Rated) as the opening of the high speed lines will drive demand for high-speed trains. • Boosting property activities in 2nd tier or 3 tier cities. On the property front, the high-speed rails are expected to benefit 2nd and 3rd tier cities located along the lines. Faster economic development will fuel demand for properties. The areas which stand to benefit include i) the satellite cities, ii) central China, and iii) the western region. Property prices in these areas are expected to be more resilient in the downcycle given affordable pricing and higher demand. • COLI and Shimao has largest landbank along high-speed rails. Most of the China property developers have built up land reserves in the 2nd or 3rd tier cities along the eight major PDLs. Among the companies in our universe, COLI has the largest landbank of 25m sq m (72.5% of its total landbank) in these areas, followed by 22m sq m (79.6% of landbank) for Shimao. They are well positioned to capture the rising economic growth along the high-speed rail network.
Figure 1: Stock comparisons
Target Core 3-yr EPS P/BV ROE Div Bloomberg Price price Mkt cap P/E (x) CAGR (x) (%) yield (%) ticker Recom. (Local) (Local) (US$ m) CY2010 CY2011 (%) CY2010 CY2010 CY2010 Agile 3383 HK N 9.76 11.39 4,509 9.5 7.3 51.4 1.9 21.9 3.4 CC Land 1224 HK N 2.93 2.52 971 111.9 21.4 297.5 0.6 0.6 0.7 China Overseas Land 688 HK O 14.76 22.10 15,533 16.5 13.6 35.7 2.6 16.9 1.2 R&F 2777 HK O 11.06 16.57 4,591 8.2 7.3 28.2 1.6 21.6 3.1 Shimao Property 813 HK O 12.00 19.87 5,477 12.2 8.9 95.8 1.7 14.2 2.2 Sino-Ocean 3377 HK O 6.52 9.88 4,734 13.8 11.2 31.6 1.4 10.0 1.9 Yanlord YLLG SP N 1.73 2.19 2,367 10.1 9.7 29.2 1.3 13.4 1.0 China Railway Group - 390 HK O 5.92 8.33 16,244 12.6 9.6 44.9 1.6 13.5 2.0 CRCC - H 1186 HK O 10.42 14.26 16,561 14.1 10.6 43.0 1.9 14.5 2.1 Simple average 23.2 11.1 73.0 1.6 14.1 2.0 O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy and TS = Trading Sell Source: Company, CIMB Research CIMB Securities (HK) Ltd. has had an investment banking relationship with Agile Property Holdings
Limited within the preceding 12 months.
Please read carefully the important disclosures at the end of this publication.
High-speed rail in China
China’s railway network is expanding… Given the rapid economic development in China and the opening up of the west, the country has rolled out an ambitious plan to extend its domestic railway network. According to the recent development plan of the Ministry of Railway (MoR), it plans to extend the domestic railway network from 86,000km in 2009 to 110,000km in 2012. … and speeding up. The expansion not only focuses on the length but also the speed of the train services. Currently, it is estimated that around 64% of the county’s existing railway lines operate at speeds below 120km/hr. As part of the county’s plan to reduce the travelling time between the different regions, China will have 35 high- speed rail lines covering 13,000km throughout the country by 2012 and 16,000km by 2020. When the entire network is in place, China will have the fastest and biggest high-speed network in the world. More importantly, the travel time from Beijing to most of the major cities in China will be in the 1-8 hour range. For example, Beijing to Shanghai will take four hours instead of 10 hours now, Beijing to Guangzhou will be cut from 22 hours to 6½ hours while Beijing to Kunming will take around 8 hours versus 38 hours now.
