Asian Insights SparX
One Belt One Road Infrastructure Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 Jul 2017 OBOR: moving faster than expected HSI: 26,706
ANALYST • Our analysis shows that market has yet to price in the potential investment spending from OBOR initiative; total Rachel MIU +852 2863 8843 [email protected] OBOR surged sharply in 2016 and China has a large share
Chong Tjen-San, CFA +60 3 26043972 • One of the key growth drivers will be from ASEAN as Chinese contractors expand their presence in the region [email protected]
• CCCC (1800 HK) best for OBOR exposure; CRCC (1186 HK) Chris Leung +852 3668 5694 ** still see mid-term upside potential [email protected] ** contributed to macro inputs only Implementation of OBOR projects is accelerating; Chinese companies are securing more projects. China is stepping up its project-driven growth model to countries interested in the One Recommendation & valuation Belt, One Road (OBOR) initiative. The OBOR strategy could pave Company Price Target Recom Mkt FY18F the way for much higher investments in the future, and provide Price Cap PE enormous opportunity for the Chinese contractors. They are Local$ Local$ US$m x participating in several large-scale infrastructure projects in six major regions, with huge interests in the China-Pakistan Economic Infrastructure construction Corridor (CPEC) development. The Chinese contractors are now CCC-H (1800 HK) HK$ 10.88 12.90 BUY 36,292 7.1 targeting at ASEAN, the next up and coming region. We estimate CCC-A (601800 CH) RMB 17.31 18.10 HOLD 36,292 13.0 the transport related investment could be much higher than the CRCC-H (1186 HK) HK$ 10.80 12.90 BUY 25,587 7.3 initial phase, exceeding US$200 billion over a 5-year period in CRCC-A (601186 CH) RMB 13.33 12.50 HOLD 25,587 10.5 ASEAN. Through OBOR, it not only creates demand for China- Gamuda (GAM MK) MYR 5.26 6.70 BUY 3,000 18.9 made goods (especially train equipment), but also mops up some Sunway Construction MYR 2.04 2.60 BUY 615 14.8 excess capacity and promotes the use of RMB in settlements. (SCGB MK)
Time to take a relook at Chinese contractors as they have Railway equipment won huge OBOR projects. In 2016, Chinese contractors signed CRRC-H (1766 HK) HK$ 7.02 8.40 BUY 40,725 12.3 US$126bn of infrastructure contracts in countries along OBOR, CRRC-A (601766 CH) RMB 10.21 11.10 HOLD 40,725 20.6
36% higher than 2015. China’s share of new contracts along the OBOR route was about 52% in 2016. To date, Chinese Source: Thomson Reuters, DBS Vickers contractors have made good progress in Malaysia, winning some US$15 billion worth of new engineering, procurement, and construction (EPC) rail projects. Chinese contractors have an edge, thanks to their access to funding, cost competitiveness, and fast turnaround. China Communications Construction Co (CCCC) stands to benefit the most as it has the highest exposure to overseas OBOR-related projects. China Railway Construction Corporation (CRCC) is our No 2 pick as it is quickly catching up, with overseas new projects surging 25% year-on-year in 2016.
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Asian Insights SparX One Belt One Road Infrastructure Sector
The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer-term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one-off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents
Executive Summary 3 Chinese contractors gaining traction in Malaysia under the OBOR initiative 4 Rising infrastructure spending in Asia 4 OBOR opportunities for Chinese contractors 6 Stock pick 9 One Belt, One Road (OBOR) 13 Inception of OBOR 13 Important implications from latest OBOR conference 14 Successful implementation of China-Pakistan Economic Corridor (CPEC) 15 Iran-Pakistan Pipeline (Peace pipeline project) 17 Pan-Asia Railway Network 18 China-Indochina Peninsula Economic Corridor 20 Benefits of OBOR 21 OBOR to drive trade growth 21 The potential exporting of high-end transportation equipment 21 Reform of major industries (and SOEs) 21 Globalisation strategy 22 Project funding avenues are widening 23 The Asian Infrastructure Investment Bank (AIIB) 23 Silk Road Fund (SRF) 24 Other Financing Vehicles 24 Drivers of infrastructure needs 25 Urbanisation drive 25 Market liberalisation and foreign trade development 25 Lack of domestic capital 25 Underdeveloped infrastructure 25 Risks of OBOR projects 26 Stock Profiles 28 China Communications Construction (1800 HK/601800 CH) 28 China Railway Construction (1186 HK/601186 CH) 35 CRRC Corporation (1766 HK/601766 CH) 42 Gamuda 49 Sunway 61 Appendix 69
Note: Prices used as of 21 Jul 2017
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Executive Summary
The bigger picture. The One Belt, One Road (OBOR) initiative is Infrastructure spending a new platform for China to develop its a novel concept, integrating the goals of foreign policies with globalisation strategy. China is developing its own growth economic policies. The programme helps Chinese state-owned model premised on “statecraft”, and OBOR plays a dominant enterprises (SOEs) to go global and, when combined with the role in this agenda. The implications are profound as backing of state credit, also advances foreign policy objectives “centralisation of control” is required under this strategy. by investing in infrastructure along the ancient Silk Road. Through OBOR, China is driving Globalization V2.0. Infrastructure spending along the Silk Road is the new platform. Historically, China has ridden on foreign developments to Investment flow will likely be one-way in the early stages. Thus, strengthen its domestic reform agenda if the deals favour China must score a success as soon as possible to sustain the Beijing. China’s accession to the World Trade Organization novel agenda. (WTO) in early 2000 was a prime example, as evidenced by the sharp rise in foreign reserves from only US$166 billion in 2000 Equities should catch up. It is time for equities to catch up with to US$1,946 billion in 2008. Authorities just need to the big plans. A solid foundation has been laid and Chinese understand the rule-based trade system. The next step is to contractors are ready to take off. The OBOR is a conducive reap economic benefits from it. platform for the Chinese contractors to export their expertise in undertaking mega infrastructure projects at competitive prices Unlike the WTO deal, the OBOR is much more complicated as and quick turnaround. In 2016, China signed US$126 billion it involves facilitating long-term investment in numerous worth of overseas projects with countries along the OBOR, countries with vast cultural and economic differences, beyond 36% higher than in 2015. Chinese contractors are actively any pragmatic political aspirations that Beijing may have. bidding for many infrastructure projects in Asia and their China has had to design a rule-based system to govern OBOR- overwhelming success in Malaysia stands out. 2017 is expected related institutions to safeguard project longevity and to be another exciting year for Chinese contractors, and we operational stability. This is a tremendous task, given China’s estimate the value of overseas projects to grow by 10-15%. lack of experience in managing international institutions of such scale. Our top pick is China Communications Construction Co or CCCC (1800 HK) because this company has the highest Enormous contract opportunity in Asia, much higher than exposure to overseas OBOR-related projects. Its current expected. Based on our analysis, we believe the potential valuation is attractive, given decent mid-teens profit growth. At infrastructure spending is huge and could exceed expectation. present, overseas backlog accounts for some 50% of total The cost of developing infrastructure in Asia runs into the outstanding projects. Also, the company is balancing its billions – infrastructure along the China-Pakistan Economic growth and financial position (given its high net gearing ratio). Corridor (CPEC) is estimated to cost some US$40 billion and This is crucial because the growing number of new contracts that in ASEAN is estimated at US$77 billion. However, this is would translate to higher working capital needs, hence just the initial batch of major infrastructure projects being creating a potential drag on its balance sheet. identified under the OBOR initiative. As history shows, the amount of transport infrastructure investment will rise in the Our No 2 pick is CRCC as it is quickly catching up, with long-term to match with the economic development. Hence overseas new projects surging 25% year-on-year in 2016. It we estimate the total transport infrastructure investment to cost has the best balance sheet (lowest net gearing ratio in the more than US$200 billion over a five-year period, more than sector) and is expected to achieve low double-digit earnings double the current batch of transport infrastructure projects growth from 2016-2018. under development in the ASEAN region. Many of these projects have Chinese participation. China-led Asian Infrastructure Train equipment is another important theme. We like CRRC Investment Bank (AIIB) has approved US$2.8 billion worth of (1766 HK) for its mid- to long-term prospect. Domestic railway OBOR-related projects in Asia (with another US$2 billion in the investments (national and metro) as well as its export potential pipeline) and the Chinese government has pledged more are earnings catalysts for CRRC. The stock has suffered as the financial support for OBOR infrastructure projects. The government prioritised investment in construction projects, anticipated strong funding support from various government thus delaying the train procurement process. We believe train agencies is positive on the project implementation. procurement activity will pick up in 2H17, which will bode well for the company.
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Chinese contractors gaining traction in Khartoum-Port Sudan railway in 2016 and CCCC completed the Mombasa-Nairobi railway in 2017. Currently, Africa still Malaysia under the OBOR initiative offers huge infrastructure investment opportunities and many big projects are under construction or about to start. Rising infrastructure spending in Asia For instance, the Nigerian government has designated CRCC Traditional markets in Africa and the Middle East. Chinese to be responsible for the construction of the Lagos-Calabar contractors have participated in various types of Railway, the Lagos-Kano Railway, and the Abuja Rail Mass infrastructure construction projects in Africa, such as railway Transit, with a total value of over US$20bn. CRCC also won lines in Kenya, Sudan, Nigeria, Angola, and Ethiopia over a US$70bn project from Chad for the construction of the the past ten years. Company A finished building the Chad-Cameroon Railway and Chad-Sudan Railway.
China’s participation in Africa’s transportation sector
Completed projects Completion Year Length (km) Investment (US$m) Contractor Djibouti-Ethiopia Railway Line, Ethopia & Djibouti 2016 753 4,000 CRCC, Company A Mombasa-Nairobi Railway, Kenya 2017 480 3,804 CCCC Khartoum-Port Sudan railway, Sudan 2014 762 1,154 Company A Abuja-Kaduna Railway, Nigeria 2016 187 850 CRCC Benguela Railway, Angola 2015 1,344 1,830 CRCC Addis Ababa Light Rail, Ethopia 2015 32 475 Company A
On-going projects Contract date Length (km) Investment (US$m) Contractor Lagos-Calabar Railway, Nigeria 2014 1,402 11,100 CRCC Lagos-Kano Railway, Nigeria 2006 1,315 8,300 CRCC Chad-Cameroon & Chad-Sudan Railway , Chad 2011 1,364 7,000 CRCC Abuja Rail Mass Transit Phase II, Nigeria 2017 33 1,473 CRCC Source: Business Day (Nigeria), National Railway Administration of PRC
In the Middle East, traditional sectors include energy, which and other amenities. This is huge for Chinese contractors. are mainly conducted under China National Petroleum Certain ASEAN nations expect their infrastructure Corporation (CNPC) and Sinopec Group. In January 2016, investments to stay at high levels over a 5-10 years period. President Xi announced China would invest around US$55bn in transportation, utilities, and other infrastructure projects in the Middle East. Company A started building a Infrastructure spending (2011-2016) high-speed railway connecting Tehran and Mashhad in Iran in 2016. US$bn 30 The Chinese are very active in Asia, especially in ASEAN 25 countries. In these new markets, the Chinese contractors are starting to play an important role and competing with the 20 more established Korean and Japanese players. 15 10 Under the OBOR initiative, the first batch of major contracts 5 being identified (largely transportation related) could lead to subsequent investment opportunity, in similar pattern as the 0 economic development in China. We estimate the total transport related infrastructure investment could exceed Vietnam Thailand Malaysia
US$200bn in ASEAN, a substantial increase from those Indonesia Singapore Philippines identified under the OBOR initiative. 2011 2012 2013 2014 2015 2016
ASEAN infrastructure spending estimates. Infrastructure Source: CEIC, Malaysian government website, Ministry of Finance- investment in most ASEAN countries has yet to catch up Thailand, Singapore Budget 2016, Ministry of Finance-Vietnam with the rest of the economy since after the 1997-98 Asian Financial Crisis. Various studies have estimated that the region’s annual infrastructure needs are in excess of US$110bn a year, including transportation, power, telecom
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Projection of infrastructure investment China’s FDI in ASEAN nations by key industries (2011- 2015) US$bn 450 US$m 3,000 400 2,500 350 2,000 300 1,500 250 1,000 200 500 150 0 100 2011 2012 2013 2014 2015 50 Electricity/Heat 0 Construction Indonesia Vietnam Thailand Philippines Malaysia Transportation/Storage/Post (2017-21F) (2014-23F) (2017-26F) (2017-22F) (2015-20F) Water Conservancy/Environment/Public Facility
Source: CEIC, Malaysian government website, Ministry of Finance- Thailand, Singapore Budget 2016, Ministry of Finance-Vietnam Source: Ministry of Commerce PRC, National Bureau of Statistics PRC, State Administration of Foreign Exchange China’s foreign direct investment in ASEAN has been growing rapidly from 2011 to 2015. In utilities, construction, Chinese contractors are establishing a strong presence in transportation, water conservancy, and the environment, Malaysia. In fact, the Chinese contractors have established a China’s investment topped US$1.7bn in 2015. strong presence in Malaysia, through the solid relationships between the two governments. In November 2016, Malaysia and China signed 14 agreements worth US$33 China’s total FDI in ASEAN nations (2011-2015) billion, and the infrastructure-related ones are shown in the table below. Since then, Chinese companies have also been US$m awarded two important railway projects by the Malaysian 16,000 government – the Gemas-JB double-tracking project (to a consortium of CRCC, Company A, and CCCC) and the East 14,000 Coast Rail Link (ECRL) EPC contract. These two projects are 12,000 worth US$15bn (MYR63.9bn) in total. 10,000
8,000 List of agreements between Malaysia and China 6,000 i) EPCC Agreement between Malay sia Rail Link Sdn Bhd, 4,000 CCCC and China Communicat ions Construction Company 2,000 (M) Sdn Bhd (CCCCM) ii) Memorandum of A greement for Inv estment, Dev elopment 0 and Construction of Malacca Gateway Project (KAJ 2011 2012 2013 2014 2015 Dev elopment and Power China) iii) Heads of Agreement between Bandar Malaysia Sdn Bhd Source: Ministry of Commerce PRC, National Bureau of Statistics PRC, and Greenland Holdings Group Overseas Investment State Administration of Foreign Exchange Company Limited in respect of the Proposed Purchase of
Land and Development thereon in Bandar Malaysia iv ) Heads of Agreement between Selat PD Sdn Bhd and CCCC Dredging (Group) Co Ltd. v ) Memorandum of A greement between KA J Dev elopment Sdn Bhd, Power China, Shenzhen Yantian Port and Rizhao Port for partnership collaboration on Malacca Gateway Port Source: Newspapers
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Chinese contractors are becoming major players overseas. OBOR opportunities for Chinese contractors China has been participating in more foreign engineering The OBOR provides a favourable platform for Chinese and procurement construction (EPC) projects in recent years, companies to expand overseas. Since the initiative was and the OBOR nations are offering more business launched, countries along the OBOR are coming up with opportunities to Chinese construction companies. In 2016, infrastructure investment plans, providing many Chinese contractors signed more than 8,000 new overseas opportunities for Chinese companies. contracts in the countries along OBOR. The total contract value grew 36% y-o-y to US$126bn, accounting for 52% of Global construction market review. In 2016, total new China’s total overseas projects. The turnover from OBOR contract value of global infrastructure was approximately countries reached US$76bn, accounting for 48% of total US$1.05tr, of which US$978bn, or 92.9% of these projects overseas projects. The OBOR’s share of total new contracts are from developing countries. The power and could further increase under the latest OBOR development transportation sectors accounted for 37.1% and 28.7% of plans. new contract value, respectively. The total turnover and the new contract value of China’s overseas projects amounted to approximately US$159.4bn and US$244bn, respectively.
China’s EPC projects along OBOR (2016)
US$bn 36% 300 3.50% 16.20% 9.70% 250 200 150 100 50 0 Turnover of China's New contracts value of Value of signed new Turnover of foreign engineering China's foreign contractsin in OBOR contracting projects in contracting projects engineering countries OBOR countries contracting projects 2015 (LHS) 2016 (LHS) YoY growth
Source: IPSOS Research
Globally, the infrastructure sector’s new contracts grew by approximately 5% in 2016 to US$815bn. The sector is New EPC projects’ growth projections projected to expand 3-4% per annum through 2019. US$bn YoY, % 1,000 6
800 5 4 600 3 400 2 200 1 0 0 2014 2015 2016 2017F 2018F 2019F
Telecommunications infrastructure (LHS) Transportation infrastructure (LHS) Power (electricity) infrastructure (LHS) Total new contract value growth (RHS)
Source: ENR; PwC & Oxford Economics; Ipsos Research and Analysis; DBS Vickers
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Among the three key infrastructure sectors, the power In summary, the total transport related investment in the industry accounted for approximately 44.5% of total new ASEAN region is estimated at more than Rmb200bn over a EPC contracts value. five-year period, much higher than the initial value of potential approximately US$77bn under the OBOR initiative. Major sectors’ share of new EPC projects (2016) This is because the OBOR projects are only the stepping stone to more future investment, especially when the Telecommunications ASEAN economies expand. infrastructure 21%
Power (electricity) infrastructure 45% Transportation infrastructure 34%
Source: ENR; PwC & Oxford Economics; Ipsos Research and Analysis; DBS Vickers
Major transport related infrastructure projects in ASEAN under the OBOR initiative
Batch 1 Location Length Status Estimated Cost Railway (km) (US$m) Rail link from Phnom Penh to Ho Chi Minh City V ietnam/Cambodia 384 Proposed 600 Boten-V ientane Railway Laos 421 Under construction 7,000 Savannakhet-Lao Bao Railway Laos 220 Under construction 4,000 Bangkok-Nong Khai Railway Thailand 873 Expected to start construction in 2017 11,360 Bangkok-Chiang Mai Railway Thailand 715 Proposed 14,000 Kuala Lumpur-Singapore High Speed Rail Malaysia to Singapore 350 Under finalization 15,000 Jakarta-Bandung railway Indonesia 150 Expected to start construction in 2017 5,135 East Coast Rail Line Malaysia 620 Expected to start construction in 2017 13,000 Gemas-Johor Bahru track Malaysia 197 Expected to start construction in 2017 2,000
Port Colombo Port City Sri Lanka Delay ed 1,400 Gwadar Pakistan Under construction 1,000 Kuantan Port Malay sia Under expansion 700 Dawei Port My anmar Initial phase 1,700
Batch 2 Location Industries Estimated Cost (US$m) Estimated inv estment (5-y ear period) ASEAN Roads & expressway s, railway s, metro 230,125 sy stems etc.
Batch 3 Estimated inv estment (5-y ear period) ASEAN Roads & expressway s, railway s, metro 254,968 sy stems etc.
Source: DBS Vickers, News, Master Plan on ASEAN Connectivity 2025
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CCCC (1800 HK) - Largest Chinese player in the OBOR countries. China Communications Construction Company (CCCC) is one of the largest international engineering contractor in China. In 2016, its new contracts overseas amounted to RMB224bn, representing a y-o-y growth of 43%, and these contracts made up about 31% of the company’s total new contracts. As of the end of 2016, its overseas backlog reached US$93bn, representing a y-o-y growth of 91%. Railways, roads and bridges, and ports accounted for 29%, 25%, and 21% of the new overseas contracts, respectively. Most of these projects are located in the OBOR countries; Africa, Southeast Asia, Hong Kong/Macau/Taiwan, and Oceania, accounted for 48%, 18%, 16%, and 11% of total contract value, respectively.
CRCC (1186 HK) - Leading railway contractors to undertake major projects in Malaysia. China Railway Construction Corporation (CRCC) is one of the leading Chinese railway contractors which has made good progress in the overseas markets. CRCC has secured some major railway projects in Malaysia and will continue to focus on the overseas markets to drive growth. The company nabbed Rmb108bn of new overseas contracts in 2016, y-o-y growth of 25%. As of the end of 2016, the overseas backlog for CRCC was RMB419bn, c.17% higher than the previous year.
CMEC (1829 HK) - Overseas power contractor to benefit from OBOR energy demand. China Machinery Engineering Corporation (CMEC) is a leading contractor focusing on EPC projects, especially in the power and energy sector. In 2016, its revenue from international engineering contracts amounted to RMB12bn, accounting for 59% of its total revenue. Revenue from power projects was RMB7.3bn and that from transportation and telecommunications projects was RMB1.3bn. By geographic locations, CMEC generated the bulk of its revenue in Asia, Africa, South America, and Europe, which account for 46.0%, 28.2%, 16.8%, and 8.6% of its total revenue, respectively.
In 2016, the company won some US$3.4bn worth of new projects to boost its backlog to US$8.9bn. It has also negotiated US$15.2bn worth of new projects, for which the power, and transportation & telecommunication sectors account for approximately US$6.9bn and US$2.6bn, respectively.
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Stock pick Top pick - go for companies with the highest overseas exposure. To ride on the OBOR initiative, CCCC provides the A solid foundation has been laid for the Chinese contractors. best exposure. The company is still exploring investment The OBOR initiative is starting to take shape after several opportunities abroad to increase overseas projects’ years of policy formulation and setting up of a contribution to the group. Given the huge outstanding comprehensive financing vehicle. Going forward, countries contracts abroad, revenue from foreign markets has along the OBOR are expected to use this emerging exceeded 20% of total revenue in 2016. Based on total opportunity to develop their economies, through outstanding contracts, the overseas portion accounts for collaborating with China and other neighbouring countries, about 50% of the company’s total projects; we can expect including building their basic infrastructure. Besides, with overseas projects’ contribution to rise further. AIIB working with other global financial institutions, it should have greater access to new capital and spread the Critical factors that drive sector valuation. The following investment risks. However, as we have highlighted under charts highlight the major events and factors that have the Risks section, the process is not easy and could be time- affected the valuation of the infrastructure sector. Broadly, consuming as it involves many geopolitical territories. Chinese government policy (railway long-term development plans, railway fixed asset investment budgets etc) , market Time to have a relook at Chinese contractors with rising measures, interest rate and construction cost pressure are overseas exposure. In 2Q-3Q 2015, the Chinese contractor critical factors that have impact on the sector valuation. sector underwent a roller-coaster ride, largely on the OBOR theme and a frenzy market. We believe the sector is ready The sector’s valuation is not expensive, supported by an to ride higher, because the OBOR initiative is becoming a improving growth outlook. The sector PE (FY17F) is 9x reality and Chinese contractors are actively bidding for compared to a high of 15x during the 2Q-3Q15 stock overseas projects. For instance, overseas new infrastructure market rally. Besides, the OBOR initiative has been projects accounted for a sizeable share of CCCC’s total new progressing well so far, with many new projects infrastructure contracts in 2016, at over30% in 2016. The implemented in the OBOR countries, a far cry from the early CAGR of CCCC’s overseas new infrastructure construction conceptual stage of the initiative during the 2015 rally. projects was 40% from 2014-2016. Therefore, it is time to have a relook at the infrastructure stocks with rising overseas exposure. The same was also true for CRCC. In 2016, newly-signed overseas contracts accounted for approximately 9% of total new contract value (US$812.87bn) and the overseas business 21% of total outstanding contract value.
Chinese contractors’ overseas performance
Overseas revenue to total 2015 2016 rev enue (%) Company A 5.0% 4.4% CRCC (1186 HK) 4.6% 5.2% CCCC (1800 HK) 18.6% 20.2% CMEC(1829 HK) 58.1% 58.9% Overseas backlog to total backlog (%) Company A 5.9% 8.4% CRCC (1186 HK) 19.8% 21.2% CCCC (1800 HK) 36.3% 58.5% CMEC(1829 HK) 100.0% 100.0% Overseas new contracts to total new contracts (%) Company A 7.2% 8.3% CRCC (1186 HK) 9.1% 8.8% CCCC (1800 HK) 24.0% 30.6% CMEC(1829 HK) 100.0% 100.0% Source: Companies; DBS Vickers
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Infrastructure index vs the Hang Seng Index
Rebased 1 Jan 08 = 100 180 10 180 160 160
140 12 17 140 15 16 120 9 11 120 100 18 100 7 13 2 6 8 80 80 1 4 5 14 60 3 60 40 40 20 20 0 0 -08 -09 -11 -12 -14 -15 -17 -09 -10 -11 -12 -13 -14 -15 -16 y y y y y y y p p p p p p p p Jan-09 Jan-08 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Se Se Se Sep-08 Se Se Se Se Se Ma Ma May-10 Ma Ma May-13 Ma Ma May-16 Ma Infrastructure sector index HSI
Point Date Timeline 1 5-Nov-08 The Rmb4 trillion budget was rolled out to stimulate the economy and will expire end 2010 2 25-Oct-10 Significant loss in Mecca Light Rail Project in Saudi Arabia by CRCC 3 31-Dec-10 The Stimulus Budget came to the end 4 25-Jul-11 Wenzhou high speed railway accident 5 2-May-12 The railway 12th FYP was announced 6 10-Jun-13 Cash crunch in the Chinese financial system 7 17-Nov-14 Shanghai-HK stock connect goes live 8 27-Mar-15 CSRC allows China mutual funds to invest in HK stocks through SH-HK stock connect 9 30-Mar-15 "V ision And Actions On Jointly Building Silk Road Economic Belt And 21st-Century Maritime Silk Road" plan was put forward 10 17-Apr-15 China policy makers cautioned on stock market frenzy; 7 measures to cool sentiment 11 6-Jul-15 Start of market rescue operations 12 11-Aug-15 Largest Rmb devaluation since US$ peg removal, Rmb reference rate down 1.9% 13 25-Aug-15 PBOC cuts interest rate by 25bps and RRR by 50bps 14 19-Jan-16 Proposed 13th FYP on railway development 15 2-May-16 China extends V AT reform to the remaining sectors of finance, life services, property and construction 16 29-Dec-16 Rmb3.5 trillion investment for railway development ender the 13th FYP 17 15-May-17 Belt and Road Forum for International Cooperation was held in Beijing, China 18 21-Jun-17 MSCI to include China A shares into the global benchmark Source: Thomson Reuters, DBS Vickers
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Infrastructure index vs railway fixed asset investment (FAI)
Rebased 1 Jan 08 = 100 RMB bn 180 250 160 140 200 120 150 100 80 100 60
40 50 20 0 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Infrastructure sector index (LHS) FAI in railway (RHS)
The infrastructure sector valuation is highly driven by the infrastructure investments, such as the Rmb4 trillion stimulus budget (2008-2010), the 12th (2010-2015) and 13th FYP (2016-2020) on railway development, and any special investment policy. From the railway monthly FAI, the valuation will move up towards the end of each fiscal year because the investment momentum tends to be high in order to meet the full year investment budget. The valuation in 2Q17 fell because of low FAI.
Source: CEIC, Thomson Reuters
Infrastructure index vs construction material PPI
Rebased 1 Jan 08 = 100 % 180 12 160 10 140 8 120 6 100 4 80 2 60 0 40 (2) 20 (4) 0 (6) Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Infrastructure sector index (LHS) Construction material PPI (RHS)
The construction material PPI is an indicator to the future profit margin trends of construction companies. As the construction material price pressure rises, the sector valuation moves downward and vice versa.
Source: CEIC, Thomson Reuters
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Infrastructure index vs interest rate (3M Shibor)
Rebased 1 Jan 08 = 100 % 180 7
160 6 140 5 120 100 4 80 3 60 2 40 20 1 0 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Infrastructure sector index (LHS) 3M SHIBOR (RHS)
Interest rate movement has a big impact on earnings especially for highly geared companies. Most of the construction companies rely on borrowings, bond issuance or perpetual securities to finance their business growth. And interest expense is a big component of these companies’ earnings.
Source: CEIC, Thomson Reuters
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One Belt, One Road (OBOR) Economic industrial parks will be used as cooperation platforms. All in, there are six major blocks under the Silk Road Economic Belt. So far, the China-Pakistan Economic Inception of OBOR Corridor (CPEC) has progressed faster than the other What is the OBOR all about? The Belt and Road Initiative is a regions, as several large-scale infrastructure projects have development strategy proposed by Chinese President Xi been identified and currently undergoing an evaluation Jinping in 2013. In March 2015, “Vision and Actions on process. Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road” was issued. The One Belt, One Road The 21st Century Maritime Silk Road has two routes. One is (OBOR) initiative focuses on connectivity and cooperation from China's coast to Europe through the South China Sea between China and over 60 countries along the Belt and and the Indian Ocean, and the other is from China's coast Road. The economic landscape is expected to transform, to the South Pacific through the South China Sea. The with most countries along the routes eager for fresh growth Maritime Silk Road will focus on building transport routes to with the aid of infrastructure development. connect major sea ports along the Belt and Road.
The OBOR comprises two very important aspects – the land- The success of the OBOR initiative depends on the based "Silk Road Economic Belt" (SREB) and oceangoing cooperation between countries along the Belt and Road. It "Maritime Silk Road" (MSR). has five major goals: Policy coordination, facilities connectivity, free trade, financial integration, and people-to- The Silk Road Economic Belt is paved through China, people bonds. Among these, facilities connectivity – which Central Asia, Russia, and Europe (the Baltics). It will link focuses mainly on transportation and energy infrastructure – China with the Persian Gulf and the Mediterranean Sea is the initiative’s top priority. through Central Asia and West Asia, and also connect China with Southeast Asia, South Asia, and the Indian Ocean. The A lot of countries along the OBOR lack the means to finance Belt will focus on building a new Eurasian Land Bridge and major infrastructure projects and in response, China rolled developing China-Mongolia-Russia, China-Central Asia-West out the Silk Road Fund in November 2014 and founded the Asia, and China-Indochina Peninsula economic corridors. Asian Infrastructure Investment Bank (AIIB) in December 2015.
Milestones of OBOR
Sep-13 President Xi Jinping proposed the Silk Road Economic Belt (SREB) Initiative during a speech at Nazarbayev University, Kazakhstan Oct-13 President Xi proposed the Maritime Silk Road (MSR) Initiativ e during a parliament speech in Indonesia Dec-13 President Xi tabled the SREB initiativ e during the Central Economic Working Conference F eb-14 Agreement was reached on the connection of Russian's Eurasian Railway and OBOR Mar-14 2014 Government report mentioned accelerating the implementation of OBOR Nov-14 President Xi announced that China would set up the Silk Road Fund with US$40bn capital during the APEC summit meeting Feb-15 China set up a working committee to focus on the implementation of OBOR Mar-15 "V ision And Actions On J ointly Building Silk Road Economic Belt And 21st-Century Maritime Silk Road?plan was put forward Dec-15 Asian Infrastructure Investment Bank (AIIB) was founded Aug-16 President Xi attended the Chinese working committee forum on OBOR and emphasised the importance of the initiativ e May-17 Leaders from 28 countries attended the Belt and Road Forum for International Cooperation in Beijing
Source: OBOR official website
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OBOR master plan
Source: Xinhua (Silk Road routes), US Department of Defence, Gazprom, Transneft (pipelines), United Nations (rail entry points)
Focus on trade cooperation. As of end-2016, the Chinese Important implications from latest OBOR conference government has signed 46 cooperation agreements with 39 The latest OBOR conference in May 2017 in Beijing shows countries and international organisations, such as the the Chinese government’s commitment to move some of outline of the China-Mongolia-Russia Economic Corridor. the projects forward. There are talks to establish free trade agreements (FTA) with OBOR countries (e.g. China-Gulf Cooperation council FTA, Greater financial commitment. As more details on the OBOR China-Israel FTA, China-Sri Lanka FTA, Phase II of China- framework is being tabled for discussions, it has drawn Pakistan FTA, etc.) and some negotiations have concluded attention from other countries and international (e.g. China-Georgia FTA, China-ASEAN FTA). Meanwhile, a organisations. So far, more than 100 countries have feasibility study of China-Nepal FTA, China-Bangladesh FTA, expressed their interests to participate in the OBOR and China-Moldova FTA is also underway. China is looking development. Global financial institutions, such as Asia to increase trade inflows to US$2 trillion from the OBOR Development Bank (ADB), AIIB, European Bank for countries by 2020. Reconstruction and Development (EBRD), European Investment Bank (EIB), BRICS Development Bank, and World OBOR is a win-win approach for China and OBOR countries. Bank, have signed memorandums of understanding (MOUs) The cooperation between China and Pakistan is a good with China’s Ministry of Finance, agreeing to future example. In the past decade, Pakistan suffered serious cooperation under the OBOR initiative. electricity shortages, which caused a drag on the economy. According to a local report in 2016, the impact of electricity shortage on the total national income is around 34%, which is even higher than some African countries. With a large amount of investments committed into Pakistan’s energy sector, the electricity shortage situation is expected to improve from 2018.
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projects are around US$38 billion and they are at various Successful implementation of China-Pakistan Economic stages of implementation. Corridor (CPEC) The OBOR initiative has six major blocks along the Silk Road In the energy infrastructure sector, a total of 19 projects Economic Belt. Among which, the CPEC has made the most have been shortlisted, including 17 priority projects and 2 progress. actively promoted projects. These energy projects are estimated to cost a total of US$25 billion, with priority China-Pakistan Economic Corridor (CPEC) is a successful projects and actively promoted projects costing US$21 example of regional facilities connectivity along the Belt and billion and US$4 billion, respectively. Upon the completion Road. It aims to integrate transport and IT systems between of these projects, total electricity generation capacity would China and Pakistan, including roads and rails, port, aviation, exceed 13.5GW. and data communication channels, as well as energy cooperation, and industrial parks. As of May 2017, there are In the transport infrastructure sector, five road and three 62 CPEC projects in progress and all of them are under the railway projects are underway. These projects are estimated Chinese Finance Projects Scheme (with China funding part to cost more than US$12 billion, of which US$8 billion will of the total investments). The estimated cost of these be used to upgrade the existing railway line (ML-1 section).
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CPEC railway network
Havelian-Kashi New Railway, 1059Km long
Reconstruction of Existing Line ML2 short and long term: water hazard Construction of new line from Peshawar to Havelian Dry Port: treatment, overhaul of Torkham US$40 million track, signal upgrading, investment extension of arrival- departure track and electrification
Restruction of ML1 New Railway Line from Existing Railway Quetta (Bostan) to Kotla including locomotive Jam on ML-2 via Zhob & purchase, overhaul of D.I.Khan (560Km) track, signal upgrading, electrification, construction of double line, communication Reconstruction/Upgradation of Quetta-Taftan existing upgrading and speeding railway, 633 km long up extending of arrival- departure lines and construction of Karachi- Kotri Double Freight Line
Gwadar to Jacobabad and Quetta(Mastung) via Besima 1600km long Karachi- New Railway line, 1328 km Peshawar PDL(High long, US$4.5 billion speed Railway Line)
Alternative Scheme of Gwadar Port Passage
Source: CPEC
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CPEC highways network China-Pakistan Economic Corridor – Total investments into infrastructure projects
Batch 1 US$m Road & Railway 12,363 Energy 24,983 Gwader Port 793 Total 38,139
Batch 2 US$m Estimated transportation related FAI (1st-5th year) 27,891
Batch 3 Estimated transportation related FAI (6th-10th year) 32,089
Note: Please refer appendix for details of contracts
Source: CPEC, DBS Vickers
The CPEC will be the bridge that links the economic Source: CPEC expansion in China-Central Asia with China-South Asia and Gwadar is a port city on the southwestern coast of Pakistan China believes it will help restart the stalled economies in and envisaged to be a crucial link between northern this region. Pakistan and western China via the deep water seaport. Numerous infrastructure projects are in the pipeline, with Iran-Pakistan Pipeline (Peace pipeline project) the Chinese government funding around US$1 billion in the form of grants or concessional loans through CPEC. In June Iran-Pakistan pipeline is a joint gas project between the 2016, the China Overseas Port Holding Company also governments of Pakistan and Iran. The 1,800 kilometre- began the construction of a US$2 billion Special Economic pipeline project was re-launched in 2010 shortly after Iran Zone in Gwadar. completed the construction of its pipeline from Asaluyeh to the Iran-Pakistan border (around 1,000 km at a cost of US$2 billion). However, progress in Pakistan has fallen behind schedule. The proposed pipeline on Pakistan’s side comprises the Gwadar to Nawabshah section (700km at US$2 billion cost, with 85% funding from China) and a smaller section of 80km from the Iran border to Gwadar city (to be funded by the Pakistani government). The pipeline could also bring natural gas from Iran through Pakistan and India into China, but this section has not been decided yet. The initial gas throughput from Iran to Pakistan is 8.7 billion cubic metres per year according to the contracts, and may increase to 40 billion cubic metres.
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Iran-Pakistan gas pipeline project
Source: The Express Tribune
Pan-Asia Railway Network Pan-Asia Railway Network Starting from Kunming. The concept of Pan-Asia Railway Network originated in the 20th century and was revived in 2006. The proposed network consists of three main routes: Eastern route, central route, and western route, all starting from Kunming, China.
Pan Asia Railway Network: Infrastructure investment summary
Batch 1 US$m Eastern Route 600 Central Route 33,360 Western Route 2,000 Spur lines 4,000 Total 39,960
Batch 2 US$m Estimated transportation related FAI (1st-5th y ear) 53,175
Batch 3 th th Estimated transportation related FAI (6 -10 year) 74,156 Note: Please refer appendix for details of contracts
Source: Baidu, DBS Vickers
Source: Wikimedia Commons
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Eastern link to Vietnam. The eastern route starts from Malaysia HSR project has made the most progress within Kunming, China via Vietnam and Cambodia to connect with the Pan-Asia Railway Network. In Malaysia, Gemas-to-Johor the railway system in Bangkok, Thailand. The railway link Bahru double tracking is the last link for the whole double from Vietnam to Laos was also included. All the railway tracking project, which is 197km long. This project, sections in China and most in Vietnam are completed. The estimated to cost MYR8.9 billion, was awarded to the missing link from Phnom Penh to Ho Chi Minh City is being consortium of China Railway Construction Corporation reconsidered. The total estimated cost for this project is (CRCC), Company A, and China Communications around US$600 million, mainly funded by the Chinese Construction Co (CCCC) in October 2016. Additionally, government. In addition, the Savannakhet–Lao Bao Railway another 620km-long East Coast Rail Link was awarded to is being re-built in Laos at an estimated cost of US$4 billion. CCCC with a contract value of US$13 billion and is The North-South Express Railway of Vietnam, which planned expected to start construction in 2018, with financial to use Japan’s Shinkansen bullet train technology, was support from the Export-Import Bank of China (China EXIM cancelled due to the high construction cost. We believe this Bank). The high-speed railway from Kuala Lumpur to project could be revived as Chinese high-speed rail (HSR) Singapore, the last section of Kunming to Singapore HSR, is technology is cheaper, making the construction cost much in the bidding process and the estimated cost is around lower. US$15 billion. In our view, Company A may stand out in the bidding as it has announced it would invest US$2 billion to Central link to Singapore. The central route is a high-speed build a regional centre in Bandar, Malaysia. railway line starting from Kunming, China via Laos, Thailand, and Malaysia to Singapore. In China, the section from Kunming to Yuxi is completed while the Yuxi-Mohan East Coast Railway Link Railway is still under construction. The total investment of Yuxi-Mohan Railway is RMB52 billion. In Laos, China has pledged for the construction of the railway from Boten to Vientiane. Construction commenced in end 2015 and is expected to finish in 2020. In Thailand, the existing railway system runs from Bangkok to Singapore. In 2016, Japan won the HSR project from Bangkok to Chiang Mai, with construction expected to begin in 2018. Two more high- speed railway lines have been proposed as part of Kunming- Singapore HSR. The Bangkok-Nong Khai Railway’s construction, done in partnership with China, began in 2016 while Bangkok-Hat Yai / Padang Besar Railway is still under planning and may be connected with Kuala Lumpur, Malaysia. From here, the HSR line will link to Singapore eventually.
Western link to Bangkok. The western route starts from Kunming, China via Myanmar to Bangkok, Thailand. The last uncompleted section in China is Dali-Ruili Railway, which has started construction and is estimated to open in 2022. However, there is still no plan for the railway from Source: ECRL Lashio, Myanmar to Ruili, China. For the existing railway lines from Myitkyina to Mandalay and Mandalay to Yangon, upgrading plans are being assessed or implemented. Authorities are also considering rebuilding the railway from Yangon, Myanmar to the Thai border with international assistance. Unfortunately, the Kunming–Yangon High-Speed Railway (Myanmar section) was cancelled in 2014, due to local political turmoil.
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Indonesia HSR coming along. The Indonesian and Chinese Electrified double tracking in Malaysia – part of Pan-Asia governments have signed a high-speed railway contract in Railway Network 2015 worth US$5.1 billion. Under the plan, the 150km-long railway line will run from Jakarta to Bandung. This project is scheduled to complete in 2019 and China will provide 40% of the total investment. The engineering, procurement, and construction (EPC) project was awarded in April 2017 to a Chinese consortium led by China Railway Corporation, and China Development Bank will provide a US$4.5 billion loan to kick-start the project.
China-Indochina Peninsula Economic Corridor This corridor connects China with countries on the Indochina Peninsula and aims to strengthen the cooperation between China and the Association of Southeast Asian Nations (ASEAN). Apart from railway construction, China promoted the cooperating on land infrastructure between China and Vietnam, and started the early work of phase-2 renovation of the Lancang-Mekong River channel. The Mohan/Boten Economic Cooperation Zone was also established on the border between China and Laos. Construction of a special cargo channel commenced in 2016, with a total investment of Rmb50 million. This would help China and Laos to explore new models for the integrated development of the border economy.
Source: Internet, DBS Vickers
China’s participation in Malaysia’s port development will further enhance its sea route connectivity. The Kuantan port, a multipurpose port facing the South China Sea in Malaysia, is currently expanding its New Deep Water Terminal with the participation of a Chinese investor, Guangxi Beibu Gulf International Group. The expansion project started in 2015 and aimed to double the existing capacity to 52 million freight weight tonnes (FWT). A Malaysia-China Kuantan Industrial Park (MCKIP) has also been proposed, which will be jointly developed by Malaysia and China. MCKIP has attracted investments totalling MYR13.4 billion and industries spanning energy-saving, environment-friendly technologies to high-end equipment manufacturing to the manufacture of advanced materials. A subsidiary of Guangxi Beibu Gulf Iron and Steel Co Ltd has taken 710 acres out of 1,200 acres in phase 1 of the MCKIP development. The subsidiary will produce high carbon steel and H-shaped steel, and export via the Kuantan port.
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Benefits of OBOR Import-export trade flows between China and ASEAN
OBOR to drive trade growth US$ mn To expand trade frontiers. One of the key objectives of the 300,000 OBOR initiative is to drive trades. This is crucial as China 250,000 plans to import US$2 trillion worth of products from the OBOR countries over the next five years, up from US$1.6 200,000 trillion in 2016. This means China has to expand its trading 150,000 volume with more countries and in order to achieve this target, its trading partners need to grow their economies. 100,000 50,000 For instance, the Trans-Eurasia railway has shortened the shipment of goods to 16 days from Yiwu, China to London. 0 The economic fundamental of this service is solid, allowing the Chinese manufacturers to get their products (including 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Exports from China Imports to China high-value products) to Europe in less than half the time (by sea previously). Source: CEIC China’s total trade has been slipping since 2015. China’s total exports and imports value has declined since 2015, due The potential exporting of high-end transportation mainly to the uncertainty in the global markets and weak equipment domestic demand. Currency depreciation also contributed Export-oriented. It may take decades to reap the financial to weaker imports. rewards of OBOR. If successful, this programme will export Chinese-made goods (alongside industrial commodities, which are struggling with overcapacity), promote the use of China’s imports and exports the RMB in settlements, and propagate Chinese engineering standards. This is a model that involves a long-term US$ mn 2,500,000 commitment to exporting capital (credit), labour, and Chinese standards to the rest of the world, assuming 2,000,000 participants are willing to accept them.
1,500,000 China is interested to export HSR trains, as it has the largest 1,000,000 HSR network in the world (approximately 21,740km at end- 2016) and is planning to build another 19,000km by 2025. 500,000 In order to achieve the goal, China merged its two rolling stock companies to form the largest train manufacturer in 0 the world. This gives the Chinese train-maker scale and a cost advantage when competing in the international market. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 This export drive involves a long-term commitment to Exports from China Imports to China exporting capital, labour, and know-how.