Figure 2: China has the largest high-speed train network
(km) In operation Under construction Planned Total Europe Belgium 173 36 - 209 France 1,872 299 2,616 4,787 Germany 1,285 378 670 2,333 Italy 744 132 395 1,271 The Netherlands - 120 - 120 Poland - - 712 712 Portugal - - 1,006 1,006 Rusia - - 650 650 Spain 1,599 2,219 1,702 5,520 Sweden - - 750 750 Switzerland 35 72 - 107 United Kingdom 113 - - 113 Total Europe 5,821 3,256 8,501 17,578 Asia
China 3,182 7,043 2,901 13,126 Taiwan 345 - - 345 India - - 495 495 Iran - - 475 475 Japan 2,452 590 583 3,625 Saudi Arabia - - 550 550 South Korea 330 82 - 412 Turkey 235 510 1,679 2,424 Total Asia 6,544 8,225 6,683 21,452 Other countries - Morocco - - 680 680 Argentina - - 315 315 Brazil - - 500 500 USA 362 - 900 1,262 Total other countries 362 - 2,395 2,757 The World 12,727 11,481 17,579 41,787
Source: Union International of Railway, MOR, CIMB Research
[ 2 ]
High-speed trains? The high-speed rails in China refer to any commercial train service with a speed of 200km/hr or higher. It is also broadly classified into two levels, i.e. 200-250km/hr and 300-350km/hr. The latter is the top high-speed railway in the world. In the long-term plan, 200-250km lines can be upgraded to the maximum speed of 300km/hr. According to the Mid-to-Long Term Railway Development Plan, high-speed rails in China mainly comprise:
• passenger dedicated line (PDL) – four north-south lines and four east-west lines with a total length of around 16,000 km by 2020 • intercity transport system (intercity railway) • upgraded conventional railways • new lines for improving the railway network in western China. Lines in operation. China now has around 3,300km of high-speed lines (mainly PDL and intercity line) in operation. The major lines are: • Wugang Passenger Railway covering 968km between Wuhan and Guangzhou with the top speed of 350km/hr • Beijing-Tianjin Intercity Railway which covers 113.5km in 30 minutes with the top speeds of 320-330km/hr • Shanghai Maglev Train, an airport link that travels 31km in 7 minutes and 20 seconds with a top speed of 431km/hr • Zhengxi Passenger Railway which links up Zhengzhou and Xian (covering 505km) in less than 110 minutes. • Jiaoji Passenger Railway, covering 364km between Jinan and Qingdao with a designed speed of 250km/hr • Yongtaiwen Passenger Railway, linking Ningbo, Taizhou and Wenzhou with a designed speed of 250km/hr • Wenfu Railway, covering 298km between Wenzhou and Fuzhou.
[ 3 ]
Figure 3: High-speed railway network in China
Source: MOR, Web sites, CIMB Research
More in the pipeline. To meet the government’s plan of expanding its high-speed rail network to 13,000km by 2012, over 7,000km of new lines are estimated to be under construction now. Based on the original development plan, we expect the commercial start of another six lines with total length of around 1,500km in 2010 and 2,800km in 2011. Upon completion by phases over the next five years, the whole high-speed railway network will comprise eight main PDL lines, i.e. four south-north and four east- west lines spanning across the country (see Figure 3). Four north-south lines. The four north-south lines cover the whole country from north eastern Harbin to the southern manufacturing powerhouse Guangzhou. The lines link up the country’s several major regions including northeastern China (Harbin, Changchun, Shenyang, Dalian), Bohai-Rim areas (Beijing, Tianjin, Qinquahgdao, Qingdao), the central region (Zhengzhou, Wuhan, Changsha), Yangtze River Delta (Nanjing, Wuxi, Suzhou, Shanghai, Hangzhou, Ningbo), the Cross-Strait Economic Zone (Fuzhou, Xiamen) and the southern regions (Guangzhou, Shenzhen and Hong Kong). After the openings of Wugang Passenger Railway and Yongtaiwen Railway in mid-to-late 2009, the Guangzhou-Shenzhen and Fuzhou-Xiamen sections are expected to start commercial operations in 2010.