Source: CEIC Reform of major industries (and SOEs) But trade between China and ASEAN counties remains a Reforms of major industries (and SOEs) to ride on the OBOR bright spot. ASEAN’s share of China total exports and initiative. At present, the OBOR initiative is being driven by a imports was 12.3% in 2016, up from 9.8% in 2010. In strong political impetus. Indeed, the programme has 2016, total trades with these countries amounted to hastened reforms of key state-owned enterprises (SOEs) by US$454 billion, among which exports and imports merging them to form industrial mammoths. More than accounted for US$258 billion and US$196 billion, US$1 trillion in state-directed mergers have taken place respectively. Imports from these countries rebounded in since 2014 in OBOR-related sectors such as railway, metals, 2016 after declining 9.6% in 2015. We believe a closer mining, and shipping. The next target is the energy-related trade relationship, especially for the import of goods and sector, including nuclear energy. services from these countries, could potentially generate infrastructure investment opportunities for Chinese Meanwhile, China is tightening its grip on these newly companies. merged SOEs by appointing Communist Party committee members to the board of directors. They are encouraged to consult the committee before making major decisions. Many
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SOEs are also merging the roles of company chairman and party secretary. These moves reflect consolidation of political control over core industries, a significant departure from past emphasis of separating political control and enterprise management. After all, investing in infrastructure in some poor countries along the Silk Road might not make economic sense, proof that China’s foreign policies are beginning to influence domestic economic reforms. The implications are profound.
Globalisation strategy
Infrastructure spending a new connectivity platform. Through OBOR, China is further intensifying its globalisation goals, with infrastructure spending along the Silk Road the new connectivity platform. China has been investing in many infrastructure projects in the developing nations (Africa, the Middle East, and Asia) as part of its globalisation drive and the OBOR will only accelerate this process. It will likely be a one-way investment flow in the early stage. Thus, China must demonstrate a successful example as soon as possible to sustain the novel agenda.
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Project funding avenues are widening As an infrastructure investment bank, it offers sovereign and non-sovereign financing for sound and sustainable projects in energy and power, transportation and The Asian Infrastructure Investment Bank (AIIB) telecommunications, rural infrastructure and agriculture China-led AIIB approved US$2.8bn projects. AIIB is a new development, water supply and sanitation, environmental multilateral financial institution founded in January 2016, protection, urban development, and logistics. To date, there aiming to bring countries together and support are 17 approved projects and 11 proposed projects. Total infrastructure projects across Asia. The bank has 80 project value for approved projects is US$16bn, with member-states as of end June 2017. The registered capital US$2.8bn financed by the AIIB, while that for proposed of the bank is US$100bn; China is the largest contributor, projects is US$10bn; AIIB will contribute US$2bn. accounting for around 30% of the initial capital.
AIIB-led infrastructure projects
Approved Projects AIIB's share Total project value US$ m US$ m India: Gujarat Rural Roads (MMGSY) Project 329 632 Tajikistan: Nurek Hydropower Rehabilitation Project, Phase I 60 350 India: India Infrastructure Fund 150 750 Georgia: Batumi Bypass Road Project 114 315 India: Andhra Pradesh 24x7 ?Power For All To be co-financed with the World Bank (WB) 160 571 Bangladesh: Natural Gas Infrastructure and Efficiency Improvement Project 60 453 Indonesia: Dam Operational Improvement and Safety Project Phase II 125 300 Indonesia: Regional Infrastructure Development Fund Project 100 406 Azerbaijan: Trans Anatolian Natural Gas Pipeline Project (TANAP) to be co-financed with the World 600 8,600 Bank (WB) Oman: Duqm Port Commercial Terminal and Operational Zone Development Project 265 353 Oman: Railway Sy stem Preparation Project 36 60 My anmar: My ingy an Power Plant Project 20 n.a. Pakistan: Tarbela 5 Hydropower Extension Project 300 824 Indonesia: National Slum Upgrading Project 217 1,743 Pakistan: National Motorway M-4 Project 100 273 Bangladesh: Distribution System Upgrade and Expansion Project 165 262 Tajikistan: Dushanbe-Uzbekistan Border Road Improvement Project 28 106
Total 2,828 15,998
AIIB's share Total project value Proposed Projects US$ m US$ m Georgia: 280 MW Nenskra Hydropower Plant 87 1,035 India: Amarav ati Sustainable Capital City Dev elopment Project 200 715 Asia: IFC Emerging Asia Fund 150 640 India: National Investment and Infrastructure Fund 200 2,100 India: Bangalore Metro Rail Project ?Line R6 338 1,783 Sri Lanka: Mahaweli Water Security Investment Program - Tranche 2 Project 155 400 India: Madhya Pradesh Rural Connectivity Project 141 502 Philippines: Metro Manila Flood Management Project 150 500 India: Mumbai Metro Line 4 Project 500 2,224 India: Transmission System Strengthening Project 100 304 Kazakhstan: 40 MW Gulshat PV Solar Power Plant Project 16 69
Total 2,037 10,272 Source: AIIB
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Silk Road Fund (SRF) Other Financing Vehicles Raised capital to fund more projects. The Silk Road Fund Chinese policy banks. China’s banks and financial (SRF) is a development and investment fund established in institutions have been actively participating in OBOR projects Dec 2014 by the Chinese government. The total capital of since the initiative was proposed. To date, the China this fund was initially set at US$40bn. The first instalment of Development Bank (CDB) has provided financing to more US$10bn was contributed by the State Administration of than 100 projects in the OBOR countries worth over Foreign Exchange (US$6.5bn), China Investment US$40bn, of which around US$30bn was issued in loans. Corporation (US$1.5bn), Export-Import Bank of China The Export-Import Bank of China (China EXIM Bank) has (US$1.5bn), and China Development Bank (US$0.5bn). In also signed 1,100 deals regarding projects in the OBOR May 2017, President Xi announced that China would countries worth a total value of US$100bn, including increase the SRF’s capital by an additional RMB100bn to US$80bn in loans. China Export & Credit Insurance support OBOR’s development during The Leaders Corporation has insured more than US$320 bn for the Roundtable of the Belt and Road Forum for International investment projects in the OBOR countries. Cooperation. In May 2017, additional special lending schemes were The fund is dedicated to supporting infrastructure, resources proposed by both China Development Bank and The Export- and energy development, industrial capacity cooperation as Import Bank of China. CDB’s special lending scheme, worth well as financial cooperation in countries and regions along RMB250bn, will be used to support infrastructure the OBOR. Up to the first quarter of 2017, 15 projects were construction, capacity-building, and financial cooperation signed by the SRF totalling investment of UD$6bn. These along the OBOR countries. Loans under this scheme are projects cover the countries along the OBOR, including expected to be implemented in three years. China EXMI Russia, Mongolia, Central Asia, South Asia, Southeast Asia, Bank will raise RMB130bn to mainly invest in the West Asia, North Africa, and Europe, etc. In addition, the construction of infrastructure and industrial parks, SRF allocated US$2bn to kick-start the China-Kazakhstan international capacity-building, as well as cooperation in Production Capacity Cooperation Fund, aiming to step up equipment manufacturing, trade, and energy resources, etc. bilateral cooperation in industrial capacity, agricultural products, energy, and regional connectivity between the Insurance companies. At end May 2017, the Chinese two countries. insurance companies have Rmb14.2 trillion of assets under management, of which about Rmb2.3 trillion is bank deposits. To further support OBOR initiative, China Insurance Regulatory Commission (CIRC) encourages the Chinese insurance companies to consider bond investments related to the OBOR projects. Higher participation rate from the Chinese insurance companies will reduce the potential funding pressure as more infrastructure projects are being rolled out.
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Drivers of infrastructure needs Lack of domestic capital Many developing countries along the OBOR face urgent Urbanisation drive priorities on their fiscal budgeting. Long-term infrastructure The biggest driving force of infrastructure investment is investments always require a large amount of capital, but urban development – rising urbanisation rate in countries the short-term return is low. This has made the along the OBOR. Many developing nations in Asia and governments prioritise healthcare and education. Despite Africa are overcrowded – with young people migrating to their rapid growth, these countries have limited resources in the cities looking for a better livelihood – but infrastructure their domestic capital markets for infrastructure projects. is grossly underdeveloped. These countries have at least 10- However, as China implements and promotes the OBOR 20% upside in the urbanisation rate, which will provide plan, financial support from AIIB, SRF, and other huge infrastructure demand for a very one period of time. government funding agencies should address these funding problems.
Urbanisation rate Underdeveloped infrastructure % Many developing nations lack proper basic infrastructure 60 such as roads, utilities, water, hospitals, schools, and 50 housing. Political uncertainty is the mean reason behind this. 40 Due to the shortfall in infrastructure investment, economic 30 growth has been depressed and the people deprived of their essential needs. 20 10 The above factors clearly highlight the extent of the 0 infrastructure investment gap. According to a McKinsey report, the world spent about US$2.5tr on various economic India Egypt China infrastructure projects in 2013. Going forward, the need for Kenya Kyrgyz Nigeria Lao PDR Pakistan Vietnam Thailand Indonesia
Myanmar infrastructure investment in emerging economies will be Philippines Uzbekistan Kazakhstan enormous. The World Bank estimates that developing Turkmenistan 1960 2015 countries will need an additional US$1-$1.5tr of annual investments through 2020 to beef up their basic Source: World Bank infrastructure development. China, through the OBOR initiative, aims to bridge this infrastructure investment gap. Market liberalisation and foreign trade development Many developing nations are opening up to foreign investments, in order to alleviate their poverty crises. While some of these economies are slowly allowing foreign investors access, some are just emerging from conflicts and attempting to get their economies on track. Many of these countries have trade relations with China.
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Risks of OBOR projects Foreign-exchange risk. Contractors may spend and earn foreign currencies. When their domestic currency Operational risk. OBOR projects are massive undertakings appreciates, the value of assets denominated in foreign involving substantial investment, and long periods of currencies will depreciate and they will incur a FX loss. construction and operation. They are also often s in harsh Fluctuations in exchange rates could also adversely affect and inhospitable environments, making these projects the sales on contracts denominated in foreign currencies. exposed to operational risks. Most OBOR projects, especially during the construction phase, may face natural problems Commodity price risk. Significant fluctuations in the market like landslides, debris flow, and floods, just some of the prices of commodities may occur. Production and operating inherent safety risks. There could also be risks resulting from costs of OBOR projects would increase when commodity the management of foreign labour because of cultural prices go up, leading to a lower return on these projects. differences. Project cancellations. There have been instances of Policy risk within borders. Another unprecedented challenge cancellations of infrastructure projects, after the contract is foreign diplomacy. The consequential success of OBOR has been signed by both governments following a lengthy depends on the leverage of “soft” power, on top of negotiation. Examples are the 845-km line project in economic largess. It is obvious that excellent diplomatic Thailand, a high-speed railway in Jakarta, Indonesia. relationships would help advance the OBOR agenda much Low return on investment. Some projects may not provide faster, as evidenced by the China-Pakistan Economic attractive returns to entice private investors. Corridor and various projects in Malaysia.
Within the individual countries along the OBOR – especially The challenges are immense for obvious reasons. But the in Africa, Southeast Asia, and the Middle East – political and courage and novelty behind the OBOR initiative are equally economic conditions are usually uncertain due to various tremendous. The political aspiration is there. The factors. If the political and economic conditions of these participants are already here. The political impetus is countries or regions change significantly, projects would be strengthening. exposed to risks and huge losses could occur. In addition, changes in local polices, e.g. in taxation, interest rates, those governing the construction industry, could have an adverse impact on OBOR projects.
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STOCK PROFILES
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China / Hong Kong Company Guide
China Communications Construction Version 5 | Bloomberg: 1800 HK EQUITY | 601800 CH Equity | Reuters: 1800.HK | 601800.SS Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 Jul 2017 H: BUY Largest OBOR beneficiary Last Traded Price (H) ( 21 Jul 2017):HK$10.88 (HSI : 26,706) Price Target 12-mth (H): HK$12.90 (19% upside) Winning overseas projects faster than expected; BUY. The Company's current valuation has yet to factor in its strong earnings growth and A: HOLD new contract potential from the OBOR countries. China Last Traded Price (A) ( 21 Jul 2017):RMB17.31 (CSI300 Index : 3,729) Communications Construction Corp (CCCC) secured c.Rmb60bn worth Price Target 12-mth (A): RMB18.10 (5% upside) Potential Catalyst: Strong contracts from One Belt, One Road (OBOR) nations of overseas projects in 1H17, accounting for over 25% of its total new Where we differ: More bullish on the potential of OBOR contracts. This further enhances the outlook for its overseas business, Analyst as the company is one of the major players in the One Belt, One Road Rachel MIU +852 2863 8843 [email protected] (OBOR) project. So far, CCCC’s success in the ASEAN region has been What’s New obvious, especially after winning two major railway projects in Malaysia worth approximately US$13.5bn. We expect the new contracts to Strong surge in overseas projects; future contracts exceed expectations as more countries join the OBOR bandwagon. may exceed expectations as more countries join the
OBOR initiative Robust earnings outlook and well-positioned to ride on the OBOR Overseas projects generate higher GP margins Earnings growth one of the highest in the industry; initiative. Generally, overseas projects generate better GP margins riding on OBOR initiative (c.2ppts higher), thus enhance future earnings outlook. Of the total Attractive valuation; BUY with HK$12.90 TP backlog of Rmb1.2trn, overseas projects accounts for over 50%. Hence, CCCC is able to grow its earnings more quickly than its peers. We have Price Relative
HK$ Relative Index RMB Relative Index tweaked our forecast for FY18 earnings higher by 3% to reflect the
234 334 16.5 robust backlog and overseas business. 214 23.2 14.5 194 284 18.2 174 12.5 234 Valuation: 154 10.5 13.2 134 184 Despite the projected 15% earnings CAGR (FY16-18F), CCCC's FY17F 8.5 114 8.2 134 PE is only 8x, one of the cheapest in the industry. In our view, as the 6.5 94 4.5 74 3.2 84 implementation of the OBOR project accelerates, CCCC will be the best Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 China Communications Construction-A (LHS) China Communications Construction (LHS) Relative HSI (RHS) Relative CSI300 Index (RHS) company to enjoy this overseas opportunity. We estimate its overseas Forecasts and Valuation (H Shares) revenue to hit c.25% of total revenue by next year, up from 20% in FY Dec (RMB m) 2015A 2016A 2017F 2018F FY16. Our H-share TP of HK$12.90 is based on 9x rolling PE, a slight Turnover 403,616 429,972 457,217 487,826 premium to its historical average PE of 8x EBITDA 34,697 41,144 45,672 49,764 . Pre-tax Profit 19,671 22,922 27,007 30,010 Net Profit 15,528 16,192 19,153 21,542 Key Risks to Our View: Low returns on long-term projects. CCC’s build-operate-transfer Net Pft (Pre Ex) (core 15,528 16,192 19,153 21,542 profit) projects might generate lower-than-expected ROI, thus affecting future Net Profit Gth (Pre-ex) (%) 11.0 4.3 18.3 12.5 profits and cashflow streams. EPS (RMB) 0.96 1.00 1.18 1.33 EPS (HK$) 1.11 1.16 1.37 1.54 Core EPS (HK$) 1.11 1.16 1.37 1.54 Infrastructure spending cutback. The local governments may cut back Core EPS (RMB) 0.96 1.00 1.18 1.33 on infrastructure spending due to lack of funding sources. EPS Gth (%) 11.0 4.3 18.3 12.5 Core EPS Gth (%) 11.0 4.3 18.3 12.5 At A Glance Diluted EPS (HK$) 1.11 1.16 1.37 1.54 Issued Capital - H shares (m shs) 4,427 DPS (HK$) 0.22 0.23 0.27 0.31 - Non H shares (m shs) 11,747 BV Per Share (HK$) 9.11 10.01 11.16 12.43 H shs as a % of Total 27 PE (X) 9.8 9.4 7.9 7.1 Total Mkt. Cap (HK$m/US$m) 283,377 / 36,292 Core PE (X) 9.8 9.4 7.9 7.1 Major Shareholders P/Cash Flow (X) 4.8 5.1 4.4 8.6 CCCG (%) 63.8 P/Free CF (X) nm nm nm nm Major H Shareholders EV/EBITDA (X) 10.1 8.7 8.2 8.1 Blackrock, Inc. (%) 7.1 Net Div Yield (%) 2.0 2.1 2.5 2.8 JPMorgan Chase & Co. (%) 6.0 P/Book Value (X) 1.2 1.1 1.0 0.9 H Shares-Free Float (%) 87.0 Net Debt/Equity (X) 0.9 0.8 0.9 0.9 3m Avg. Daily Val. (US$m) 31.9 ROAE (%) 13.0 12.1 13.0 13.1 ICB Industry : Industrials / Construction & Materials Earnings Rev (%): Nil 3 Consensus EPS (RMB) 1.18 1.33 Other Broker Recs: B: 19 S: 1 H: 2 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ASIAN INSIGHTS VICKERS SECURITIES
ed-JLC / sa- CW
Company Guide
China Communications Construction
Backlog Rmb mn CRITICAL DATA POINTS TO WATCH 1,400,000 1,200,000 Earnings Drivers: 1,000,000 Huge OBOR potential. Chinese contractors are becoming major 800,000 players in the overseas construction sector. In 2016, Chinese 600,000 contractors signed 36% more projects, amounting to 400,000 US$126bn from OBOR countries and accounting for 52% of 200,000 China’s total overseas projects. Being the largest OBOR 0 2014 2015 2016 1Q17* participant, CCCC is benefitting from this trend. It has over Domestic Overseas 50% of total backlog coming from overseas projects, which *Notes: Total also generate higher GP margins. New contracts Solid order backlog and strong overseas operations. In 2016, Rmb mn total new contracts signed by CCCC reached Rmb731bn, 800,000 presenting y-o-y growth of 12.4%. After signing Rmb223bn 600,000 worth of new contracts from overseas markets in 2016, the company signed c.Rmb60bn in 1H17, signalling strong contract 400,000 inflow momentum. Besides, these overseas projects can 200,000 generate higher profits for the company. Its total backlog amounted to Rmb1.1 trillion, with overseas projects accounting 0 for over 50%. The huge uncompleted order book will support 2014 2015 2016 1H17 Domestic Overseas revenue generation over several years. As the government continues to promote the OBOR programme, CCCC could Price vs GPM HK$ % outperform its peers in overseas markets. 25 15
20 13 Long-term investment projects another earnings growth pillar. 15 11 Investment projects, which include BOT and PPP projects, play 10 9 important roles in CCCC’s domestic business. The company 5 had accumulated investments of Rmb117bn and operating 0 7 revenue of Rmb2.3bn (36% y-o-y), as of end of December Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 2016. As these long-term investments enter maturity, the Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 earnings potential could be huge. The Chinese government has Price (LHS) GPM % (RHS) been promoting the PPP model and total value of PPP projects Price vs new contracts in 2017 is estimated at Rmb3.8 trillion. HK$ RMB mn 25 500,000 Divestment of non construction related business. CCCC’s 20 400,000 strategy to cut its stakes in ZPMC aims will lower the future 15 300,000 10 200,000 capex and reduce the financial burden on the company. This 5 100,000 strategy will steer the company to focus on the other long-term 0 0 investments which supposedly generate better returns. Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Price (LHS) New Contracts (RHS)
Revenue split (RMB m) 600,000 500,000 400,000 300,000 200,000 100,000 0 2014A 2015A 2016A 2017F 2018F
Construction Design Dredging Port Machinery Other
Source: Company, DBS Vickers
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Company Guide China Communications Construction
Balance Sheet: Highly geared balance sheet. Due to rising long-term Leverage & Asset Turnover (x) investments and maintenance capex, the company’s net 1.80 0.7 gearing ratio has been high. As the company continues to 1.60 participate in PPP projects, its net gearing ratio is projected at 1.40 0.7 c.0.9x for FY17/18F. At end-2016, the company had completed 1.20 1.00 Rmb154bn worth of BOT projects and had another Rmb108bn 0.6 0.80 of outstanding commitment to be fulfilled. To become asset- 0.60 0.6 light, CCCC has to consider optimising its capital base or 0.40 downsizing its balance sheet. By spinning off the long-term 0.20 0.00 0.5 investments under a separate vehicle, it could lessen its 2014A 2015A 2016A 2017F 2018F financing burden. Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure RMBm Cash management. The operating cash outflow was Rmb14bn 60,000.0 in 1Q17, due to the nature of the construction business. We 50,000.0 expect operating cashflow to improve in the coming quarters in 40,000.0 FY17, especially in 4Q when the government will start to make repayments to construction companies. 30,000.0 20,000.0 10,000.0 Share Price Drivers: Positive investment policy and large orders on hand. 0.0 2014A 2015A 2016A 2017F 2018F Sustainable investment spending and new contract flows Capital Expenditure (-) should boost sentiment on the infrastructure sector, especially ROE pertaining to overseas markets, since CCCC has been a strong contender in this segment. The huge orders on hand are 12.0% positive on its earnings growth prospects. 10.0%
8.0%
Key Risks: 6.0% VAT implementation. The implementation of VAT could impact future earnings growth if certain cost items, such as 4.0% subcontracting costs, have a high portion which is not VAT- 2.0% deductible. Thus, the company's net profit could be affected 0.0% 2014A 2015A 2016A 2017F 2018F until it embarks on efforts to contain non-deductible costs. Forward PE Band (x) Mismanagement of businesses and deteriorating balance sheet. Management could misjudge the profitability of certain 13.1 long-term investment projects, resulting in severe losses. This 11.1 could affect its cashflow and it may have to seek debt funding +2sd: 10.1x 9.1 to support its business operations. +1sd: 8.4x 7.1 Avg: 6.8x
Infrastructure spending cutback. The local governments may 5.1 ‐1sd: 5.2x cut back on infrastructure spending due to lack of funding ‐2sd: 3.5x 3.1 sources. Jul-13 Jul-14 Jul-15 Jul-16 PB Band (x) Company Background China Communications Construction Company Ltd. (CCCC) is 2.0 1.8 a transportation infrastructure group that is involved in 1.6 infrastructure construction and design, dredging, and port 1.4 +2sd: 1.34x machinery manufacturing. It should benefit from the overseas 1.2 +1sd: 1.13x opportunities resulting from 'One Belt, One Road' due to its 1.0 Avg: 0.93x expertise in building ports, bridges, tunnels, and expressways. 0.8 ‐1sd: 0.72x 0.6 ‐2sd: 0.52x 0.4 Jul-13 Jul-14 Jul-15 Jul-16 Source: Company, DBS Vickers
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Company Guide
China Communications Construction
Key Assumptions FY Dec 2014A 2015A 2016A 2017F 2018F Backlog (RMB bn) 818.3 867.3 1,099.8 1,380.9 1,655.6 New contracts (RMB bn) 608.4 650.3 730.8 755.1 780.3 Source: Company, DBS Vickers
Segmental Breakdown (RMB m)
FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (RMB m) Construction 294,692 339,124 349,050 370,155 392,533 Design 20,278 22,607 21,914 23,667 25,845 Dredging 21,576 14,708 28,796 30,162 33,178 Port Machinery 26,105 23,139 25,298 27,828 30,325 Others 3,391 4,038 4,914 5,405 5,946 Total 366,042 403,616 429,972 457,217 487,826 Gross Profit (RMB m) Construction 27,085 35,052 43,614 47,323 50,163 Design 4,586 5,206 5,701 6,199 6,199 Dredging 3,814 5,486 4,806 5,087 5,421 Port Machinery 3,514 3,531 3,457 3,803 4,145 Others 273 479 834 917 1,009 Total 39,272 49,754 58,412 63,330 66,937 Gross Profit Margins (%) Construction 9.1 10.1 12.2 12.5 12.5 Design 21.7 21.3 21.7 21.8 20.0 Dredging 13.6 16.4 15.9 16.0 15.5 Port Machinery 13.1 14.6 13.3 13.3 13.3 Others 7.1 11.1 14.1 14.1 14.1 Total 10.7 12.3 13.6 13.9 13.7 Source: Company, DBS Vickers
Income Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 366,042 403,616 429,972 457,217 487,826 Cost of Goods Sold (326,770) (353,862) (372,073) (393,887) (420,889) Gross Profit 39,272 49,754 57,899 63,330 66,937 Other Opng (Exp)/Inc (15,487) (23,956) (26,775) (27,790) (27,898) Operating Profit 23,785 25,798 31,124 35,539 39,039 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 339 384 190 195 199 Net Interest (Exp)/Inc (6,520) (6,511) (8,392) (8,727) (9,228) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 17,604 19,671 22,922 27,007 30,010 Tax (3,721) (3,758) (5,233) (6,212) (6,752) Minority Interest 102 (85) (479) (624) (698) Preference Dividend 0 (300) (1,018) (1,018) (1,018) Net Profit 13,985 15,528 16,192 19,153 21,542 Net Profit before Except. 13,985 15,528 16,192 19,153 21,542 EBITDA 32,121 34,697 41,144 45,672 49,764 Growth Revenue Gth (%) 10.3 10.3 6.5 6.3 6.7 EBITDA Gth (%) 15.4 8.0 18.6 11.0 9.0 Opg Profit Gth (%) 21.5 8.5 20.6 14.2 9.8 Net Profit Gth (%) 11.3 11.0 4.3 18.3 12.5 Margins & Ratio Gross Margins (%) 10.7 12.3 13.5 13.9 13.7 Opg Profit Margin (%) 6.5 6.4 7.2 7.8 8.0 Net Profit Margin (%) 3.8 3.8 3.8 4.2 4.4 ROAE (%) 13.6 13.0 12.1 13.0 13.1 ROA (%) 2.4 2.3 2.1 2.3 2.4 ROCE (%) 5.5 5.0 5.2 5.6 5.8 Div Payout Ratio (%) 19.9 19.8 19.4 20.0 20.0 Net Interest Cover (x) 3.6 4.0 3.7 4.1 4.2 Source: Company, DBS Vickers
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Company Guide China Communications Construction
Interim Income Statement (RMB m) FY Dec 2H2014 1H2015 2H2015 1H2016 2H2016
Revenue 207,481 175,775 227,841 182,313 247,659 Cost of Goods Sold (184,845) (157,229) (196,633) (160,279) (211,794) Gross Profit 22,636 18,546 31,208 22,034 35,865 Other Oper. (Exp)/Inc (9,715) (7,037) (16,919) (8,788) (17,987) Operating Profit 12,921 11,509 14,289 13,246 17,878 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 200 121 263 (39) 229 Net Interest (Exp)/Inc (3,293) (2,948) (3,563) (3,522) (4,870) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 9,828 8,682 10,989 9,685 13,237 Tax (1,976) (1,815) (1,943) (2,273) (2,960) Minority Interest 113 (55) (30) (154) (325) Net Profit 7,965 6,812 9,016 7,258 9,952 Net profit bef Except. 7,965 6,812 9,016 7,258 9,952
Growth Revenue Gth (%) 8.8 10.9 9.8 3.7 8.7 Opg Profit Gth (%) 21.8 5.9 10.6 15.1 25.1 Net Profit Gth (%) 16.3 13.2 13.2 6.5 10.4
Margins Gross Margins (%) 10.9 10.6 13.7 12.1 14.5 Opg Profit Margins (%) 6.2 6.5 6.3 7.3 7.2 Net Profit Margins (%) 3.8 3.9 4.0 4.0 4.0 Source: Company, DBS Vickers
Balance Sheet (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F
Net Fixed Assets 64,110 70,018 69,121 71,880 74,513 Invts in Associates & JVs 9,730 12,589 18,751 18,946 19,145 Other LT Assets 201,411 255,968 276,064 305,542 330,083 Cash & ST Invts 78,237 98,229 115,134 109,420 90,235 Inventory 46,149 51,904 45,554 51,569 59,131 Debtors 150,734 167,914 190,485 210,363 230,685 Other Current Assets 79,809 74,691 85,973 92,851 100,279 Total Assets 630,180 731,313 801,082 860,570 904,071
ST Debt 91,034 86,605 99,484 99,484 99,484 Creditors 224,617 257,379 292,990 322,122 335,157 Other Current Liab 23,645 29,096 31,480 35,204 37,260 LT Debt 137,801 168,578 173,996 183,996 193,996 Other LT Liabilities 21,471 20,649 16,562 16,562 16,562 Shareholder’s Equity 116,531 146,724 159,323 175,331 193,043 Minority Interests 15,081 22,282 27,247 27,871 28,569 Total Cap. & Liab. 630,180 731,313 801,082 860,570 904,071
Non-Cash Wkg. Capital 28,430 8,034 (2,458) (2,543) 17,678 Net Cash/(Debt) (150,598) (156,954) (158,346) (174,060) (203,245) Debtors Turn (avg days) 139.9 144.1 152.1 160.0 165.0 Creditors Turn (avg days) 242.0 254.7 277.3 292.4 292.3 Inventory Turn (avg days) 45.2 51.8 49.1 46.2 49.2 Asset Turnover (x) 0.6 0.6 0.6 0.6 0.6 Current Ratio (x) 1.0 1.1 1.0 1.0 1.0 Quick Ratio (x) 0.7 0.7 0.7 0.7 0.7 Net Debt/Equity (X) 1.1 0.9 0.8 0.9 0.9 Net Debt/Equity ex MI (X) 1.3 1.1 1.0 1.0 1.1 Capex to Debt (%) 18.5 20.1 13.5 13.2 11.1 Z-Score (X) 1.1 1.0 1.0 1.1 1.0 Source: Company, DBS Vickers
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Company Guide
China Communications Construction
Cash Flow Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F
Pre-Tax Profit 17,604 19,671 22,922 27,007 30,010 Dep. & Amort. 7,997 8,515 9,830 9,938 10,526 Tax Paid (3,995) (4,625) (4,747) (5,233) (6,212) Assoc. & JV Inc/(loss) (339) (384) (190) (195) (199) (Pft)/ Loss on disposal of FAs (2,200) 2,675 2,456 0 0 Chg in Wkg.Cap. (20,650) 830 (7,924) (5,671) (25,779) Other Operating CF 5,991 5,231 7,372 8,727 9,228 Net Operating CF 4,408 31,913 29,719 34,573 17,574 Capital Exp.(net) (42,255) (51,267) (36,854) (37,397) (32,683) Other Invts.(net) (234) 5,885 (1,301) 0 0 Invts in Assoc. & JV (1,785) (863) (4,795) 0 0 Div from Assoc & JV 729 952 1,081 0 0 Other Investing CF (1,960) (180) 3,164 3,334 3,268 Net Investing CF (45,505) (45,473) (38,705) (34,064) (29,415) Div Paid (3,116) (3,195) (3,291) (3,145) (3,831) Chg in Gross Debt 38,246 26,862 33,853 10,000 10,000 Capital Issues 4,986 21,151 1,500 0 0 Other Financing CF (8,315) (8,394) (9,960) (13,079) (13,514) Net Financing CF 31,801 36,424 22,102 (6,224) (7,344) Currency Adjustments (119) 273 644 0 0 Chg in Cash (9,415) 23,137 13,760 (5,714) (19,185) Opg CFPS (RMB) 1.55 1.92 2.33 2.49 2.68 Free CFPS (RMB) (2.34) (1.20) (0.44) (0.17) (0.93)
Source: Company, DBS Vickers
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Company Guide China Communications Construction
H Share - Target Price & Ratings History
S.No. Date Closing 12-mth Rating HK$ 3 Price Target 12.0 4 Price 11.5 2 1: 1-Sep-16 HK$8.46 HK$9.40 Hold 11.0 1 2: 29-Nov-16 HK$9.40 HK$9.95 Hold 10.5 3: 30-Mar-17 HK$11.08 HK$12.00 Hold 10.0 4: 19-Jul-17 HK$10.92 HK$12.90 Buy 9.5 9.0 8.5 8.0 7.5 7.0 Jul-17 Jul-16 Jan-17 Jun-17 Oct-16 Feb-17 Apr-17 Sep-16 Dec-16 Nov-16 Mar-17 Aug-16 May-17
Source: DBS Vickers
A Share - Target Price & Ratings History
S.No. Date Closing 12-mth Rating RMB Price Target 20.0 2 3 4 Price 18.0 1: 1-Sep-16 RMB11.99 RMB11.30 Hold 2: 29-Nov-16 RMB16.85 RMB17.00 Hold 16.0 3: 30-Mar-17 RMB18.19 RMB20.25 Hold 14.0 1 4: 19-Jul-17 RMB17.34 RMB18.10 Hold 12.0 10.0 8.0 6.0 Jul-16 Jul-17 Oct-16 Feb-17 Dec-16 May-17
Source: DBS Vickers Analyst: Rachel MIU
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China / Hong Kong Company Guide
China Railway Construction Version 5 | Bloomberg: 1186 HK EQUITY | 601186 CH Equity | Reuters: 1186.HK | 601186.SS Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 Jul 2017 H: BUY Rising overseas contribution
Last Traded Price (H) ( 21 Jul 2017):HK$10.80 (HSI : 26,706) Maintain BUY on significant overseas opportunities. Apart from the Price Target 12-mth (H): HK$12.90 (19% upside) African market, China Railway Construction Corp (CRCC) is making A: HOLD greater inroads into the ASEAN region to further boost its overseas Last Traded Price (A) ( 21 Jul 2017):RMB13.33 (CSI300 Index : 3,729) business. It has successfully penetrated the ASEAN markets, especially Price Target 12-mth (A): RMB12.50 (-6% downside) (Prev RMB13.40) in Malaysia. All in, total overseas new contracts grew by c.25% to Potential Catalyst: New contracts from ASEAN countries Rmb108bn in FY16, bringing total overseas backlog to approximately Where we differ: Huge overseas potential to drive FY18 earnings Rmb420bn at end 2016. This implies that future overseas revenue will
Analyst rise and could exceed expectations, following more overseas contracts Rachel MIU +852 2863 8843 [email protected] being awarded. The company recently secured over Rmb12bn of mass rail transit projects in Nigeria. What’s New Rising overseas contracts and revenues; breaking Domestic integrated railway spending. The Chinese government is
into new markets in ASEAN countries building integrated railway systems within major cities as the nation’s
Domestic infrastructure market remains healthy urbanisation rate rises. The focus is on mass transit networks, including Solid backlog to boost future business growth; city-suburban railway and subways. Many cities are building subways
revised up FY18 earnings and it is estimated that total operating length will increase from
Maintain BUY with HK$12.90 TP 4,100km in 2016 to about 8,000km by 2020. This translates to Rmb2- 3tr of investment. The company new subway contracts surged 80% in Price Relative FY16 to Rmb171bn and 109% in 1Q17 to Rmb44bn.
Solid earnings outlook. CRCC had c.Rmb2tr of orders on hand at end- March 2017, of which the overseas portion accounted for c.20%. As such, we have revised up FY17/18F earnings by 1%/2%% and estimate FY16-18F earnings CAGR of 11%. The company had a healthy balance sheet with low gearing ratio of 20% at end 2016.
Forecasts and Valuation (H Shares) FY Dec (RMB m) 2015A 2016A 2017F 2018F Valuation: Turnover 600,539 629,327 658,490 689,600 Trading at FY17F 8.3x PE, CRCC’s share price has yet to reflect its EBITDA 32,615 33,901 35,273 37,277 growing overseas presence. We believe the market is adopting a wait- Pre-tax Profit 17,113 18,970 21,395 24,085 and-see approach, especially on its overseas business but in our view, Net Profit 12,645 14,000 15,353 17,283 the acceleration could be faster than expected. Our CRCC-H TP is Net Pft (Pre Ex) (core 12,645 14,000 15,353 17,283 based on SOTP. profit) Net Profit Gth (Pre- 7.8 10.7 9.7 12.6 ex) (%) Key Risks to Our View: EPS (RMB) 0.93 1.03 1.13 1.27 Cost overrun. Mismanagement of projects could lead to substantial EPS (HK$) 1.08 1.19 1.31 1.47 cost overrun, affecting profit growth. Core EPS (HK$) 1.08 1.19 1.31 1.47 Core EPS (RMB) 0.93 1.03 1.13 1.27 At A Glance EPS Gth (%) (2.1) 10.7 9.7 12.6 Issued Capital - H shares (m shs) 2,076 Core EPS Gth (%) (2.1) 10.7 9.7 12.6 - Non H shares (m shs) 11,503 Diluted EPS (HK$) 1.08 1.19 1.31 1.47 H shs as a % of Total 15 DPS (HK$) 0.17 0.19 0.20 0.22 Total Mkt. Cap (HK$m/US$m) 199,788 / 25,587 BV Per Share (HK$) 9.52 11.18 12.30 13.55 Major Shareholders PE (X) 10.0 9.0 8.3 7.3 CRCC Group (%) 55.7 Core PE (X) 10.0 9.0 8.3 7.3 Major H Shareholders P/Cash Flow (X) 2.3 6.5 7.6 7.6 Society of Security Fund (%) 9.1 P/Free CF (X) 4.5 nm nm nm JPMorgan Chase & Co. (%) 8.5 EV/EBITDA (X) 4.4 4.7 4.9 4.9 BlackRock, Inc. (%) 7.0 Net Div Yield (%) 1.6 1.7 1.8 2.0 The Bank of New York Mellon Corporation (%) 5.0 P/Book Value (X) 1.1 1.0 0.9 0.8 H Shares-Free Float (%) 70.4 Net Debt/Equity (X) CASH 0.1 0.2 0.2 3m Avg. Daily Val. (US$m) 13.8 ROAE (%) 12.4 11.5 11.1 11.4 ICB Industry : Industrials / Construction & Materials Earnings Rev (%): 1 2 Consensus EPS (RMB) 1.14 1.26 Other Broker Recs: B: 20 S: 2 H: 4 Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ASIAN INSIGHTS VICKERS SECURITIES
ed-TH / sa- CW
Company Guide
China Railway Construction
CRITICAL DATA POINTS TO WATCH Gross margin (%) 14 Earnings Drivers: 12 Expanding offshore business to boost backlog. CRCC is expanding its overseas operations to generate higher earnings 10 growth. About 20% of total backlog orders are overseas 8 projects, and these contracts tend to have higher GP margins. 6 At end-1Q17, the outstanding backlog stood at Rmb2 trillion. 4 Recently, the company secured phase II of a rail contract in 2 Nigeria for US$1.473bn (phase I was awarded to CRCC on 24 0 August 2012 for US$823m). This shows the company has FY2014 FY2015 FY2016 FY2017F FY2018F gained strong support from its overseas customers. Subway new contracts (RMB bn) Selectively invest in investment projects to generate long-term 180 profits. CRCC is broadening its profit streams to level out 160 earnings volatility under a pure construction-business model. 140 The company’s total long-term investment in build-operate- 120 transfer (BOT) projects reached approximately Rmb26bn last 100 year. The company should start reaping returns from these 80 long-term investments when they are operational. We 60 anticipate that as the Chinese government speeds up 40 implementation of public-private partnership (PPP) projects in 20 the subway segment, CRCC will have new investment 0 opportunities. FY2012 FY2013 FY2014 FY2015 FY2016 1Q16 1Q17 Backlog breakdown (RMB bn) Short-term fluctuations in gross profit margins due to VAT 2,500 implementation. Overall, we expect GP margin to remain stable, 2,000 although some short-term volatility is expected due to the implementation of VAT in May 2016. Quarterly GP margins 1,500 have fallen from 10+% before the VAT implementation to 8- 1,000 9% after May 2016. The VAT impact should even out in the 500 future. 0 FY2014 FY2015 FY2016 1H17
Domestic Overseas
New contracts breakdown (RMB bn) 1,400 1,200 1,000 800 600 400 200 0 FY2014 FY2015 FY2016 1H17*
Domestic Overseas
* New contracts breakdown for 1H17 is not available Source: Company, DBS Vickers
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Company Guide China Railway Construction
Balance Sheet: Healthy financial position will continue. CRCC has a low net Leverage & Asset Turnover (x) gearing ratio of 20% at end-December 2016. We estimate its net gearing ratio to maintain at a healthy level (<50%) in the coming few years, as the company is cautious of over- leveraging. Although net operating cashflow is volatile due to the nature of its business, the company strives to balance growth with its funding ability. We project generation of operating cash to stay positive in the foreseeable future.
Share Price Drivers: Rising overseas contributions. The rising importance of CRCC’s overseas business should drive valuation, as the earnings Capital Expenditure potential is better than the domestic market. CRCC is racing fast in building its overseas presence and about 20% of its total backlog is from overseas. We believe market has yet to factor this into its share price.
Key Risks: VAT implementation. The implementation of VAT could impact future earnings growth if certain cost items such as subcontracting costs have a high portion which might not be VAT-deductible. As a result, net earnings could be affected ROE until the company embarks on efforts to contain the non- deductible costs.
Overstretching its balance sheet. To support its business expansion, CRCC may need to increase borrowings to fund long-term investments and projects. The ROI on these investments may be below expectations. As a result, net gearing may rise sharply, thus eroding its balance-sheet strength.
Lower-than-expected infrastructure spending. The Chinese Forward PE Band government may cut back on infrastructure spending due to lack of funds. Also, the strategy on BOT or PPP models may fail if the payback period is longer than expected and financial investors are reluctant to assume the operational risks.
Company Background China Railway Construction Corporation Ltd (CRCC) is a full- service construction company which offers services such as construction, survey design, and consulting. CRCC also has manufacturing, real estate, and logistics operations. The PB Band company specialises in railway construction.