[ 4 ] Figure 4: North-south lines Length Design Travel Construction Estimated date Main stations (km) speed Time start date of completion (km/hr) Four north-south lines Jingha PDL (Beijing - Harbin; composed of 3 portions)
Jingshen Passenger Railway (Beijing - Shenyang) 684 350 2 hrs Dec-10 2012 Beijing, Chengde, Shenyang
Hada Passenger Railway (Harbin - Dalian) 904 350 3 hrs Aug-07 2011 Harbin, Changchun, Shenyang
Panying Passenger Railway (Panjin - Yingkou) 89.4 350 May-09 2011 Panying, Yingkou
Jinghu High-Speed Railway (Beijing - Shanghai)
Beijing, Tianjin, Jinan, Xuzhou, Bengbu, Jinghu High-Speed Railway (Beijing - Shanghai) 1318 350 5 hrs Jan-08 2011 Nanjing, Changzhou, Wuxi, Suzhou, Kunshan, Hongqiao Bengbu-Hefei branch 131 300 Jan-09 Jun-12 Bengbu, Hefei
Jinggang (Beijing - Hong Kong, composed of 4 portions)
Jingshi Passenger Railway (Beijing - Shijiazhuang) 270 350 1 hr Oct-08 Dec-12 Beijing, Baoding, Shijiazhuang
Shiwu Passenger Railway (Shijiazhuang - Wuhan) 841 350 3 hrs Oct-08 Oct-12 Shujiazhuang, Wuhan
Wuguang Passenger Railway (Wuhan - Guangzhou) 989 350 3 hrs Dec-09 Wuhan, Changsha, Guangzhou
Guangshengang (Guangzhou-Shenzhen) 105 350 30 min Jul-10 Guangzhou Shengzhen
Southeast Coastal PDL (Shanghai - Shenzhen; composed of 5 portions) Huhangyong Passenger Railway (Shanghai - 160 350 30 min Feb-09 2010 Shanghai, Hangzhou, Ningbo Hangzhou - Ningbo) 1 hr 12 Yongtaiwen Railway (Ningbo-Taizhou-Wenzhou) 268 250 Dec-04 Aug-09 Ningbo, Taizhou, Wenzhou min 1 hr 25 Wenfu Railway (Wenzhou- Fuzhou) 298 250 Oct-05 Jun-09 Wenzhou, Fuzhou min Fuxia Railway (Fuzhou - Xiamen) 273 200 Sep-05 Mar-10 Fuzhou, Putian, Xiamen Xiashen Railway (Xiamen - Shenzhen) 502 200 Nov-07 Jan-11 Xiamen, Shenzhen
Source: MOR, Web sites, CIMB Research
[ 5 ] Figure 5: Four north-south PDL
Source: MOR, Web sites, CIMB Research
Four east-west lines open up the central and west. The four east-west lines play an important role in opening up the western and central parts of China as they link up the coastal cities (Qingdao, Xuzhou, Shanghai, Hangzhou) to the central part of China (Taiyuan, Zhengzhou, Wuhan, Changsha) and the remote cities in western China, such as Lanzhou, Chengdu and Kunming. The improvement in connection should help speed up the development of central and western China, and narrow the economic imbalance relative to the coastal cities. After the recent opening of the line between Zhengzhou and Xian, more new lines are expected to start operations from 2012 (see Figure 6).
[ 6 ] Figure 6: East-west lines Length Design Travel Time Construction Estimated date Main stations (km) speed start date of completion (km/hr) Four east-west lines Qingtai PDL (Qingdao-Taiyuan, composed of 3 portions) Shitai Passenger Railway (Taiyuan - 190 250 1 hr 2005 2009 Taiyuan, Shijiazhuang Shijiazhuang) Shiji Passenger Railway (Shijiazhuang - 319 250 2009 2012 Shijiazhuang, Dezhou, Jinan Dezhou - Jinan) Jiaoji Passenger Railway (Jinan - Qingdao) 250 2007 Jinan, Qingdao
Xulan PDL (Xuzhou - Lanzhou, composed of 4 portions) Zhengxu Passenger Railway (Xuzhou - 357 350 2010 2013 Xuzhou, Zhengzhou Zhengzhou)
Zhengxi Passenger Railway (Zhengzhou - Xian) 505 350 1hr 48 min Sep-05 Feb-10 Zhengzhou, Xian
Xibao Passenger Railway (Xian - Baoji) 148 350 Nov-09 2012 Xian, Baoji
Baolan Passenger Railway (Baoji - Lanzhou) 403 350 Planning Planning Baoji, Lanzhou
Huhangrong PDL (Shanghai - Chengdu, composed of 8 portions) Beijing- Shanghai Express Railway (Shanghai- Shanghai, Nanjing Nanjing section) Hening Passenger Railway (Nanjing - Heifei) 166 200 1 hr 2005 Apr-08 Nanjing, Hefei
Hewu Passenger (Hefei - Wuhan) 351 200 1 hr 30 min Dec-08 Hefei, Wuhan
Hanyi Railway (Wuhan - Yichang) 293 200 1 hr 30min Sep-08 Jan-12 Wuhan, Yichang
Yiwan Railway (Yichang - Lichuan section) 377 120 3 hrs 2010 Yichang, Lichuan
Yuli Passenger Railway (Lichuan - Chongqing) 264 200 1 hr 30 min Dec-08 2012 Lichuan, Chongqing
Suiyu Railway (Chongqing - Suining) 132 200 Jan-09 Jan-12 Chongqing, Suining Dacheng Railway (Suining - Chengdu) Suining, Chengdu
Hukun PDL (Shanghai - Kunming, composed of 2 portions) Shanghai-Hangzhou-Ningbo Passenger 159 350 30 min Mar-09 Oct-10 Shanghai, Hangzho Railway (Shanghai-Hangzhou section) Hangchang Passenger Railway (Hangzhou- 926 350 3 hrs Dec-09 2012 Hangzhou, Changsha Changsha) Changkun Passenger Railway (Changsha- 1175 350 2010 2014 Changsha, Kunming Kunming)
Source: MOR, Web sites, CIMB Research
[ 7 ] Figure 7: Four East-west PDL
Source: MOR, Web sites, CIMB Research
Intercity transport lines bode well for satellite cities. The intercity transport system refers to the high-speed railways built in metropolitan areas, especially in the Pearl River Delta area, Yangtze River Delta area and Bohai Economic Rim. All these intercity railways have a shorter distance under 500km. The maximum speed is at least 200-250km/hr and some lines can reach 350km/hr. These lines should strengthen the communications within the regions and benefit some satellite cites nearby. For example, the Beijing-Tianjin Express has ratcheted up Tianjin’s economic development and narrowed the property price gap between these two areas. According to the original construction plan, around 1,000km of new lines will start commercial operations in 2010.
[ 8 ] Figure 8: Intercity transport lines
Length Design Construction Estimated date (km) speed start date of completion (km/hr)
Intercity railways Beijing-Tianjin Intercity Rail 115 350 Apr-05 Jan-08 Chengdu-Dujiangyan Intercity Rail 57 200 Apr-08 May-10 Nanchang-Jiujiang Intercity Rail 131 200 Jun-07 Jan-10 Shanghai Nanjing Intercity 296 300 Jul-08 Jul-10 Guangzhou-Zhuhai Intercity Mass Rapid Transit 117 200 Dec-05 2010 Hainan East Ring Intercity Rail 308 200 Sep-07 2010 Changchun-Jilin Intercity Rail 109 250 May-07 2010 Nanjing-Anqing Intercity Rail 257 200 Dec-08 Jun-12 Nanjing-Hangzhou Intercity Rail 251 350 Dec-08 Dec-12 Jiangyou-Mianyang-Chengdu-Leshan Intercity Rail 319 200 Dec-08 Dec-12 Wuhan Megalopolis Intercity Rail 160 350 Mar-09 2011-2013 Beijing-Tangshan Intercity Rail 160 350 2009 2012 Tianjin-Baoding Intercity Rail 145 250 2009 2012 Qingdao-Yantai-Weihai-Rongcheng Intercity Rail 299 250 2009 2012 Harbin-Qiqihar Intercity Rail 286 250 2009 2013 Beijing-Zhangjiakou Intercity Rail 174 200 2009 2013 Chongqing-Wanzhou Intercity Rail 250 350 2009 2013 Shenyang-Dandong Intercity Rail 208 350 2009 2013
Chengdu-Chongqing Intercity Rail 305 300 2009 2014 Source: MOR, CIMB Research
Implications for construction sector
High-speed rail construction takes up 43% of MOR’s annual spending on railways. Based on the plan to build another 10,000km of PDL by 2012 and the estimated construction cost of Rmb120m/km, we expect the government to spend Rmb1.2tr in 2009-12 on the construction of new high-speed lines. Assuming the construction cost is evenly spread over 2009-12, we forecast an annual spending of around Rmb300m on high-speed lines which would take up around 43% of the MOR’s budgeted railway FAI of Rmb700m in 2010. Equal footing for CRCC and CRG in high-speed rail. Based on the recent contract