Source: Company, DBS Vickers
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Company Guide
China Railway Construction
Key Assumptions FY Dec 2014A 2015A 2016A 2017F 2018F Backlog (RMB m) 1,762,978.0 1,808,528.4 1,977,766.8 2,088,726.4 2,181,645.8 Gross margin (%) Construction operations 9.3 9.6 6.8 7.4 7.8 Survey & design 30.9 33.6 30.1 29.0 28.0 Manufacturing 21.5 20.7 25.1 25.0 25.0 operations Source: Company, DBS Vickers
Segmental Breakdown (RMB m)
FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (RMB m) Construction operations 512,336 519,313 540,135 567,141 595,498 Survey, design & 9,009 10,080 12,257 13,483 14,832 consultancy Manufacturing 11,902 14,688 14,341 16,492 18,965 operations Other businesses 80,155 75,601 85,622 87,855 90,758 Elimination (20,101) (19,143) (23,027) (26,481) (30,453) Total 593,303 600,539 629,327 658,490 689,600
Source: Company, DBS Vickers
Income Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 593,303 600,539 629,327 658,490 689,600 Cost of Goods Sold (528,375) (531,756) (571,378) (595,207) (621,069) Gross Profit 64,928 68,782 57,950 63,283 68,532 Other Opng (Exp)/Inc (45,024) (47,380) (36,219) (38,995) (41,224) Operating Profit 19,904 21,402 21,731 24,288 27,308 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc (3) 96 (29) (32) (34) Net Interest (Exp)/Inc (4,369) (4,385) (2,732) (2,861) (3,189) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 15,532 17,113 18,970 21,395 24,085 Tax (3,472) (3,739) (4,119) (4,707) (5,299) Minority Interest (325) (729) (851) (1,335) (1,503) Preference Dividend 0 0 0 0 0 Net Profit 11,735 12,645 14,000 15,353 17,283 Net Profit before Except. 11,735 12,645 14,000 15,353 17,283 EBITDA 30,637 32,615 33,901 35,273 37,277 Growth Revenue Gth (%) 1.1 1.2 4.8 4.6 4.7 EBITDA Gth (%) 14.8 6.5 3.9 4.0 5.7 Opg Profit Gth (%) 16.8 7.5 1.5 11.8 12.4 Net Profit Gth (%) 13.4 7.8 10.7 9.7 12.6 Margins & Ratio Gross Margins (%) 10.9 11.5 9.2 9.6 9.9 Opg Profit Margin (%) 3.4 3.6 3.5 3.7 4.0 Net Profit Margin (%) 2.0 2.1 2.2 2.3 2.5 ROAE (%) 13.5 12.4 11.5 11.1 11.4 ROA (%) 2.0 1.9 1.9 1.9 2.0 ROCE (%) 6.7 6.8 6.1 6.1 6.3 Div Payout Ratio (%) 15.8 16.1 15.5 15.0 15.0 Net Interest Cover (x) 4.6 4.9 8.0 8.5 8.6 Source: Company, DBS Vickers
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Company Guide China Railway Construction
Interim Income Statement (RMB m) FY Dec 2H2014 1H2015 2H2015 1H2016 2H2016
Revenue 331,116 262,894 337,644 266,727 362,600 Cost of Goods Sold (293,002) (234,091) (297,665) (239,399) (331,978) Gross Profit 38,114 28,803 39,980 27,328 30,622 Other Oper. (Exp)/Inc (27,371) (19,558) (27,823) (17,646) (18,573) Operating Profit 10,743 9,245 12,157 9,682 12,049 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 21 96 0 31 (61) Net Interest (Exp)/Inc (1,991) (2,343) (2,042) (1,947) (785) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 8,774 6,998 10,115 7,766 11,204 Tax (1,975) (1,404) (2,335) (1,567) (2,552) Minority Interest (220) (263) (466) (377) (474) Net Profit 6,579 5,331 7,315 5,822 8,177 Net profit bef Except. 6,579 5,331 7,315 5,822 8,177
Growth Revenue Gth (%) (5.6) 0.3 2.0 1.5 7.4 Opg Profit Gth (%) 12.6 0.9 13.2 4.7 (0.9) Net Profit Gth (%) 17.7 3.4 11.2 9.2 11.8
Margins Gross Margins (%) 11.5 11.0 11.8 10.2 8.4 Opg Profit Margins (%) 3.2 3.5 3.6 3.6 3.3 Net Profit Margins (%) 2.0 2.0 2.2 2.2 2.3 Source: Company, DBS Vickers
Balance Sheet (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F
Net Fixed Assets 41,632 41,821 42,152 37,487 33,855 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 60,523 78,924 105,699 126,314 144,409 Cash & ST Invts 98,517 122,152 129,025 128,626 130,003 Inventory 227,930 245,591 265,781 292,359 321,595 Debtors 153,342 130,522 137,778 148,800 160,704 Other Current Assets 41,518 76,983 78,716 88,162 98,741 Total Assets 623,566 696,096 759,345 821,943 889,502
ST Debt 45,591 43,371 30,429 30,429 30,429 Creditors 227,087 252,255 289,977 313,176 338,230 Other Current Liab 157,525 188,253 170,593 185,463 201,600 LT Debt 80,999 78,457 113,934 123,934 133,934 Other LT Liabilities 7,180 4,941 5,695 5,840 6,013 Shareholder’s Equity 92,768 111,665 131,187 144,237 158,928 Minority Interests 12,415 17,154 17,529 18,864 20,367 Total Cap. & Liab. 623,566 696,096 759,345 821,943 889,502
Non-Cash Wkg. Capital 38,178 12,588 21,704 30,683 41,210 Net Cash/(Debt) (28,073) 324 (15,338) (25,737) (34,360) Debtors Turn (avg days) 75.2 86.3 77.8 79.4 81.9 Creditors Turn (avg days) 150.8 168.0 177.0 188.4 194.5 Inventory Turn (avg days) 151.4 166.0 166.9 174.4 183.4 Asset Turnover (x) 1.0 0.9 0.9 0.8 0.8 Current Ratio (x) 1.2 1.2 1.2 1.2 1.2 Quick Ratio (x) 0.6 0.5 0.5 0.5 0.5 Net Debt/Equity (X) 0.3 CASH 0.1 0.2 0.2 Net Debt/Equity ex MI (X) 0.3 CASH 0.1 0.2 0.2 Capex to Debt (%) 16.8 22.3 20.7 13.0 11.0 Z-Score (X) 1.4 1.3 1.3 1.3 1.3 Source: Company, DBS Vickers
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Company Guide
China Railway Construction
Cash Flow Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F
Pre-Tax Profit 15,532 17,113 18,970 21,395 24,085 Dep. & Amort. 10,607 11,117 12,200 11,017 10,004 Tax Paid (2,600) (3,472) (3,739) (4,119) (4,707) Assoc. & JV Inc/(loss) 3 (96) 29 32 34 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (18,966) 23,499 (8,892) (14,422) (15,946) Other Operating CF 2,166 7,407 985 2,861 3,189 Net Operating CF 6,742 55,567 19,553 16,764 16,658 Capital Exp.(net) (21,287) (27,144) (29,816) (20,000) (18,000) Other Invts.(net) (1,546) (2,282) 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 5,684 5,090 3,544 (2,000) (1,500) Net Investing CF (17,149) (24,336) (26,273) (22,000) (19,500) Div Paid (11,873) (12,323) (11,318) (2,303) (2,593) Chg in Gross Debt 17,800 (2,025) (1,913) 10,000 10,000 Capital Issues 9,134 14,987 11,120 0 0 Other Financing CF 354 (8,464) 0 (2,861) (3,189) Net Financing CF 15,416 (7,825) (2,111) 4,836 4,219 Currency Adjustments (35) 121 310 0 0 Chg in Cash 4,973 23,527 (8,521) (400) 1,377 Opg CFPS (RMB) 2.08 2.36 2.09 2.30 2.40 Free CFPS (RMB) (1.18) 2.09 (0.76) (0.24) (0.10)
Source: Company, DBS Vickers
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Company Guide China Railway Construction
H Share - Target Price & Ratings History
S.No. Date Closing 12-mth Rating HK$ 2 Price Target 13.0 Price 12.5 1: 1-Sep-16 HK$9.49 HK$11.60 Buy 12.0 1 3 2: 22-Nov-16 HK$11.24 HK$12.90 Buy 11.5 3: 3-Apr-17 HK$11.02 HK$12.90 Buy 11.0 10.5 10.0 9.5 9.0 8.5 8.0 Jul-17 Jul-16 Jan-17 Jun-17 Oct-16 Feb-17 Apr-17 Sep-16 Dec-16 Nov-16 Mar-17 Aug-16 May-17
Source: DBS Vickers Analyst: Rachel MIU
A Share - Target Price & Ratings History
S.No. Date Closing 12-mth Rating RMB Price Target 15.0 2 3 Price 14.0 1: 1-Sep-16 RMB9.36 RMB10.60 Hold 13.0 2: 22-Nov-16 RMB11.84 RMB12.50 Hold 12.0 3: 3-Apr-17 RMB12.99 RMB13.40 Hold 11.0 1 10.0 9.0 8.0 7.0 6.0 Jul-16 Jul-17 Oct-16 Feb-17 Dec-16 May-17
Source: DBS Vickers Analyst: Rachel MIU
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China / Hong Kong Company Guide
CRRC Corporation Version 5 | Bloomberg: 1766 HK EQUITY | 601766 CH Equity | Reuters: 1766.HK | 601766.SS Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 Jul 2017 H: BUY Rolling faster with new contracts ahead Last Traded Price (H) ( 21 Jul 2017):HK$7.02 (HSI : 26,706) Price Target 12-mth (H): HK$8.40 (20% upside) (Prev HK$8.70) Major rolling stock contracts being awarded. Since 2Q17, the Chinese government has been awarding rolling stock contracts. So far, CRRC A: HOLD has secured some Rmb60bn worth of contracts, comprising largely sale Last Traded Price (A) ( 21 Jul 2017):RMB10.21 (CSI300 Index : 3,729) of multiple units and locomotives. The rolling stock sector was Price Target 12-mth (A): RMB10.60 (4% upside) (Prev RMB11.1) depressed in 2016 as the Chinese government focused on construction Potential Catalyst: Recovery of the rolling stock sector projects; procurement volume was therefore low. We believe the rolling Where we differ: Sentiment could pickup on new contract awards stock sector is recovering and anticipate more projects ahead. China
Analyst intends to expand its subway network rapidly. About 4,000km of Rachel MIU +852 2863 8843 [email protected] subway lines are in the pipeline, 2,000km of which is expected to be What’s New completed by 2018 (at a cost of Rmb1.65 trillion) and the balance by • Government procurement of rolling stock has 2020. Therefore, the subway sector is a bright spot for the rolling stock started and overseas prospects are gaining demand. On other hand, the national railway rolling stock demand will momentum provide the baseline support, estimated at Rmb100bn per year till 2020. • Awarded major contracts for multiple units and locomotive maintenance services Overseas potential. New projects from overseas are gradually picking • Outlook of rolling stock sector improving on up, with about Rmb14bn secured YTD from the US, Indonesia, and growing demand from railway and subway players India. The overseas prospects are good, especially with potential • Maintain BUY on improving prospects demand from the One Belt, One Road (OBOR) countries. It is estimated
Price Relative that demand in Southeast Asia, North America, and Europe could reach US$34bn, US$25bn, and US$39bn by 2020, respectively.
Valuation: We believe valuation should reflect the improving outlook and maintain our BUY call. We see the market as overly pessimistic; the Chinese government has started its rolling stock procurement programme Forecasts and Valuation (H Shares) recently. We revised down FY17 earnings by 2% after a weak set of FY Dec (RMB m) 2015A 2016A 2017F 2018F Turnover 237,785 224,138 241,749 263,950 1Q17 results but expect future quarters to pick up q-o-q. Earnings EBITDA 24,114 24,424 26,151 28,994 CAGR is at 12% (FY16-18), compared to a contraction in FY16. Our Pre-tax Profit 17,048 16,935 18,404 21,350 revised HK$8.40 TP is based on historical average 17x PE. Net Profit 11,818 11,296 12,299 14,181 Net Pft (Pre Ex) (core 11,818 11,296 12,299 14,181 profit) Key Risks to Our View: Net Profit Gth (Pre-ex) (%) 9.3 (4.4) 8.9 15.3 Cost overrun for overseas projects. CRRC is actively looking for overseas EPS (RMB) 0.43 0.39 0.43 0.49 business opportunities. Weak cost control could affect the profitability EPS (HK$) 0.50 0.46 0.50 0.57 of overseas projects. Core EPS (HK$) 0.50 0.46 0.50 0.57 Core EPS (RMB) 0.43 0.39 0.43 0.49 EPS Gth (%) 9.3 (9.1) 8.9 15.3 At A Glance Core EPS Gth (%) 9.3 (9.1) 8.9 15.3 Issued Capital - H shares (m shs) 4,371 Diluted EPS (HK$) 0.50 0.46 0.50 0.57 - Non H shares (m shs) 24,328 DPS (HK$) 0.17 0.24 0.26 0.31 H shs as a % of Total 15 BV Per Share (HK$) 4.11 4.23 4.48 4.79 Total Mkt. Cap (HK$m/US$m) 317,990 / 40,725 PE (X) 14.0 15.4 14.1 12.3 Major Shareholders Core PE (X) 14.0 15.4 14.1 12.3 CSRG (%) 55.6 P/Cash Flow (X) 11.0 8.3 8.8 8.6 Major H Shareholders P/Free CF (X) 21.8 15.9 12.7 12.1 Himalaya Capital Investors, L.P. (%) 6.1 EV/EBITDA (X) 7.0 7.8 7.3 6.6 BlackRock, Inc. (%) 5.7 Net Div Yield (%) 2.5 3.5 3.8 4.3 H Shares-Free Float (%) 88.1 P/Book Value (X) 1.7 1.7 1.6 1.5 3m Avg. Daily Val. (US$m) 13.9 Net Debt/Equity (X) CASH CASH CASH CASH ICB Industry : Industrials / Industrial Engineering ROAE (%) 12.7 11.2 11.4 12.3 Earnings Rev (%): (2) Nil Consensus EPS (RMB) 0.44 0.50 Other Broker Recs: B: 12 S: 4 H: 6
Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX ASIAN INSIGHTS VICKERS SECURITIES
ed-TH / sa- CW
Company Guide
CRRC Corporation
CRITICAL DATA POINTS TO WATCH Backlog (RMB bn)
Earnings Drivers: Subway rolling stock demand to lead growth. The Chinese government is still committed to investing in railways. Under the 13th Five-Year plan, the total procurement budget is estimated at Rmb500bn, averaging Rmb100bn per year. But we believe that the rapid growth of the rolling stock will come from the subway segment. There are over 4,000km of new subway lines in the pipeline and about half is scheduled to be completed in 2018 (at an estimated investment cost of
Rmb1.65 trillion) and the balance by 2020. Therefore, future railway investment will form the baseline for CRRC’s expansion, GP Margin (%) while the subway segment will be an area of more rapid growth.
New contracts indicative of future revenue trends. The slowdown of new rolling stock contracts in 2016 affected CRRC’s 2016’s and 1H17’s revenue trend. However, we expect 2H17 revenue to improve, after having fallen for several quarters, because the Chinese government has started its procurement programme. Recently, CRRC was awarded some relatively large projects – totaling Rmb55bn – related to sales of multiple units, locomotive, and freight wagons. Major rolling stock contracts (RMB bn) 70 Stable profit margins. CRRC has been keeping its GP margin 60 stable across product categories. We expect this trend to 50 40 continue, following the successful launch of its new train 30 products based on the Chinese standards suitable for both 20 domestic and overseas markets. The company is emphasising 10 high-ROI businesses, such as locomotives and high-speed train 0 equipment, to keep its GP margin stable in the coming few years. 2-Jan-14 5-Apr-17 20-Oct-14 29-Jun-17 29-Sep-15 29-Dec-15 28-Dec-16 16-Nov-15 Expect overseas opportunities to increase. CRRC had faced China rolling stock investment some initial struggles when it first ventured overseas. However, RMB bn % we view overseas opportunities positively, especially as more 160 100 140 countries join the OBOR bandwagon, compared to three years’ 80 120 60 ago when most of these projects were still in the planning 100 40 80 20 stage. Recently, the company secured about Rmb14bn worth 60 -13.4% 0 of overseas projects. Chinese contractors have been successful 40 20 (20) in the Malaysian railway sector, which provides new business 0 (40) opportunities for rolling stock demand. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 6M16 6M17 RMB fluctuation. The appreciation of the USD could affect its Vehicle procurement investment (LHS) YoY growth (RHS) earnings, as the company has US$600m worth of convertible bonds on hand. However, a fair bit of its overseas projects are Source: Company, DBS Vickers booked in USD, which should provide some natural hedge to the currency fluctuation. A weaker domestic currency also helps its exports.
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Company Guide CRRC Corporation
Balance Sheet: Anticipate cashflow improvement ahead. In 1Q17, there was a Leverage & Asset Turnover (x) net cash outflow of Rmb15.5bn from operating activities, presenting an increase of 235% from 1Q16. This is mainly due to the weak 1Q17 results. Based on a positive earnings outlook, we expect the cash flow to turn positive in coming quarters.
Share Price Drivers: Expect turnaround in rolling stock sector to lift share price sentiment. Fixed asset investment in domestic railways is the key to CRRC’s performance. Its share price has been hit due to the poor 1Q17 outlook and market taking a pessimistic view Capital Expenditure on the railway investment trend. The recent new contract awards could signify a turnaround; we think that the market has ignored the potential of the subway sector.
Key Risks: Slowdown in railway spending. Any change in investment policy could affect the valuations of the sector and company in either direction. This would affect future profitability as the backlog order visibility will be low. ROE Major railway accidents. Experience shows that such occurrences could set back sentiment in railway investment. Besides, if a faulty product is identified as the cause of an accident, the legal liability is high and could result in major losses for the company.
Liberalisation of the industry. This would lead to intensifying competition from foreign equipment manufacturers and dampen profit margins.
Forward PE Band Company Background CRRC Corp Ltd (CRRC) offers a wide range of rolling stock products and services. The company's products include locomotives, passenger carriages, freight wagons, multiple units, rapid transit vehicles, and key related components. It also produces and sells other industrial-related products such as wind-power generation units and new-energy vehicles.
PB Band
Source: Company, DBS Vickers
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Company Guide
CRRC Corporation
Key Assumptions FY Dec 2014A 2015A 2016A 2017F 2018F Backlog (RMB bn) 197.5 214.4 188.1 222.1 255.9 GP Margin (%) 19.6 19.6 20.1 20.1 20.2 Source: Company, DBS Vickers
Segmental Breakdown (RMB m)
FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (RMB m) Railway equipment 125,814 129,551 106,175 112,545 122,674 Rapid transit vehicles & 17,931 24,477 26,978 30,215 34,143 urban infrastructure New businesses 40,984 52,513 57,562 63,894 70,283 Modern services 33,722 31,244 33,424 35,095 36,849 Total 218,451 237,785 224,138 241,749 263,950 Gross Profit (RMB m) Railway equipment 30,177 29,668 25,608 27,348 29,810 Rapid transit vehicles & 2,878 2,974 4,252 4,834 5,463 urban infrastructure New businesses 7,908 11,770 13,443 14,376 15,814 Modern services 1,863 2,124 1,725 2,106 2,211 Total 42,827 46,535 45,028 48,665 53,297 Gross Profit Margins (%) Railway equipment 24.0 22.9 24.1 24.3 24.3 Rapid transit vehicles & 16.1 12.1 15.8 16.0 16.0 urban infrastructure New businesses 19.3 22.4 23.4 22.5 22.5 Modern services 5.5 6.8 5.2 6.0 6.0 Total 19.6 19.6 20.1 20.1 20.2 Source: Company, DBS Vickers
Income Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 218,451 237,785 224,138 241,749 263,950 Cost of Goods Sold (175,620) (191,250) (179,110) (193,084) (210,653) Gross Profit 42,831 46,535 45,028 48,665 53,297 Other Opng (Exp)/Inc (27,219) (29,057) (27,563) (29,263) (31,030) Operating Profit 15,612 17,478 17,465 19,402 22,267 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 734 419 453 489 528 Net Interest (Exp)/Inc (1,862) (849) (984) (1,487) (1,445) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 14,484 17,048 16,935 18,404 21,350 Tax (2,137) (2,951) (3,025) (3,405) (4,056) Minority Interest (1,531) (2,279) (2,614) (2,700) (3,113) Preference Dividend 0 0 0 0 0 Net Profit 10,815 11,818 11,296 12,299 14,181 Net Profit before Except. 10,815 11,818 11,296 12,299 14,181 EBITDA 21,589 24,114 24,424 26,151 28,994 Growth Revenue Gth (%) 14.2 8.9 (5.7) 7.9 9.2 EBITDA Gth (%) 26.3 11.7 1.3 7.1 10.9 Opg Profit Gth (%) 27.0 12.0 (0.1) 11.1 14.8 Net Profit Gth (%) 30.4 9.3 (4.4) 8.9 15.3 Margins & Ratio Gross Margins (%) 19.6 19.6 20.1 20.1 20.2 Opg Profit Margin (%) 7.5 7.5 8.0 8.2 8.6 Net Profit Margin (%) 5.0 5.0 5.0 5.1 5.4 ROAE (%) N/A 12.7 11.2 11.4 12.3 ROA (%) N/A 3.9 3.5 3.6 4.0 ROCE (%) N/A 9.3 8.5 8.5 9.1 Div Payout Ratio (%) 30.3 34.6 53.4 53.4 53.4 Net Interest Cover (x) 8.4 20.6 17.7 13.0 15.4 Source: Company, DBS Vickers
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Company Guide CRRC Corporation
Interim Income Statement (RMB m) FY Dec 2H2014 1H2015 2H2015 1H2016 2H2016
Revenue 132,040 91,816 145,968 92,321 131,817 Cost of Goods Sold (105,858) (72,310) (118,940) (71,679) (107,431) Gross Profit 26,183 19,507 27,028 20,642 24,386 Other Oper. (Exp)/Inc (17,205) (12,398) (16,659) (12,964) (14,599) Operating Profit 8,978 7,108 10,370 7,678 9,787 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 418 209 210 333 120 Net Interest (Exp)/Inc (1,044) (313) (535) (454) (530) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 8,352 7,004 10,044 7,557 9,377 Tax (1,029) (1,329) (1,621) (1,483) (1,542) Minority Interest (905) (976) (1,304) (1,280) (1,335) Net Profit 6,418 4,699 7,119 4,795 6,501 Net profit bef Except. 6,418 4,699 7,119 4,795 6,501
Growth Revenue Gth (%) N/A 6.3 10.5 0.5 (9.7) Opg Profit Gth (%) N/A 7.2 15.5 8.0 (5.6) Net Profit Gth (%) N/A 6.9 10.9 2.0 (8.7)
Margins Gross Margins (%) 19.8 21.2 18.5 22.4 18.5 Opg Profit Margins (%) 6.8 7.7 7.1 8.3 7.4 Net Profit Margins (%) 4.9 5.1 4.9 5.2 4.9 Source: Company, DBS Vickers
Balance Sheet (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F
Net Fixed Assets 58,743 62,180 66,364 67,189 68,111 Invts in Associates & JVs 4,814 3,613 8,472 8,961 9,489 Other LT Assets 34,695 40,375 42,521 45,028 47,501 Cash & ST Invts 53,296 42,628 45,647 49,006 52,417 Inventory 59,628 59,747 54,402 55,545 57,713 Debtors 58,424 72,514 74,053 74,180 79,547 Other Current Assets 29,214 30,638 46,852 49,895 53,164 Total Assets 298,814 311,694 338,311 349,805 367,942
ST Debt 27,375 15,260 27,184 28,184 29,184 Creditors 71,390 83,179 91,950 89,930 92,341 Other Current Liab 74,148 70,652 65,093 68,303 71,951 LT Debt 12,216 14,316 14,838 14,838 14,838 Other LT Liabilities 11,508 14,712 15,441 15,774 16,120 Shareholder’s Equity 89,295 96,900 104,857 111,129 118,747 Minority Interests 12,882 16,674 18,948 21,648 24,761 Total Cap. & Liab. 298,814 311,694 338,311 349,805 367,942
Non-Cash Wkg. Capital 1,728 9,067 18,264 21,387 26,132 Net Cash/(Debt) 13,705 13,052 3,625 5,985 8,395 Debtors Turn (avg days) N/A 100.5 119.3 111.9 106.3 Creditors Turn (avg days) N/A 152.5 185.2 177.7 162.7 Inventory Turn (avg days) N/A 117.7 120.7 107.4 101.1 Asset Turnover (x) NM 0.8 0.7 0.7 0.7 Current Ratio (x) 1.2 1.2 1.2 1.2 1.3 Quick Ratio (x) 0.6 0.7 0.6 0.7 0.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 23.3 25.0 23.9 13.9 13.6 Z-Score (X) 1.7 1.8 1.6 1.8 1.8 Source: Company, DBS Vickers
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Company Guide
CRRC Corporation
Cash Flow Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F
Pre-Tax Profit 14,484 17,048 16,935 18,404 21,350 Dep. & Amort. 5,244 6,217 6,505 6,260 6,199 Tax Paid (2,878) (3,328) (3,644) (3,025) (3,405) Assoc. & JV Inc/(loss) (734) (419) (453) (489) (528) (Pft)/ Loss on disposal of FAs 1,567 627 579 0 0 Chg in Wkg.Cap. 7,995 (6,974) (587) (3,164) (5,043) Other Operating CF 2,760 1,811 1,652 1,768 1,759 Net Operating CF 28,437 14,982 20,986 19,754 20,332 Capital Exp.(net) (9,215) (7,387) (10,032) (6,000) (6,000) Other Invts.(net) (6,328) (4,478) (12,304) (3,600) (3,600) Invts in Assoc. & JV (250) (165) (4,321) 0 0 Div from Assoc & JV 447 340 434 0 0 Other Investing CF (4,438) 6,297 1,513 0 0 Net Investing CF (19,785) (5,392) (24,709) (9,600) (9,600) Div Paid (3,447) (3,327) (4,141) (6,027) (6,562) Chg in Gross Debt 5,097 (11,294) 3,553 1,000 1,000 Capital Issues 8,266 501 179 0 0 Other Financing CF (2,643) (2,567) 1,716 (1,768) (1,759) Net Financing CF 7,272 (16,687) 1,306 (6,794) (7,321) Currency Adjustments 0 0 0 0 0 Chg in Cash 15,925 (7,098) (2,416) 3,360 3,411 Opg CFPS (RMB) 0.75 0.80 0.75 0.80 0.88 Free CFPS (RMB) 0.70 0.28 0.38 0.48 0.50
Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
Page 47
Company Guide CRRC Corporation
H Share - Target Price & Ratings History
S.No. Date Closing 12-mth Rating HK$ Price Target 9.0 2 3 Price 1 8.5 1: 24-Aug-16 HK$6.93 HK$8.20 Buy 2: 2-Dec-16 HK$7.56 HK$8.55 Buy 8.0 3: 30-Mar-17 HK$7.71 HK$8.70 Buy
7.5
7.0
6.5
6.0 Jul-17 Jul-16 Jan-17 Jun-17 Oct-16 Feb-17 Apr-17 Sep-16 Dec-16 Nov-16 Mar-17 Aug-16 May-17
Source: DBS Vickers Analyst: Rachel MIU
A Share - Target Price & Ratings History
S.No. Date Closing 12-mth Rating RMB Price Target 13.0 1 2 3 Price 12.0 1: 24-Aug-16 RMB9.40 RMB9.10 Hold 2: 2-Dec-16 RMB11.32 RMB11.10 Hold 11.0 3: 30-Mar-17 RMB10.50 RMB11.10 Hold 10.0 9.0 8.0 7.0 6.0 Jul-16 Jul-17 Oct-16 Feb-17 Dec-16 May-17
Source: DBS Vickers Analyst: Rachel MIU
ASIAN INSIGHTS VICKERS SECURITIES
Page 48
Malaysia Company Guide Gamuda
Version 9 | Bloomberg: GAM MK | Reuters: GAMU.KL Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 Jul 2017
BUYBUYBUY Best Transportation Proxy LastLast Traded Price ((( 21 Jul 201721 2017)2017))):: RM5.26 (KLCIKLCIKLCIKLCI : 1,759.16) BestBest proxy to transportation infrastructureinfrastructure. Gamuda is our top Price TaPrice TargetTarget 121212-12---mthmthmthmth:::: RM6.70 (27% upside) (Prev RM6.70) large-cap pick in the sector, as it is the best proxy to a slew of upcoming transportation-related projects. Its strong reputation
Analyst for MRT Line 1 and appointment as Project Delivery Partner Chong Tjen-San, CFA +60 3 26043972 [email protected] (PDP) for Penang Transport Master Plan (PTMP) has given it leverage for other large-multiplier projects. What’s New Where we differ: Our EPS is on a fully diluted basis assuming full • 3QFY17 driven by strong construction earnings conversion of its warrants. We raised our earnings to factor in • Expect large-scale wins over next two years stronger wins over the next two years. However, we anticipate there will likely be a lag effect before more meaningful earnings • Raising earnings for FY18F/19F contribution as land acquisition and actual mobilisation of machinery could be slower than expected for a project like East • TP lifted to RM6.70RM6.70;;;; Still our top large cap pick Coast Railway Link (ECRL). Our TP is at the higher end of
consensus reflecting our view that the stock should be positioned as the bell weather of the sector. Gamuda’s Price Relative outstanding orderbook now stands at RM8.2bn, which does not RM Relative Index include the PDP fees for MRT Line 2 aboveground works. 6.0 219 199 5.5 179
5.0 159 PPPotentialPotential catalyst: Key contract wins and earnings delivery are
139 4.5 the most important critical factors for Gamuda. There are 119 4.0 99 expectations of RM10bn of new orders per annum for CY17F- 3.5 79 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 18F. For 2017, this will largely be driven by the ECRL while for Gamuda (LHS) Relative KLCI (RHS) 2018 it will be the MRT Line 3. This will underpin a 3-year
earnings CAGR of 13% for FY16-FY19F. Gamuda is in the Forecasts and Valuation midst of formalising its official guidance for property presales FY JulJulJul (((RMRMRM m) 201620162016AAA 201720172017FFF 201820182018FFF 201920192019FFF for FY18F which tentatively is set at RM3bn (+20% y-o-y) Revenue 2,122 4,248 6,423 8,561 EBITDA 470 641 753 906 Valuation: Pre-tax Profit 781 917 1,028 1,181 We maintain our BUY rating with a new SOP-derived TP of Net Profit 626 691 780 902 RM6.70. We have accounted for the dilution of warrants and Net Pft (Pre Ex.) 626 691 780 902 Net Pft Gth (Pre-ex) (%) (8.2) 10.3 12.8 15.7 corresponding increase in cash raised from full conversion EPS (sen) 22.3 24.6 27.8 32.1 while also assuming some new wins outside of MRT 2. EPS Pre Ex. (sen) 22.3 24.6 27.8 32.1 EPS Gth Pre Ex (%) (21) 10 13 16 Key Risks to Our View: Diluted EPS (sen) 22.3 24.6 27.8 32.1 Net DPS (sen) 8.88 8.88 8.88 8.88 High rrawaw material priceprice. The tunneling portion of MRT Line 2 is BV Per Share (sen) 245 262 283 307 its largest project and is susceptible to fluctuations of raw PE (X) 23.6 21.4 18.9 16.4 material prices, particularly for steel. Nonetheless, we think this PE Pre Ex. (X) 23.6 21.4 18.9 16.4 P/Cash Flow (X) 140.4 68.0 52.2 38.9 is partly mitigated by the higher contract value on a per km EV/EBITDA (X) 39.3 28.9 24.6 20.3 basis. Net Div Yield (%) 1.7 1.7 1.7 1.7 At A Glance P/Book Value (X) 2.1 2.0 1.9 1.7 Issued Capital (m shrs) 2,444 Net Debt/Equity (X) 0.5 0.4 0.4 0.4 Mkt. Cap (RMm/US$m) 12,857 / 3,000 ROAE (%) 9.5 9.7 10.2 10.9 Major Shareholders (%)
Earnings Rev (%): 0 0 0 EPF 9.8 Consensus EPS (sen): 27.3 31.0 36.2 Consensus EPS sensen :: KWAP 6.8 Other Broker Recs: B: 18 S: 1 H: 4 Free Float (%) 78.8 Source of all data on this page: Company, AllianceDBS, Bloomberg 3m Avg. Daily Val (US$m) 7.3 Finance L.P ICB IndustrICB IndustryIndustryyy : Industrials / Construction & Materials
ASIAN INSIGHTS VICKERS SECURITIES ed: JS / sa:BC, PY Company Guide
Gamuda
WHAT’S NEW Bullish undertone
3QFY173QFY17 results in line:line::: Pick up in construction earnings. Key highlights from briefing : ConfidentConfident on large scale wins: Guidance of RM10bn per year Guidance for strong winswins.... Gamuda is aiming for RM10bn for CY17/18. worth of new orders per year for CY17/18F. For CY17F, this will likely be anchored by ECRL and LRT3 while for CY18F it RaisingRaising earnings and TP.TP. Gamuda remains our top pick for the will be from MRT Line 3. MRT Line 3 is expected to receive sector. We raised our earnings for FY18/19F and our SOP- cabinet approval in mid-CY18 while project rollout will likely derived TP to RM6.70. be in late 2018/early 2019. Up to half of MRT Line 3 will be tunnelling works, which is positive for Gamuda. No surprises. Gamuda posted 3QFY17 net profit of RM171m (+12% y-o-y, +3% q-o-q) bringing 9MFY17 net profit to Property presales of RM3bn in FY18F. Gamuda is in the midst RM499m (+5% y-o-y), which was in line with our and of formalising its official guidance for property presales for consensus estimates. FY18F. The figure has been tentatively set at RM3bn which will be underpinned by its local property launches from Gamuda Strong quarter for constructionconstruction.... 3QFY17 construction pretax Gardens, Kundang Estates and Twentyfive.7, and buoyant jumped 107% y-o-y to RM87m. On a cumulative basis, sales from Vietnam. Gamuda’s initial guidance for Vietnam 9MFY17 surged 64% y-o-y to RM231m driven by higher property sales for FY17F was RM630m (+19% y-o-y) but it will progress of works from MRT Line 2. Pretax margins in 9MFY17 likely close the financial year at close to RM1bn in presales. were 9% vs 7% in 9MFY16. KV MRT Line 1 has been completed and the whole line will be opened for service on 17 Industrialised Building System (IBS). Gamuda dedicated a fair July. amount of time from its briefing to talk about its new IBS venture. The site is situated on a 27-acre piece of land in Will beat property presales targettargettarget?target??? 3QFY17 property presales Sepang where the first factory (capacity of 1m tonnes per was RM620m, bringing 9MFY17 presales to RM1.4bn. We annum) is already running. There are plans for a second factory understand 4QFY17 property sales will be strong driven by in Banting, adding another 1.5m tonnes per annum. Currently, maiden sales for Gamuda Gardens, and stronger Vietnam and the capacity is for in-house (800 units in Jade Hills) but is Horizon Hills sales. Hence, we expect FY17F property presales targeting to clinch some external projects in the coming to surpass its target of RM2.1bn by c.20-25%. months. In three years’ time, the target is for one-third internal But earnings weaker in the interim. However, 3QFY17 property use and two-thirds external use. pretax profit was down 8% y-o-y and 12% q-o-q to RM45m. Raising earnings and TPand TP.TP We raised our FY18-FY19F net profit Similarly, 9MFY17 pretax profit fell 18% y-o-y to RM144m as by 6%/15% to factor in higher new contract wins of RM8bn 9MFY17 margins dropped to 13% from 23% in 9MFY16. The per financial year (vs RM2-3bn per financial year previously. lower margins are expected to be temporary given the sales This is still below Gamuda’s guidance. We also lift our SOP- mix (overseas projects have lower margins) and higher upfront derived TP to RM6.70 from RM6.30 previously to account for costs for its new townships. Unbilled sales now stand at incremental new wins of RM8bn (vs RM3.5bn) previously. This RM2bn, giving earnings visibility of about two years. is on the back of lower margins of 5-6% to be on the more Progress of MRT Line 2 awardsawards.. For MRT Line 2, utilities prudent side. relocation, earthworks, piling and pier construction work are progress for Packages V201, V202, V203, V208 and V210. For the tunnelling portion, six out of the ten tunnel boring machines (TBM) are ready to be deployed and factory . acceptance test for the balance six is scheduled to be soon. The first tunnel drive will commence in November 2017. So far, 31 work packages for MRT line 2 have been awarded including the tunnelling package of RM15.47bn. All ten viaduct packages have been awarded which will ensure gradual recognition of its PDP fees.
ASIAN INSIGHTS VICKERS SECURITIES Page 2 Company Guide Gamuda
Quarterly / Interim Income Statement (RMm) FY JulJulJul 3Q3Q3Q20163Q201620162016 2Q2Q2Q20172Q201720172017 3Q3Q3Q20173Q201720172017 % chg yoy % chg qoq% qoq
Revenue 467 854 839 79.6 (1.7) Cost of Goods Sold (377) (738) (691) 83.1 (6.4) Gross ProfitGross Profit 89.989.989.9 116116116 149149149 65.265.265.2 28.528.528.5 Other Oper. (Exp)/Inc 16.8 52.7 21.8 29.8 (58.6) Operating Profit 107107107 168168168 170170170 59.659.659.6 1.31.31.3 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm Associates & JV Inc 109 79.5 82.2 (24.4) 3.5 Net Interest (Exp)/Inc (29.7) (29.1) (31.3) (5.3) (7.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm PrePrePre---tax Profittax Profit 186186186 219219219 221221221 19.119.119.1 1.21.21.2 Tax (20.7) (39.4) (42.8) 107.4 8.6 Minority Interest (12.5) (12.9) (7.5) 39.6 (41.8) Net ProfitNet Profit 153153153 166166166 171171171 11.911.911.9 2.82.82.8 Net profit bef Except. 153 166 171 11.9 2.8 EBITDA 215 248 253 17.2 2.0 Margins (%) Gross Margins 19.2 13.5 17.7 Opg Profit Margins 22.8 19.7 20.3 Net Profit Margins 32.7 19.5 20.4
Source of all data: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES Page 3 Company Guide
Gamuda
Gamuda’s SOP Div isionDivision StakStake eStake SubtotalSubtotalSubtotal SOPSOPSOPSOP/shareSOP/shareSOP/share %%% RMmRMmRMmRMmRMmRMm Construction - MRT Above ground 50 2496.1 0.89 Construction - MRT tunneling 50% 7020.8 2.50 Construction - Potential new wins 3076.3 1.10
Local Property Kota Kemuning 50 6.5 Valencia 99 3.2 Bandar Botanic 100 207.1 Horizon Hills 50 240.2 Jade Hills 100 119.8 Madge Mansions 100 11.5 Jalan Pudu 100 56.9 High Park Suites 100 70.9 Gamuda Gardens 100 524.8 Kundang Estate 100 120.0 Bukit Bantayan Residence 100 164.0 Net Tangible Asset 3953.0 Subtotal 3286.8 3286.8 1.17
Foreign Property Yenso Park Hanoi Vietnam 100 377.3 150.9 0.05 Tan Thang development 100 231.7 92.7 0.03
WaterWaterWater Gamuda Water 80 521.9 521.9 0.19 Splash 40 2800 1120.0 0.40
T ollsTollsolls LDP 46 1536.8 Sprint 30 415.8 Kesas 30 379.9 Panargarh Palsit 50 149.2 Durgapur 50 106.5 SMART 50 119.3 Subtotal 2707.5 2707.5 0.96
Less net debt for FY17 -3377.0 -1.20
Cash raised from warrants 1724.0
Total SOP 18820.0
Number of shares outstanding (m) 2406.0 Warrants issue 401.0 400.985 Fully diluted number of shares (m) 2807.0
SOP/share (RM) 6.70
Source: AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES Page 4 Company Guide Gamuda
Construction margins CRITICAL DATA POINTS TO WATCH 11.6 Critical Factors 11.7 10.0 Key criticalcritical factorsfactors. Our findings reveal that significant contract 8.94 8.5 8.64 wins coupled with the corresponding earnings growth are the 8.3 7.6 main key share price drivers. The stock also tends to outperform 6.7 during the general election period. There is a partial negative 5.0 correlation between its share price and steel prices given it bears 3.3 fluctuations in raw material prices for the MRT tunneling. We 1.7 understand Gamuda sources almost all of its steel requirements 0.0 2015A 2016A 2017F 2018F 2019F locally for the MRT project and hence it is not impacted by the recent changes in regulations for imported steel. It only imports Property launches Malaysia steel where it is not available locally such as steel used in railway 1330 tracks. 1356.6
1085.3 1000 950 900 Expectation of largelarge----scaledscaled winsscaled wins.wins... Gamuda has an orderbook of 850 RM8.2bn now excluding the PDP portion for MRT Line 2 where 814.0 it derives a project management fee of 6%. Its orderbook now 542.6 comprises two projects which are MRT Line 2 tunneling, and the Pan Borneo Highway Sarawak project. While its orderbook is at 271.3 its peak now, it is guiding for RM10bn new orders for CY17 0.0 2015A 2016A 2017F 2018F 2019F (driven by ECRL) and another RM10bn for CY18 (driven by MRT 3). This together with expectations of the start of the next Construction profit contribution earnings upcycle from FY17F (Y/E July) onwards driven by MRT 41.24 40.4 Line 2 could be the much needed catalyst for the next leg of 32.5 share price performance. The MMC-Gamuda JV has returned as 32.99 26.9 the tunneling contractor with a total contract value of 24.7 24.75 23.4 RM15.47bn or RM7.7bn per contractor. 16.50 Property sales buoyed by overseas contracts. FY16 property 8.25 presales was RM2.05bn (+69% y-o-y). Gamuda will likely close FY17F with property presales of RM2.5bn vs its initial guidance 0.00 of RM2.1bn. This will be driven by maiden sales for Gamuda 2015A 2016A 2017F 2018F 2019F Gardens, and better Vietnam and Horizon Hills sales. The overall Property profit contribution strength has come from its overseas projects and new launches 29.5 29.8 26.6 locally and it is not really a reflection of a stronger property 25.3 23.6 market. Gamuda is in the midst of formalising its official 23.8 22.1 guidance for property presales for FY18F which will likely be set 17.9 at RM3bn which will be underpinned by new launches locally and buoyant sales from Vietnam. Gamuda’s initial guidance for 11.9
Vietnam property sales for FY17F was RM630m (+19% y-o-y) 6.0 but it will likely close the financial year at close to RM1bn in 0.0 presales. 2015A 2016A 2017F 2018F 2019F
Sale of SplashSplash. The sale of Splash remains the biggest overhang New order wins for Gamuda. In our view, this will only be resolved post the 8000 8000 8080.0 7735 upcoming General Elections. There may be special dividends now from the sale especially if there are delays in the Penang 6464.0
Transport Master Plan (PTMP) project. 4848.0
3232.0
1500 1616.0
0.0 2016A 2017F 2018F 2019F
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES Page 5 Company Guide
Gamuda
Appendix 1: A look at GamudaGamudaGamuda’sGamuda’s performance since its listing ––– what drives its share price?
Gamuda’sGamuda’s share price performance vs KLCI,KLCI, Steel price and EPS
Indexed GAM MK Steel Price FBMKLCI GAM EPS (rhs) 200 0.200
175
150 0.150
125
100 0.100
75
50 0.050
25
0 0.000 Jun-16 Jun-15 Jun-14 Jun-13 Jun-12 Oct-16 Oct-15 Oct-14 Oct-13 Oct-12 Apr-17 Apr-16 Apr-15 Apr-14 Apr-13 Feb-17 Feb-16 Feb-15 Feb-14 Feb-13 Dec-16 Dec-15 Dec-14 Dec-13 Dec-12 Aug-16 Aug-15 Aug-14 Aug-13 Aug-12
Source: Company, AllianceDBS, DBSVI
The key share price driver for Gamuda appears to be new contract wins and to some extent, earnings growth. For the period until June-16, there was some negative correlation with steel prices as raw material requirements for the KV MRT Line tunnelling contract is borne by the contractor.
Gamuda’sGamuda’s share price performance vs contract wins
GAM vs FBM KLCI 120%
B- No significant newsflow 110% on new contract wins
100%
A- 1) KV MRT 1 tunnelling C - PDP For MRT LIne 2 in Nov- contract; 2) FY13 core 14 and tunnelling contract in 90% earnings grew 19% y-o-y Mar-16 and 3) Conclusion of General Elections
80% Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
Source: Company, AllianceDBS, DBSVI
ASIAN INSIGHTS VICKERS SECURITIES Page 6 Company Guide Gamuda
Gamuda’s share price recorded the most significant in November 2014, PDP for the Penang Transport Master Plan outperformance during the period June 2012 to July 2013 (PTMP) as well as the tunneling package for MRT Line 2 worth (Period A). This was due to a combination of positive newsflow RM15.47bn in March 2016. from the announcement of the MRT Line 1 tunneling contract worth RM8.28bn in April 2012 coupled with the expectations of Major contract wins for Gamuda since 2012 are as follows :- strong earnings growth for FY13. FY13 core net earnings grew • April 2012 – Announcement on KV MRT Line 1 tunneling by c.19% y-o-y after stripping out the one-off arbitration contract worth RM8.28bn. charge. This also coincided with the conclusion of the 13th • Nov 2014- Appointment as PDP for MRT Line 2. General Elections where its share price rallied thereafter. • August 2015 – Appointment as PDP for PTMP. • March 2016 – Awarded tunneling contract for KV MRT From July 2013 onwards (Period B) Gamuda showed a general Line 2 worth RM15.47bn. downtrend in its share price until June 2014 given the lack of significant newsflow post the award of MRT Line 1. From June 2014 to March 2016 (Period C), we think the outperformance was a combination of the award of the PDP role for MRT Line 1
Gamuda’sGamuda’s share price performance vs Quarterly EPS GAM vs FBM KLCI GAM EPS (rhs) 140% 10.00
9.00 120% 8.00 100% 7.00
80% 6.00
5.00 60% 4.00 40% 3.00
20% 2.00 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Source: Company, AllianceDBS, DBSVI
Gamuda’s share price performance does not share any meaningful correlation with quarterly EPS delivery. We think this is because it manages investors’ expectations fairly well. Even in 3Q13 when it reported a one-off provision for tribunal awards of RM113m, the share price did not de-rate significantly. Stripping this out, 9M13 net profit would have increased by 14%.
ASIAN INSIGHTS VICKERS SECURITIES Page 7 Company Guide
Gamuda
Leverage & Asset Turnover (x) Balance Sheet: 0.6 0.70 ManageableManageable net gearinggearing. Net gearing remained manageable with a 0.6 ratio of 0.56 as at 30 April 2017. More recent land bank purchases 0.60 0.5 0.5 0.50 include its maiden project in Toa Payoh, Singapore for S$345.9m 0.4 0.40 (Gamuda has a 50% share), a small parcel of freehold land in 0.4 Melbourne for AUD40m, an 18-acre land in Kota Kinabalu for 0.30 0.3 0.3 0.20 RM100m, and a 257-acre parcel located just 2km from Kota 0.2 0.10 Kemuning for RM392m. 0.2 0.00 0.1 2015A 2016A 2017F 2018F 2019F Further land banking still possiblepossible. Gamuda is still seeking to land Gross Debt to Equity (LHS) Asset Turnover (RHS) bank further in choice locations despite the softening property Capital Expenditure market. But it will be more selective now given its aggressive land RMm banking over the past year or so. Also, the sale of Splash will help 120.0 bring down gearing levels. 100.0
80.0
Share Price Drivers: 60.0
ProxProxyy to transportationtransportation----relatedrelated projectsprojects. Besides having a strong 40.0 reputation, it also has ample capacity and the technical know-how 20.0 to bid for large upcoming transport-related projects. Thus far, 0.0 execution for MRT Line 1 has been smooth. Gamuda has also 2015A 2016A 2017F 2018F 2019F expressed interest in bidding for ECRL, MRT Line 3, LRT 3 civil Capital Expenditure (-) works and Pan Borneo Highway Sabah. It is making a concerted ROE (%) effort to beef up its orderbook and to diversify its project risk.