awards (Figure 9), China Railway Construction (CRCC) and China Railway Group (CRG) have similar market shares in high-speed rail network construction. We estimate that the construction of high speed rail contributes approximately 50% of their railway construction revenue or 25% of their total revenues in FY09-11. Both CRCC and CRG are well positioned to tap the infrastructure spending on high-speed rails. Potential network upgrading set to fuel FAI beyond 2013. As the majority of the 16,000 PDL will be completed by 2012, the pace of construction of new lines may slow down after 2013. However, we believe the upgrading of conventional lines will fill up the construction gap after 2013 as around 70% of the existing lines operate at speeds below 120km/hr. We expect the annual railway infrastructure FAI to stay high at over Rmb700bn from 2013 onwards. Strong demand on high-speed trains, supported by replacement cycle. The commencement of high-speed rail and the potential upgrade of the speed of existing lines should provide continuous demand for the high-speed trains, also known as multiple units (MU). MOR expects the MU fleet in operation to be expanded from 176 train sets in 2008 to 800 train sets in 2012 or 46% CAGR during 2008-2012. The Chinese MU market is a duopoly, with China South Locomotive (CSR) and China North Locomotive (CNR) as the key players. The delivery of MUs may peak in 2015 after the completion of the 16,000km of PDLs. However, the replacement cycle, which is approximately 20 years, may kick in from 2020 onwards and fuel demand.
[ 9 ] Figure 9: Recent contract awards for high-speed lines
Completion Total costContract awards Length Cost / km CRCC CRG Rmb mRmb mRmb mkmRmb m Qinhuangdao Shenyang Passenger Railway 2002 15,961 5,200 6,235 405 39 Beijing-Tianjin Intercity Rail 2008 14,300 3,800 3,250 115 124 Shitai Passenger Railway (Taiyuan - Shijiazhuang) 2009 17,075 4,300 - 190 90 Wuguang Passenger Railway (Wuhan - Guangzhou) 2009 116,600 35,474 36,124 989 118 Zhengxi Passenger Railway (Zhengzhou - Xian) 2010 35,300 15,880 221 505 70 Shanghai Nanjing Intercity Rail 2010 29,600 7,932 4,001 296 100 Jinghu High-Speed Railway (Beijing - Shanghai) 2011 200,900 33,743 26,186 1,318 152 Jingshi Passenger Railway (Beijing - Shijiazhuang) 2012 43,900 5,188 10,583 270 163 Shiwu Passenger Railway (Shijiazhuang - Wuhan) 2012 116,760 2,285 22,568 841 139 Hada Passenger Railway (Harbin - Dalian) 2011 82,000 1,297 23,006 904 91 Nanjing-Hangzhou Intercity Rail 2011 29,780 8,713 4,547 251 119 Yuli Passenger Railway (Lichuan - Chongqing) 2012 26,180 7,082 7,883 264 99 Total 130,894 144,604 109
Source: Company, CIMB Research
Implication for property sector
Opening up central and western China. High-speed rail will lead to faster economic development and rising demand for properties in the cities and areas the tracks traverse. This mega transport network is important to China given the sheer size of the country, its vast population and the huge economic imbalance between the different regions. The construction of the eight PDL should help step up economic activities in central and western China, provide substantial economic benefits for these areas and narrow the wealth disparity between the inner and coastal cities in the longer term. With improving living standards, we expect rising property investments in the 2nd and 3rd tier cities along the high-speed rails. Major cities that stand to benefit include Wuhan, Changsha, Zhengzhou in central China and Xian, Chengdu and Chongqing in western China.