10.0% Resolution for Splash. A successful resolution for Splash would 8.0% remove the overhang on the stock. Investors could now potentially look forward to special dividends to compensate for the earnings 6.0% void. 4.0%
Key Risks: 2.0%
MacroeconomicMacroeconomic factorsfactors. Generally, an economic slowdown could 0.0% 2015A 2016A 2017F 2018F 2019F adversely affect the group because this could defer or halt some projects, especially infrastructure projects. This could result in Forward PE Band (x) slower order book replenishment. (x) 24.6
Slowdown in property marketmarket. The various tightening policies for 22.6 +2sd: 22.6x the Malaysian property sector could reduce the demand for 20.6 +1sd: 20.6x property (i.e. residential and commercial) in the near future. 18.6 Avg: 18.6x
16.6 -1sd: 16.6x Company Background Gamuda's core businesses focus on three segments which are 14.6 -2sd: 14.6x engineering & construction, infrastructure concessions, and 12.6 Jul-13 Jul-14 Jul-15 Jul-16 property development. PB Band (x) (x) 2.5
2.3 +2sd: 2.22x 2.1 +1sd: 2.1x Avg: 1.97x 1.9 -1sd: 1.84x
1.7 -2sd: 1.72x
1.5
1.3 Jul-13 Jul-14 Jul-15 Jul-16
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES Page 8 Company Guide Gamuda
Key Assumptions FY JulJulJul 201520152015A2015AAA 201620162016A2016AAA 201720172017F2017FFF 201820182018F2018FFF 201920192019F2019FFF
Construction margins 7.60 8.50 11.6 8.94 8.64 Property launches Malaysia 950 900 850 1,330 1,000 Construction profit 24.7 23.4 26.9 32.5 40.4 contribution Property profit contribution 29.5 23.6 26.6 25.3 22.1 New order wins 7,735 1,500 8,000 8,000
Segmental Breakdown FY JulJulJul 201520152015AAA 201620162016AAA 201720172017FFF 201820182018FFF 201920192019FFF
Revenues (RMm) Construction 1,158 905 2,515 4,380 6,414 Property development 842 758 660 790 815 Infrastructure 401 459 468 477 487 Overseas property 0.0 0.0 605 775 845
TotalTotalTotal 2,4002,4002,400 2,1222,1222,122 4,2484,2484,248 6,4236,4236,423 8,5618,5618,561 Pretax profit (RMm) Construction 242 212 291 392 554 Property development 289 214 198 204 193 Infrastructure 450 481 503 508 513 Overseas property 0.0 0.0 89.6 101 110 Others (124) (126) (164) (177) (189) TotalTotalTotal 858858858 781781781 917917917 1,0281,0281,028 1,1811,1811,181 Pretax Margins (%) Construction 20.9 23.4 11.6 8.9 8.6 Property development 34.4 28.2 30.0 25.8 23.7
Income Statement (RMm) FY JulJulJul 201520152015A2015AAA 201620162016A2016AAA 201720172017F2017FFF 201820182018F2018FFF 201920192019F2019FFF
Revenue 2,400 2,122 4,248 6,423 8,561 Cost of Goods Sold (1,820) (1,685) (3,550) (5,519) (7,412) Gross ProfitGross Profit 580580580 437437437 698698698 904904904 1,1481,1481,148 Other Opng (Exp)/Inc (10.4) 10.9 (84.1) (181) (277) Operating Profit 570570570 448448448 614614614 722722722 872872872 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 375 413 417 421 425 Net Interest (Exp)/Inc (86.6) (79.7) (114) (115) (116) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 PrePrePre---tax Profittax Profit 858858858 781781781 917917917 1,0281,0281,028 1,1811,1811,181 Tax (133) (112) (183) (206) (236) Minority Interest (43.3) (42.6) (42.6) (42.6) (42.6) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net ProfitNet Profit 682682682 626626626 691691691 780780780 902902902 Net Profit before Except. 682 626 691 780 902 EBITDA 590 470 641 753 906 Growth Revenue Gth (%) 7.6 (11.6) 100.2 51.2 33.3 EBITDA Gth (%) 22.7 (20.4) 36.6 17.5 20.3 Opg Profit Gth (%) 23.9 (21.4) 37.1 17.6 20.7 Net Profit Gth (Pre-ex) (%) (5.2) (8.2) 10.3 12.8 15.7 Margins & Ratio Gross Margins (%) 24.2 20.6 16.4 14.1 13.4 Opg Profit Margin (%) 23.7 21.1 14.5 11.2 10.2 Net Profit Margin (%) 28.4 29.5 16.3 12.1 10.5 ROAE (%) 11.6 9.5 9.7 10.2 10.9 ROA (%) 5.8 4.6 4.7 4.9 5.3 ROCE (%) 4.6 3.2 3.7 4.1 4.6 Div Payout Ratio (%) 31.3 39.8 36.1 32.0 27.6 Net Interest Cover (x) 6.6 5.6 5.4 6.3 7.5 Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES Page 9 Company Guide
Gamuda
Quarterly / Interim Income Statement (RMm) FY JulJulJul 3Q3Q3Q20163Q201620162016 4Q4Q4Q20164Q201620162016 1Q1Q1Q20171Q201720172017 2Q2Q2Q20172Q201720172017 3Q3Q3Q20173Q201720172017
Revenue 467 614 505 854 839 Cost of Goods Sold (377) (478) (406) (738) (691) Gross ProfitGross Profit 89.989.989.9 136136136 98.798.798.7 116116116 149149149 Other Oper. (Exp)/Inc 16.8 32.4 35.0 52.7 21.8 Operating Profit 107107107 169169169 134134134 168168168 170170170 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 109 78.3 98.5 79.5 82.2 Net Interest (Exp)/Inc (29.7) (37.0) (26.5) (29.1) (31.3) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 PrePrePre---tax Profittax Profit 186186186 210210210 206206206 219219219 221221221 Tax (20.7) (49.4) (30.6) (39.4) (42.8) Minority Interest (12.5) (8.6) (12.9) (12.9) (7.5) Net ProfitNet Profit 153153153 152152152 162162162 166166166 171171171 Net profit bef Except. 153 152 162 166 171 EBITDA 215 247 232 248 253
Growth Revenue Gth (%) (11.4) 31.5 (17.8) 69.1 (1.7) EBITDA Gth (%) (2.7) 14.7 (6.0) 6.7 2.0 Opg Profit Gth (%) (2.6) 58.1 (20.8) 25.9 1.3 Net Profit Gth (Pre-ex) (%) (4.6) (0.4) 6.6 2.5 2.8 Margins Gross Margins (%) 19.2 22.2 19.5 13.5 17.7 Opg Profit Margins (%) 22.8 27.5 26.5 19.7 20.3 Net Profit Margins (%) 32.7 24.8 32.1 19.5 20.4
Balance Sheet (RMm) FY JulJulJul 201520152015AAA 201620162016AAA 201720172017FFF 201820182018FFF 201920192019FFF
Net Fixed Assets 312 420 492 561 627 Invts in Associates & JVs 2,621 2,881 3,298 3,719 4,144 Other LT Assets 5,163 5,529 5,529 5,529 5,529 Cash & ST Invts 1,438 1,473 1,831 2,266 2,810 Inventory 186 117 135 155 178 Debtors 1,377 1,441 1,657 1,905 2,191 Other Current Assets 2,230 2,297 2,297 2,297 2,297 Total Assets 13,32613,32613,326 14,15814,15814,158 15,23915,23915,239 16,43316,43316,433 17,77617,77617,776
ST Debt 777 640 1,040 1,440 1,840 Creditor 1,355 1,046 1,203 1,383 1,591 Other Current Liab 327 413 413 413 413 LT Debt 3,358 4,169 4,169 4,169 4,169 Other LT Liabilities 815 676 676 676 676 Shareholder’s Equity 6,337 6,878 7,360 7,931 8,624 Minority Interests 356 336 379 421 464 Total Cap. & Liab. 13,32613,32613,326 14,15814,15814,158 15,23915,23915,239 16,43316,43316,433 17,77617,77617,776
Non-Cash Wkg. Capital 2,110 2,395 2,472 2,560 2,662 Net Cash/(Debt) (2,698) (3,335) (3,377) (3,342) (3,198) Debtors Turn (avg days) 235.2 242.3 133.1 101.2 87.3 Creditors Turn (avg days) 226.8 263.5 116.5 86.0 73.6 Inventory Turn (avg days) 48.7 33.2 13.0 9.6 8.2 Asset Turnover (x) 0.2 0.2 0.3 0.4 0.5 Current Ratio (x) 2.1 2.5 2.2 2.0 1.9 Quick Ratio (x) 1.1 1.4 1.3 1.3 1.3 Net Debt/Equity (X) 0.4 0.5 0.4 0.4 0.4 Net Debt/Equity ex MI (X) 0.4 0.5 0.5 0.4 0.4 Capex to Debt (%) 0.6 2.1 1.9 1.8 1.7 Z-Score (X) 2.0 2.2 2.2 2.2 2.2
Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES Page 10 Company Guide Gamuda
Cash Flow Statement (RMm) FY JulJulJul 201520152015A2015AAA 201620162016A2016AAA 201720172017F2017FFF 201820182018F2018FFF 201920192019F2019FFF
Pre-Tax Profit 858 781 917 1,028 1,181 Dep. & Amort. 20.2 21.6 27.2 31.0 34.6 Tax Paid (882) (124) (183) (206) (236) Assoc. & JV Inc/(loss) (375) (413) (417) (421) (425) Chg in Wkg.Cap. 164 (228) (76.7) (88.2) (101) Other Operating CF 818 67.3 (50.4) (61.2) (73.6) Net Operating CF 604604604 105105105 217217217 283283283 379379379 Capital Exp.(net) (24.3) (102) (100.0) (100.0) (100.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 83.5 189 0.0 0.0 0.0 Other Investing CF (1,473) (743) 50.4 61.2 73.6 Net Investing CF (1,413)(1,413)(1,413) (656)(656)(656) (49.6)(49.6)(49.6) (38.8)(38.8)(38.8) (26.4)(26.4)(26.4) Div Paid (285) (289) (209) (209) (209) Chg in Gross Debt 1,561 650 400 400 400 Capital Issues 219 27.3 0.0 0.0 0.0 Other Financing CF (167) 198 0.0 0.0 0.0 Net Financing CF 1,3281,3281,328 586586586 191191191 191191191 191191191 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 518 35.2 358 435 544 Opg CFPS (sen) 18.3 11.9 10.5 13.2 17.1 Free CFPS (sen) 24.1 0.10 4.17 6.52 9.95 Source: Company, AllianceDBS
ASIAN INSIGHTS VICKERS SECURITIES Page 11 Company Guide
Gamuda
Target Price & Ratings History
RMRMRM 12-mth 5.65 Date of Closing S.No.S.No.S.No. TTarget arget Rating 20 ReportReportReport PricePricePrice PricePricePrice 5.45 1: 05 Aug 16 4.85 5.80 BUY 14 18 16 19 21 2: 02 Sep 16 4.85 5.80 BUY 5.25 3: 29 Sep 16 4.90 5.80 BUY 17 4: 06 Oct 16 4.85 5.80 BUY 15 5.05 6 10 12 5: 21 Oct 16 4.93 5.80 BUY 2 4 6: 24 Oct 16 4.95 5.80 BUY 7: 07 Nov 16 4.87 5.80 BUY 4.85 11 3 5 13 1 7 8 8: 06 Dec 16 4.69 5.80 BUY 9 9: 19 Dec 16 4.82 5.80 BUY 4.65 10: 10 Jan 17 4.95 5.80 BUY 11: 12 Jan 17 4.94 5.80 BUY 4.45 12: 07 Feb 17 4.93 5.80 BUY Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 13: 03 Mar 17 4.90 5.80 BUY 14: 24 Mar 17 5.29 6.30 BUY Note : Share price and Target price are adjusted for corporate actions. 15: 05 Apr 17 5.20 6.30 BUY 16: 27 Apr 17 5.23 6.30 BUY 17: 28 Apr 17 5.27 6.30 BUY 18: 05 May 17 5.27 6.30 BUY 19: 02 Jun 17 5.40 6.30 BUY 20: 28 Jun 17 5.48 6.70 BUY 21: 07 Jul 17 5.43 6.70 BUY
Source: AllianceDBS Analyst: Chong Tjen-San
ASIAN INSIGHTS VICKERS SECURITIES Page 12 Malaysia Company Guide Sunway Construction Group
Version 9 | Bloomberg: SCGB MK | Reuters: SCOG.KL Refer to important disclosures at the end of this report
DBS Group Research . Equity 24 Jul 2017
BUYBUYBUY Strong and steady LastLast Traded Price ((( 21 Jul 201721 2017)2017))):: RM2.04 (KLCIKLCIKLCIKLCI : 1,759.16) Malaysia’sMalaysia’s leading pure construction player. Sunway Price Target 121212-12---mthmthmthmth:::: RM2.60 (27% upside) (Prev RM2.60) Construction Group (SCG) is the largest listed pure play Analyst construction company in Malaysia. Given its strong track record Chong Tjen-San, CFA +60 3 26043972 [email protected] with MRT, LRT and BRT jobs previously, SCG is on a strong What’s New footing to bag several key infrastructure packages such as LRT3 and BRT as well as other infrastructure- related and building • New contract wins could surprise on upside projects. SCG has also established itself as the only construction • Lumpy recognition of variation orders may lift specialist to be involved in all three Rapid Line infra projects (MRT, LRT and BRT). This makes the group one of the strongest FY17F earnings contenders to win Eleventh Malaysia Plan (11MP) projects. • Net cash balance sheet gives flexibility for Private RidingRiding on Singapore’s public housing development. Its precast Finance Initiative contracts and higher dividends division is a strong proxy to the growing demand for HDB • Pure contractors should not trade at a discount to residences in Singapore, where the government has a target to build an additional 88,000 units of public housing in FY16-FY19. diversified ones in a construction upcycle With premium EBIT margins recorded over the past few years,
the business is ROE-enhancing and also synergistic to its construction business. We estimate that every RM200m increase Price Relative in new wins from its precast division (beyond our assumption of RM Relative Index RM300m) will raise our FY17F earnings by 6% vs 1% for 2.3 203 2.1 construction wins. 183 1.9 163 1.7 More modest RM2bn order win guidance for FY17F. Not one to 1.5 143 More modest RM2bn order win guidance for FY17F. 1.3 123 rest on its laurels, SCG will be bidding for LRT 3 (already 1.1 103 0.9 83 prequalified), private and public sector building jobs and internal Jul-15 Jan-16 Jul-16 Jan-17 projects from the property arm of its holding company. Contract Sunway Construction Group (LHS) Relative KLCI (RHS) wins reached RM2.7bn (including precast) in 2016, which exceeded its RM2.5bn guidance. For FY17F, management is Forecasts and Valuation guiding for RM2bn worth of new wins, from a combination of FY DecDecDec (((RMRMRM m) 201520152015AAA 201620162016AAA 201720172017FFF 201820182018FFF LRT3, internal jobs, precast projects and some other private Revenue 1,917 1,789 2,321 2,739 sector building jobs. EBITDA 178 185 231 259 Pre-tax Profit 141 154 194 222 Valuation: Net Profit 127 124 155 178 BUY, TPTP set atset at RM2.60. Our TP is based on sum-of-parts (SOP) Net Pft (Pre Ex.) 127 124 155 178 valuation to reflect the growing contribution from its high- Net Pft Gth (Pre-ex) (%) 1.9 (2.9) 25.6 14.7 margin precast business. We believe pure play construction EPS (sen) 9.84 9.55 12.0 13.8 EPS Pre Ex. (sen) 9.84 9.55 12.0 13.8 players should at least trade at parity to its more diversified EPS Gth Pre Ex (%) 2 (3) 26 15 larger-cap peers in times of rising government development Diluted EPS (sen) 9.84 9.55 12.0 13.8 expenditure. Net DPS (sen) 4.00 4.00 5.40 6.19 Key Risks to Our View: BV Per Share (sen) 34.9 38.1 44.7 52.3 PE (X) 20.7 21.4 17.0 14.8 The timely execution of its peak orderbook of RM4.6bn is PE Pre Ex. (X) 20.7 21.4 17.0 14.8 crucial to minimise the risk of any earnings cuts. With its P/Cash Flow (X) 11.2 33.0 17.3 12.7 strong execution track record and experience, we believe the EV/EBITDA (X) 12.9 12.5 9.8 8.4 Net Div Yield (%) 2.0 2.0 2.6 3.0 group is able to execute the projects in a timely manner. P/Book Value (X) 5.8 5.3 4.6 3.9 At A Glance Net Debt/Equity (X) CASH CASH CASH CASH Issued Capital (m shrs) 1,292 ROAE (%) 33.2 26.2 29.0 28.4 Mkt. Cap (RMm/US$m) 2,636 / 615 Earnings Rev (%): 0 0 0 Major Shareholders (%) Consensus EPS (sensensen)::: N/A 12.3 13.2 Sunway Berhad 55.6 Other Broker Recs: B: 7 S: 0 H: 5 Tan Sri Jeffrey Cheah & Family 7.6 Source of all data on this page: Company, AllianceDBS, Bloomberg Free Float (%) 37.9 Finance L.P 3m Avg. Daily Val (US$m) 0.65 ICB Industry : Industrials / Construction & Materials
ASIAN INSIGHTS VICKERS SECURITIES ed: JS/ sa:BC, PY Company Guide Sunway Construction Group
WHAT’S NEW Aiming big
NewNew contract wins could surprise on the upsideupside:::: This is largely Besides this there is still a healthy pipeline of internal dependent on key wins for LRT 3. projects (largely hospital-related), BRT KL project (only contractor role), TRX building jobs, and Pan Borneo EarningsEarnings could be buoyed by VOs: SCG is actively pursuing Sabah where SCG could have a role to play. More variation orders for some completed infrastructure projects. recently, Sunway Berhad said that it would allocate BUY, TPTP RM2.60. Pure play contractors should not trade at a RM1bn in capital expenditure to build five hospitals in discount during a construction upcycle. the next five years in Sunway Penang (2 hospitals), Sunway Velocity, Cheras (1), Sunway Damansara (1), and We met with Sunway Construction (SCG) recently. Below are Sunway Ipoh (1). the key takeaways from our meeting. SCG appears to express a keener interest on the Pan Borneo Sabah project as expectations are that there will 1)New wins could surprise on the upside. SCG is sticking to be portions for more greenfield development (as its RM2bn new order win guidance for FY17F (our opposed to upgrading works for Pan Borneo Sarawak). forecast is RM2.1bn). YTD wins amounted to RM0.9bn However, it will also wait for clarification on the allowed while current outstanding orderbook as at 31 March equity holdings for West Malaysian based contractors 2017 stood at RM4.6bn. We believe there is a high before submitting tenders. probability it could exceed this given its aggressive bid for LRT 3 packages. SCG could bid for up to half of the 10 civil packages. In particular, there is one large work 2017 YTDYTD order wins package which spans c.9km where a successful win Contract Sum 2017 YTD order wins Clie Client ntClient Te nureTenure (RMm)(RMm)(RMm) would enable SCG to substantially exceed its new order Sunway Property - Kelana Jaya Condo Sunway Property Jan 17- Nov 20 449 win guidance. The average size of a LRT 3 package CP 3 Walkway Sunway South Quay 2017 4 ranges from 2.5km to 4.5km. Precast Various 43 GDC Plant 1 Putrajaya Holdings 2Q17 - 3Q18 152 Based on our sensitivity analysis, every RM500m SUKE - Package CB 1 -272 piles Cergas Murni 2Q18 18 additional increase in new construction contracts beyond DASH - Package CA 1 - 227 piles Usahasama Monza 1Q18 16 our assumption for FY17F will raise our FY18F net profit MRT S 201 (Part of MRT V201 by 4.3% and SOP-derived TP by 9.2%. package) MRT Corp Mar 17- Sept 20 212 894
Source : SCG SensitivitySensitivity Analysis for incremental new wins 2017 New order winsFY18F net profit increase (%) 2017 New order wins FY18F net profit increase (%) 2)22)) Earnings could be buoyed by lumpy VOs. Recall 1Q17 RM2.1bn (Base case) 0 construction pretax margin improved to 8.1% vs 4.4% in RM2.6bn (+RM500m) 4.3 4Q16 and 7.0% in 1Q16. The higher margins were due RM3.1bn (+RM1bn) 8.2 to the completion of one civil engineering project and RM3.6bn (+RM1.5bn) 11.8 also a variation order (VO) for one of its legacy Indian Sustainable construction projects. We understand there could also be further VOs orde rbook 2017 SOP-derived TP (RM) recognised for this Indian project in 2Q but the quantum RM4.5bn (Base case) 2.60 is small. SCG is also actively pursuing VOs for two local RM5.0bn (+RM500m) 2.84 infrastructure projects. RM5.5bn (+RM1bn) 3.07 3)Balance sheet strength. SCG is in a net cash position of RM6bn (+RM1.5bn) 3.31 RM329m (RM0.25/share) as at 31 March 2017. We Source : AllianceDBS, DBS Vickers estimate SCG will generate FCF/share of RM0.11 and RM0.14 for FY17F and FY18F, respectively, based on RM35m capex per annum. This has yet to take into account the Integrated Construction Precast Hub (ICPH) in Singapore which will cost SGD40m over a three-year
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construction period. SCG is looking to rope in a JV which is at a substantial discounts of 40-62% to IJM (17.7x), partner for this, hence the capex commitments would Gamuda (20.0x), and WCT (20.6x). SCG’s strong execution likely be lower. track record as the only contractor with a track record in MRT, LRT and BRT projects, its net cash balance sheet, and We believe SCG’s balance sheet strength gives it ROE-enhancing precast division should still underpin PE flexibility to raise dividend payout beyond its 35% of net expansion. profit policy, undertake more Private Finance Initiative related projects, and venture into new markets in Asean. We note that SCG’s dividend payout for FY15 was 40% and FY16 was >50%.