Figure 10: Economic imbalance between the coastal and inland cities GDP/Disposable income per capita Property activities
80,000 200 70,000 60,000 50,000 150 40,000 30,000 100
Rmb 20,000 10,000 Rmb bn 50 -
Xian - Wuhan Chengdu Shanghai Hangzhou Changsha Xian Chongqing Zhengzhou Wuhan Chengdu Shanghai Hangzhou Changsha Chongqing GDP per capita Disposal income Zhengzhou Property inv estment Property transaction
Source: China Statistics Year Book, CIMB Research
Price gap between cities to be narrowed in the longer term. While property prices in the first tier cities deserve a premium over 2nd tier, 3rd tier and satellite cites given stronger economic activities in Tier 1 cities, the construction of the high-speed railways should help narrow the price gap in the longer term. For example, the price gap between Beijing and Tianjin improved as a result of the rapid development of Tianjin and the opening of the Beijing-Tianjin Expressway.
[ 10 ] Figure 11: Property price index
145 140 135 130 125 120 115
110 105 Dec 2005 = 100 100 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Dec-05 Mar-06 Sep-06 Dec-06 Mar-07 Sep-07 Dec-07 Mar-08 Sep-08 Dec-08 Mar-09 Sep-09 Dec-09 Mar-10 Sep-10 Dec-10
Beijing Tianjin
Source: NDRC, CIMB Research,
Property prices to be more resilient in 2nd and 3rd tier cities. With the reduction of the wealth disparity, improving affordability and less speculative activities, we expect property prices in the 2nd and 3rd tier cities to be more resilient, particularly during the downcycle. As shown in Figure 12, the correction of property prices was less severe in Tianjin than Beijing in the last downcycle.
Figure 12: Prices in the 2nd tier cities were more resilient in the downturn Property price index – Beijing Property price index - Tianjin
16 16.0 14 14.0 12 12.0 10 10.0 8
ange 8.0 h c 6 6.0 % 4 4.0 yoy % change % yoy yoy 2 2.0 0 0.0 -2.0 -2 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10
-4.0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 -4 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: NDRC, CIMB Research
Developers set to ride on the high-speed trains. In view of improving connectivity between the different regions and the anticipation of a pick-up in economic activities along the high-speed rails, developers have been building up their landbank in most of the major stations along the lines. To illustrate developers’ exposure to different high-speed rails, we highlight the size of the landbank in the major stations along the different PDL (see Figures 14 and 15). As we expect the high-speed lines to create more economic benefit for the 2nd and 3rd tier cities, the developer’s exposure to 1st tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen is excluded in our calculation. COLI – a major player along the high-speed lines… For the companies in our universe (Figure 13), COLI has the largest exposure with around 25m sq m of landbank located along the major stations (excluding Beijing, Shanghai and Guangzhou) of the eight PDL. This accounted for 72.85% of its total land reserves. In terms of cities, COLI has relatively high exposure in Jinan, Shenyang, Changchun (the north-eastern China), Suzhou (satellite city close to Shanghai), Xian, Chongqing and Chengdu in the western China. … followed by Shimao and Sino-Ocean Land. Shimao has 21.8m sq m of landbank along the high-speed lines, representing 79.6% of its total land reserves. In terms of landbank distribution, Shimao has higher exposure to land along several north-south lines, i.e. Jinghu PDL, Jinghua PDL and the Southeast Coastal PDL (see appendices). The phased opening of these lines in 2010-12 augurs well for property developments in these areas. Sino Ocean has 9.2m sq m of land reserves along the
[ 11 ] PDL with the focus on north and northeastern China, mainly Tianjin and Shenyang. CC Land’s focus is on western china while Agile is strong in Guangdong and Hainan. CC Land has 8.8m sq m of landbank or 90% of its land reserve in Chongqing and Chengdu which are two major stations in the Huhangrong PDL. The opening up of western China is positive for CC Land. However, its relatively low asset turnover remains the major overhang. As Figure 13 shows, Agile has a relatively low exposure (4m sq m) to land bank along the eight PDL because it has a much stronger presence in Guangdong and Hainan which are not located along these eight PDL.
Figure 13: Developers’ exposure to high-speed lines
Landbank along the HS Landbank in BJ, SH & GZ Landbank along the HS rails (excl % to total landbank rails (sq m) BJ, SH & GZ) (sq m) (sq m)
Agile 5,403,766 1,448,866 3,954,900 12.2% C C Land 8,855,248 - 8,855,248 90.2% China Resources Land 23,738,374 4,090,923 19,647,451 77.6% China Overseas 28,565,114 3,587,490 24,977,624 72.5% Guangzhou R&F 21,350,057 6,410,326 14,939,731 65.7% Shimao Property 22,989,610 1,172,851 21,816,759 79.6% Shiu On Land 8,069,000 2,483,000 5,586,000 57.9% Sino-Ocean Land 12,046,000 2,879,000 9,167,000 65.6% Yanlord Land 3,105,868 702,000 2,403,868 57.2% Poly HK 8,480,000 2,820,000 5,660,000 45.6%
Source: Company, CIMB Research
[ 12 ] Figure 14: Developers’ landbank along the 4 north-south PDL (sq m)
Major stations Agile C C Land China Shimao Sino-Ocean Yanlord Overseas Property Land Land
Jinghu PDL (BJ-SH) Beijing - - 1,521,972 136,104 2,879,000 - Tianjin - - 354,000 795,750 3,174,000 688,780 Jinan - - 3,005,871 - - - Xuzhou - - - 1,221,240 - - Nanjing 495,625 - 680,310 1,381,818 - 744,710 Changshu - - - 1,160,941 - - Changzhou 559,765 - - 1,287,856 - - Wuxi - - - 1,330,000 - - Suzhou - - 2,405,697 1,296,575 - 412,860 Kunshan - - - 2,049,337 - - Shanghai 325,598 - 1,258,518 1,036,747 - 702,000 Sub-total (excl BJ & SH) 1,055,390 - 6,445,878 10,523,517 3,174,000 1,846,350
Jingha PDL Harbin - - - 1,072,049 - - Changchun - - 2,341,691 - - - Shenyang 702,852 - 6,985,444 1,956,751 760,000 - Dalian - - 297,000 1,813,000 4,155,000 - Chengde Beijing - - 1,521,972 136,104 2,879,000 - Subtotal (excl BJ) 702,852 - 9,624,135 4,841,800 4,915,000 -
Jingang PDL Beijing - - 1,521,972 136,104 2,879,000 - Shijiazhuang Taiyuan ------Zhengzhou ------Wuhan - - - 1,367,599 - - Changsha ------Guangzhou 1,123,268 - 807,000 - - - Subtotal (excl BJ & GZ) - - - 1,367,599 - -
Southeast Coastal PDL Shanghai 325,598 - 1,258,518 1,036,747 - 702,000 Jiaxing - - - 916,231 - - Hangzhou - - 1,051,000 1,323,132 1,078,000 - Ningbo - - 545,700 700,000 - - Taizhou - - - 400,000 - - Wenzhou Fuzhou - - - 451,387 - - Xiamen - - - 674,100 - - Subtotal (excl SH) - - 1,596,700 4,464,850 1,078,000 -
Source: Company, CIMB Research
[ 13 ] Figure 15: Developers’ landbank along the 4 east-west PDL (sq m)
Major stations Agile C C Land China Shimao Sino-Ocean Yanlord Overseas Property Land Land
Qingtai PDL Taiyuan ------Shijiazhuang Dezhou Jinan - - 3,005,871 - - - Qingdao - - 878,870 118,993 - - Subtotal - - 3,884,741 118,993 - -
Xulan PDL Xuzhou - - - 1,221,240 - - Zhengzhou ------Xian 234,439 - 1,461,800 - - - Lanzhou Subtotal 234,439 - 1,461,800 1,221,240 - -
Huhangrong PDL
Shanghai 325,598 - 1,258,518 1,036,747 - 702,000 Nanjing 495,625 - 680,310 1,381,818 - 744,710 Heifei ------Wuhan - - - 1,367,599 - - Yichang Lichuan Chongqing 463,842 6,386,000 2,474,882 - - - Chengdu 1,498,377 2,425,248 2,495,359 500,000 - 557,518 Subtotal (excl Shanghai) 2,457,844 8,811,248 5,650,551 3,249,417 - 1,302,228
Hukun PDL Shanghai 325,598 - 1,258,518 1,036,747 - 702,000 Hangzhou - - 1,051,000 1,323,132 1,078,000 - Nanchang Changsha ------Guiyang ------Kunming - 44,000 - - - - Subtotal (excl Shanghai) - 44,000 1,051,000 1,323,132 1,078,000 -
Source: Company, CIMB Research
Valuation and recommendation
Construction companies set to tap FAI on high-speed rails. The construction of another 10,000km high-speed rail at an estimated cost of Rmb1.2tr will benefit the rail construction companies directly. Both CRCC and CRG has similar market share in high-speed rail construction. It is estimated that around 25% of their respective revenue in FY09-11 will be derived from high-speed rail construction. The FAI for railway construction, in our view, is less affected by monetary tightening because the majority (90%) of the funding comes from the MOR. These companies’ high backlog/revenue ratio of over 200% should provide some assurance on near-term earnings visibility. Near-term re-rating catalysts may come from potential increase in the target railway network length in 2020, better-than-expected contract awards both domestically and overseas, and an improvement in margins when the pace of new construction projects slows down. We prefer CRCC in the construction sector in view of its stronger cashflows. CRCC is now trading at P/Es of 14x CY10 and 11x CY11 while CRG is trading at 13x CY10 and 10x CY11. These valuations are attractive compared with their two-year historical average forward P/E of 21x and should already reflect a more moderate earnings growth rate of 36% in FY10 compared to FY09’s lofty 66%, as well as
[ 14 ] concerns over a slowdown in infrastructure FAI due to the tightening of loans in 2010. High-speed train network bode well for 2nd and 3rd tier cities. The construction of high-speed rails is expected to boost property activities in the 2nd and 3rd tier cities as the opening up of these cities speeds up economic development. With the narrowing of the wealth gap, affordability is set to improve in these areas. Property prices will be more resilient in the downcycle given higher end-user demand and less speculative activities in general. COLI, Shimao and Sino Ocean provide higher exposure along the high-speed lines. To ride on the high-speed networks, COLI, Shimao and Sino Ocean stay our top picks in the China property sector. These companies’ strong presence will enable them to tap the potential rise in end-user demand in the 2nd and 3rd tier cities, particularly along the high-speed lines. We also like these market leaders with strong execution capability given the higher policy risks. These stocks are trading at RNAV discounts of 25-43% and are attractive long-term investments. Rising property transactions in 2nd and 3rd tier cities act as the key potential share price catalyst.
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RECOMMENDATION FRAMEWORK #1*
STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: The stock's total return is expected to exceed a relevant OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 12 months. expected to outperform the relevant primary market index over the next 12 months. NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant NEUTRAL: The industry, as defined by the analyst's coverage universe, is benchmark's total return. expected to perform in line with the relevant primary market index over the next 12 months. UNDERPERFORM: The stock's total return is expected to be below a relevant UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, benchmark's total return by 5% or more over the next 12 months. is expected to underperform the relevant primary market index over the next 12 months. TRADING BUY: The stock's total return is expected to exceed a relevant TRADING BUY: The industry, as defined by the analyst's coverage universe, is benchmark's total return by 5% or more over the next 3 months. expected to outperform the relevant primary market index over the next 3 months. TRADING SELL: The stock's total return is expected to be below a relevant TRADING SELL: The industry, as defined by the analyst's coverage universe, benchmark's total return by 5% or more over the next 3 months. is expected to underperform the relevant primary market index over the next 3 months.
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
CIMB-GK Research Pte Ltd (Co. Reg. No. 198701620M)
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RECOMMENDATION FRAMEWORK #2 **
STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS OUTPERFORM: Expected positive total returns of 15% or more over the next OVERWEIGHT: The industry, as defined by the analyst's coverage universe, 12 months. has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months. NEUTRAL: Expected total returns of between -15% and +15% over the next NEUTRAL: The industry, as defined by the analyst's coverage universe, has 12 months. either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next 12 months. UNDERPERFORM: Expected negative total returns of 15% or more over the UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, next 12 months. has a high number of stocks that are expected to have total returns of -15% or worse over the next 12 months. TRADING BUY: Expected positive total returns of 15% or more over the next 3 TRADING BUY: The industry, as defined by the analyst's coverage universe, months. has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months. TRADING SELL: Expected negative total returns of 15% or more over the next TRADING SELL: The industry, as defined by the analyst's coverage universe, 3 months. has a high number of stocks that are expected to have total returns of -15% or worse over the next 3 months.
** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
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