BUYBUYBUY,BUY, TP unchanged at RM2.60RM2.60RM2.60.RM2.60 Generally, purer play contractors trade at a discount to the larger cap diversified players like IJM, Gamuda and WCT given the lack of a recurring income base. In our view, this should not apply in times of a construction upcycle where there is sustained development spending from high multiplier projects like MRT, LRT, High Speed Rail and East Cost Railway Link ECRL). Based on our estimates, SCG trades at 12.7x CY18 PE (ex-cash)
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Page 63 Company Guide Sunway Construction Group
New order wins CRITICAL DATA POINTS TO WATCH 2600 2600 2626.0
Sweet spot ahead. We think SCG’s construction segment is 2250.9 2100 2100 entering a ‘sweet spot’ on the back of the expected upturn in 1875.7 Malaysia’s construction industry. Given its well-established 1500.6 brand name and strong execution track record, we believe the 1125.4 800 group is one of the strongest contenders to bag several key 750.3 projects under the Eleventh Malaysia Plan (11MP). We are of the 375.1 view that SCG is on a strong footing to bag several key 0.0 infrastructure packages such as LRT3, BRT and other private 2014A 2015A 2016A 2017F 2018F sector building jobs. Construction revenue
2469 Stronger infrastruinfrastructurecture orderbook.orderbook.orderbook. YTD wins amounted 2518.7 2032 2012 RM0.9bn while its outstanding orderbook stands at RM4.6bn. 2015.0 1664 YTD wins include MRT S201 package of RM212m, which is 1502 part of the RM1.2bn MRT V201 package. Recall, the station 1511.2 package value is embedded in the total viaduct contract value 1007.5 and will be open for tender to other subcontractors. About half of its outstanding orderbook comes from two key projects – 503.7
MRT Line 2 V201 and Putrajaya Parcel F - where the raw 0.0 material requirements for MRT aboveground works are borne 2014A 2015A 2016A 2017F 2018F by the government while it has also locked in half of the steel Precast revenue requirements for the Putrajaya job at lower prices. The quality 316.00 301 310 287 of its orderbook is strong and we think margins should be 270 253 relatively intact. SCG is guiding for RM2bn of new wins for 252.80 FY17F inclusive of precast contracts. For 2016, new contract 189.60 wins of RM2.7bn exceeded its initial guidance of RM2.5bn. 126.40 Highly profitable precast segment. SCG’s precast segment is 63.20 expected to contribute a larger share of earnings to the group. SCG’s precast division made up 13-16% of revenue in FY12- 0.00 FY16. It was the largest earnings contributor in FY15, 2014A 2015A 2016A 2017F 2018F accounting for 57% of the group’s EBIT. The group believes Construction EBIT margins normalised margins lie in the 20-25% range. This is supported 6.77 6.8 6.48 by sustainable orders from the Singapore market. Its Tampines 6.08 plant has been returned but will be compensated by an 5.5 additional four lines for its Iskandar plant by 3Q17 and better 4.1 3.56 capacity at its Senai plant. The capacity from both its Johor plants will rise to c.170,000 m3/year. 2.7
1.4 What’s in store for the rest of 2017?2017?2017? With tenders for LRT 3 0.0 already in progress, we expect some awards towards 3Q17. We 2015A 2016A 2017F 2018F understand it will bid for four to five packages including a sizeable one which would enable it to beat its new order win Precast EBIT margins guidance if it wins. Besides LRT 3, it will continue to bid for 30.5 30.8 internal jobs, BRT KL-Klang project, and there is also a traffic dispersal project in KL. It is exploring jobs overseas in two 24.6 20.3 21 21 countries, Myanmar and Indonesia, but this is just in the 18.5 preliminary stages. 12.3
. 6.2
0.0 2015A 2016A 2017F 2018F Source: Company, AllianceDBS
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Leverage & Asset Turnover (x) 1.4 Balance Sheet: 0.50 1.4 Strong balance sheet and cash generation ability. As at 31 0.40 March 2017, the group had a net cash position of RM329m, 1.3 0.30 with no long-term borrowings and minimal working capital 1.3
0.20 requirements going forward. We estimate the group will retain 1.2 its strong balance sheet with a net cash position in FY17F and 0.10 1.2 FY18F. Meanwhile, its ROAE is expected to hover around the 0.00 1.1 27-29% level. 2014A 2015A 2016A 2017F 2018F Gross Debt to Equity (LHS) Asset Turnover (RHS) Share Price Drivers: Capital Expenditure ExecuExecutingting on peak orderbook. SCG's outstanding orderbook RMm now stands at RM4.6bn which is at its peak. This gives it two 50.0 45.0 and a half years of visibility. The largest projects are Putrajaya 40.0 Parcel F and MRT Line 2, V201 package which form about half 35.0 30.0 of the orderbook. More importantly, we think pretax margins 25.0 for these two key projects will be at least 7-8%. Recall that 20.0 15.0 2015’s pretax margin was low at 3.6% due to MRT Line 1 and 10.0 KLCC project (NEC and Package 2 and 2A) where certain losses 5.0 0.0 and provisions were recognised. 2014A 2015A 2016A 2017F 2018F
Capital Expenditure (-) Dividend payout policy of at least 35%. SCG is committed to Dividend payout policy of at least 35%. ROE (%) distribute a minimum 35% of its core profit to shareholders, which is uncommon among construction players. This could be 30.0% attributable to its sizeable operations with a large asset base 25.0% that requires little capex spending ahead. We have imputed a 20.0% 45% dividend payout ratio, based on our strong net cash 15.0% forecasts. This translates into decent yields of c.3-4%. 10.0%
Key Risks: 5.0%
Delays in construction. There may be project cost overruns due 0.0% to several factors such as design and engineering issues and 2014A 2015A 2016A 2017F 2018F soil conditions. Forward PE Band (x) (x) 18.5
Fluctuating prices of raw materials. The construction business 17.5 typically requires a wide range of raw materials including steel 16.5 +2sd: 16.7x bars, ready-mixed concrete, diesel, electrical cables and fittings, 15.5 +1sd: 15.5x which are all subject to price fluctuations. 14.5 Avg: 14.4x 13.5 -1sd: 13.2x 12.5 Company Background -2sd: 12x 11.5
An established player with 30 years of heritage, Sunway 10.5 Construction Group (SCG) is one of Malaysia’s largest 9.5 Jul-15 Jan-16 Jul-16 Jan-17 construction companies. It adopts an integrated business model that covers various phases of construction activities, PB Band (x) (x) from project design to completion. 5.9
5.4 +2sd: 5.08x 4.9 +1sd: 4.69x 4.4 Avg: 4.31x
3.9 -1sd: 3.92x -2sd: 3.53x 3.4
2.9 Jul-15 Jan-16 Jul-16 Jan-17 Source: Company, AllianceDBS
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Key Assumptions FY DecDecDec 201420142014A2014AAA 201520152015A2015AAA 201620162016A2016AAA 201720172017F2017FFF 201820182018F2018FFF New order wins 800 2,600 2,600 2,100 2,100 Construction revenue 2,032 1,664 1,502 2,012 2,469 Precast revenue 301 253 287 310 270 Construction EBIT margins 3.56 6.08 6.48 6.77 Precast EBIT margins 30.5 20.3 21.0 21.0
Segmental Breakdown FY DecDecDec 201420142014AAA 201520152015AAA 201620162016AAA 201720172017FFF 201820182018FFF Revenues (RMm) Construction 2,032 1,664 1,502 2,012 2,469 Precast Concrete 301 253 287 310 270 Consolidated Adjustments (452) 0.0 0.0 0.0 0.0 TotalTotalTotal 1,8811,8811,881 1,9171,9171,917 1,7891,7891,789 2,3212,3212,321 2,7392,7392,739 EBIT (RMm) Construction 59.2 91.4 130 167 Precast Concrete 77.1 58.2 65.1 56.7 TotalTotalTotal 120120120 136136136 150150150 195195195 224224224 EBIT Margins (%) Construction N/A 3.6 6.1 6.5 6.8 Precast Concrete N/A 30.5 20.3 21.0 21.0 TotalTotalTotal 6.46.46.4 7.17.17.1 8.48.48.4 8.48.48.4 8.28.28.2
Income Statement (RMm) FY DecDecDec 201420142014A2014AAA 201520152015A2015AAA 201620162016A2016AAA 201720172017F2017FFF 201820182018F2018FFF Revenue 1,881 1,917 1,789 2,321 2,739 Cost of Goods Sold (1,485) (1,514) (1,413) (1,875) (2,262) Gross ProfitGross Profit 395395395 403403403 376376376 447447447 477477477 Other Opng (Exp)/Inc (275) (267) (227) (251) (253) Operating Profit 120120120 136136136 150150150 195195195 224224224 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 30.4 (0.1) 0.0 0.0 0.0 Net Interest (Exp)/Inc 0.72 4.54 4.08 (1.4) (1.4) Exceptional Gain/(Loss) (10.6) 0.0 0.0 0.0 0.0 PrePrePre---tax Profittax Profit 141141141 141141141 154154154 194194194 222222222 Tax (26.5) (13.0) (30.0) (38.8) (44.5) Minority Interest 0.05 (0.6) (0.1) 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net ProfitNet Profit 114114114 127127127 124124124 155155155 178178178 Net Profit before Except. 125 127 124 155 178 EBITDA 162 178 185 231 259 Growth Revenue Gth (%) 2.2 1.9 (6.7) 29.8 18.0 EBITDA Gth (%) 90.0 10.1 4.0 24.6 12.3 Opg Profit Gth (%) 183.7 13.4 9.7 30.6 14.6 Net Profit Gth (Pre-ex) (%) 86.5 1.9 (2.9) 25.6 14.7 Margins & Ratio Gross Margins (%) 21.0 21.0 21.0 19.2 17.4 Opg Profit Margin (%) 6.4 7.1 8.4 8.4 8.2 Net Profit Margin (%) 6.1 6.6 6.9 6.7 6.5 ROAE (%) 24.6 33.2 26.2 29.0 28.4 ROA (%) 8.5 9.2 8.0 9.1 9.0 ROCE (%) 21.8 25.3 20.9 22.8 23.0 Div Payout Ratio (%) 0.0 40.7 41.9 45.0 45.0 Net Interest Cover (x) NM NM NM 143.6 159.8 Source: Company, AllianceDBS
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Quarterly / Interim Income Statement (RMm) FY DecDecDec 1Q1Q1Q20161Q201620162016 2Q2Q2Q20162Q201620162016 3Q3Q3Q20163Q201620162016 4Q4Q4Q20164Q201620162016 1Q1Q1Q20171Q201720172017
Revenue 424 430 381 553 420 Other Oper. (Exp)/Inc (389) (393) (342) (516) (377) Operating Profit 35.435.435.4 37.637.637.6 39.639.639.6 3337.07.07.0 42.142.142.1 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 2.14 0.51 0.84 0.60 2.11 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 PrePrePre-Pre---taxtax Profittax Profit 37.537.537.5 38.138.138.1 40.440.440.4 37.637.637.6 44.244.244.2 Tax (8.5) (6.8) (9.1) (5.7) (9.5) Minority Interest 0.0 0.0 (0.2) 0.0 0.0 Net ProfitNet Profit 29.129.129.1 31.331.331.3 31.131.131.1 32.032.032.0 34.734.734.7 Net profit bef Except. 29.1 31.3 31.1 32.0 34.7 EBITDA 35.4 37.6 39.6 37.0 42.1
Growth Revenue Gth (%) (9.8) 1.4 (11.4) 45.2 (24.2) EBITDA Gth (%) 28.4 6.3 5.2 (6.4) 13.5 Opg Profit Gth (%) 28.4 6.3 5.2 (6.4) 13.5 Net Profit Gth (Pre-ex) (%) (1.0) 7.8 (0.6) 2.7 8.3 Margins
Opg Profit Margins (%) 8.3 8.7 10.4 6.7 10.0 Net Profit Margins (%) 6.8 7.3 8.2 5.8 8.3
Balance Sheet (RMm) FY DecDecDec 201420142014AAA 201520152015AAA 201620162016AAA 201720172017FFF 201820182018FFF
Net Fixed Assets 179 163 135 134 134 Invts in Associates & JVs 24.2 0.0 0.0 0.0 0.0 Other LT Assets 10.8 17.4 15.2 15.2 15.2 Cash & ST Invts 222 468 467 516 610 Inventory 20.2 17.3 24.0 23.3 27.6 Debtors 790 835 912 1,132 1,336 Other Current Assets 8.52 14.4 14.9 14.9 14.9 Total Assets 1,2541,2541,254 1,5151,5151,515 1,5671,5671,567 1,8361,8361,836 2,1372,1372,137
ST Debt 135 137 137 138 139 Creditor 791 913 925 1,107 1,309 Other Current Liab 13.2 9.26 11.4 11.4 11.4 LT Debt 0.07 0.0 0.0 0.0 0.0 Other LT Liabilities 4.29 4.10 0.61 0.61 0.61 Shareholder’s Equity 315 451 493 579 676 Minority Interests (5.2) 0.63 0.76 0.76 0.76 Total Cap. & Liab. 1,25411,254,254 1,5151,5151,515 1,5671,5671,567 1,8361,8361,836 2,1372,1372,137
Non-Cash Wkg. Capital 14.1 (56.1) 14.2 52.2 57.5 Net Cash/(Debt) 86.4 332 331 379 471 Debtors Turn (avg days) 175.7 154.7 178.2 160.7 164.4 Creditors Turn (avg days) 192.4 211.3 243.6 201.6 198.0 Inventory Turn (avg days) 5.8 4.6 5.5 4.7 4.2 Asset Turnover (x) 1.4 1.4 1.2 1.4 1.4 Current Ratio (x) 1.1 1.3 1.3 1.3 1.4 Quick Ratio (x) 1.1 1.2 1.3 1.3 1.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 33.8 18.8 5.5 25.5 25.3 Z-Score (X) 3.8 3.5 3.4 3.4 3.2
Source: Company, AllianceDBS
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Page 67 Company Guide Sunway Construction Group
Cash Flow Statement (RMm) FY DecDecDec 201420142014A2014AAA 201520152015A2015AAA 201620162016A2016AAA 201720172017F2017FFF 201820182018F2018FFF
Pre-Tax Profit 151 141 154 194 222 Dep. & Amort. 41.6 41.9 35.7 35.6 35.4 Tax Paid (26.5) (13.0) (30.0) (38.8) (44.5) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 297 79.9 (71.9) (38.0) (5.4) Other Operating CF (279) (13.6) (7.6) 0.0 0.0 Net Operating CF 184184184 236236236 79.979.979.9 153153153 208208208 Capital Exp.(net) (45.7) (25.7) (7.5) (35.0) (35.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 395 (38.8) 86.1 0.0 0.0 Net Investing CF 349349349 (64.5)(64.5)(64.5) 78.578.578.5 (35.0)(35.0)(35.0) (35.0)(35.0)(35.0) Div Paid (429) (70.0) (84.0) (69.8) (80.1) Chg in Gross Debt 46.5 1.64 (0.3) 1.00 1.00 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (85.5) 65.7 1.25 0.0 0.0 Net Financing CF (468)(468)(468) (2.6)(2.6)(2.6) (83.1)(83.1)(83.1) (68.8)(68.8)(68.8) (79.1)(79.1)(79.1) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 65.5 169 75.3 48.9 93.9 Opg CFPS (sen) (8.7) 12.1 11.7 14.8 16.5 Free CFPS (sen) 10.7 16.3 5.60 9.11 13.4 Source: Company, AllianceDBS
Target Price & Ratings History
RMRMRM 2.21 12-mth Date of Closing S.No.S.No.S.No. TTarget arget Rating 22 ReportReportReport PricePricePrice 2.11 PricePricePrice 20 21 24 1: 23 Aug 16 1.63 1.92 BUY 2.01 18 2: 26 Aug 16 1.62 1.92 BUY 19 23 3: 02 Sep 16 1.64 1.92 BUY 1.91 4: 06 Oct 16 1.70 1.92 BUY 16 5: 18 Oct 16 1.67 1.92 BUY 1.81 6 14 6: 21 Oct 16 1.74 1.92 BUY 4 11 17 7: 24 Oct 16 1.69 1.92 BUY 7 12 1.71 8 13 8: 08 Nov 16 1.65 1.92 BUY 2 10 15 9: 23 Nov 16 1.62 1.92 BUY 1.61 5 10: 06 Dec 16 1.62 1.92 BUY 1 3 9 11: 10 Jan 17 1.70 1.92 BUY 1.51 12: 16 Jan 17 1.68 1.92 BUY Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 13: 07 Feb 17 1.76 1.92 BUY 14: 24 Feb 17 1.75 2.13 BUY Note : Share price and Target price are adjusted for corporate actions. 15: 03 Mar 17 1.70 2.13 BUY 16: 27 Mar 17 1.78 2.13 BUY 17: 05 Apr 17 1.81 2.13 BUY 18: 27 Apr 17 1.95 2.13 BUY 19: 28 Apr 17 2.00 2.13 BUY 20: 05 May 17 2.00 2.13 BUY 21: 26 May 17 2.10 2.60 BUY 22: 02 Jun 17 2.08 2.60 BUY 23: 16 Jun 17 2.01 2.60 BUY 24: 07 Jul 17 2.01 2.60 BUY
Source: AllianceDBS Analyst: Chong Tjen-San
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Appendix
Peers valuation - Infrastructure construction
FY16-18 Mkt PE PE Yield P/Bk EV/EBITDA ROE Earnings Currency Price Cap Fiscal 17F 18F 17F 17F 17F 18F 17F CAGR Company Name Code Local$ US$m Yr x x % x x x % % Asia Pacific ex Japan China Comms.Con.'H'* 1800 HK HKD 10.88 36,292 Dec 7.9 7.1 2.5 1.0 8.2 8.1 13.0 15.3 China Railway Con.'H'* 1186 HK HKD 10.8 25,587 Dec 8.3 7.3 1.8 0.9 4.9 4.9 11.1 11.1 China State.Constr.* 3311 HK HKD 13.1 7,529 Dec 10.5 8.6 2.9 2.0 9.7 8.0 20.4 15.5 Baoye Group 'H' 2355 HK HKD 5.77 433 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Beijing Urban Construction 1599 HK HKD 4.97 810 Dec 9.6 8.3 2.7 1.4 6.3 5.3 15.6 17.9 Chun Wo Dev# 711 HK HKD 0.87 180 Mar n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. China Comm.Con.'A'* 601800 CH CNY 17.31 36,292 Dec 14.6 13.0 1.4 1.8 9.7 8.9 13.0 15.3 China Railway Con.'A'* 601186 CH CNY 13.33 25,587 Dec 11.8 10.5 1.3 1.3 5.8 5.3 11.1 11.1 China State Con.Engr.'A' 601668 CH CNY 10.7 47,586 Dec 9.4 8.3 2.5 1.5 5.3 4.8 16.4 16.2 Hyundai Engr.& Con. 000720 KS KRW 48,700 4,849 Dec 10.0 8.6 1.1 0.8 3.9 3.7 8.5 16.9 Daewoo Engr.& Con. 047040 KS KRW 7,780 2,889 Dec 6.2 7.3 0.1 1.2 5.1 5.6 22.7 n.a. Cimic Group CIM US AUD 40.75 16,693 Dec 19.5 18.2 3.1 3.7 8.4 8.2 19.8 10.1 Gamuda* GAM MK MYR 5.26 3,000 Jul 21.4 18.9 1.7 2.0 28.9 24.6 9.7 11.6 Ijm# IJM MK MYR 3.5 2,963 Mar 18.6 16.7 2.4 1.3 12.0 10.9 7.1 (7.5) Sunway Construction* SCGB MK MYR 2.04 615 Dec 17.0 14.8 2.6 4.6 9.8 8.4 29.0 20.0 Average (H-share) 9.1 7.9 2.4 1.2 7.1 6.4 14.1 14.6 Average (A-share) 12.7 11.3 1.6 1.5 7.3 6.6 12.7 14.0
# FY17: FY18; FY18: FY19
Source: Thomson Reuters, *DBS Vickers
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Page 69 Asian Insights SparX One Belt One Road Infrastructure Sector
Peers valuation - Railway equipment
Latest reported Mkt PE PE PEG PEG P/Bk P/Bk EV /EBITDA Gross Net Currency Price Cap Fiscal 17F 18F 17F 18F 17F 18F 17F 18F margin margin Company Name Code Local$ US$m Yr x x x x x x x x % % Asian peers Xiangtan Elec.Mnfg. 'A' 600416 CH CNY 12.37 1,734 Dec 34.4 22.9 0.3 0.5 2.2 2.1 n.a. n.a. 12.6 1.3 Guodian Nanjing 'A' 600268 CH CNY 5.87 553 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 20.9 0.5 Zhuzhou Times 'A' 600458 CH CNY 11.34 1,350 Dec 26.7 17.7 0.7 0.3 1.7 1.6 12.7 9.5 16.1 2.1 Gem-Year Industrial 'A' 601002 CH CNY 9.71 1,141 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 21.2 3.1 J inxi Axle 'A' 600495 CH CNY 7.01 1,256 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 14.4 2.8 Tianma 'A' 002122 CH CNY 10.3 1,814 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 22.3 (11.7) Baotou Beifang 'A' 600967 CH CNY 16.22 4,063 Dec 47.0 39.1 2.7 1.9 3.5 3.2 n.a. n.a. 11.6 4.9 Fujian Longxi 'A' 600592 CH CNY 9.78 579 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 22.7 10.1 Taiyuan Hvy.Ind.'A' 600169 CH CNY 3.92 1,490 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.7 (44.9) CRRC 'A'* 601766 CH CNY 10.21 40,725 Dec 23.1 20.6 1.9 1.7 2.6 2.5 11.6 10.7 20.1 5.0 Beijing Ctrowell Tech. 'A' 300455 CH CNY 10.09 586 Dec 51.5 45.7 3.7 3.6 4.8 4.4 n.a. n.a. 42.8 23.8 Tianjin Keyvia Electric 'A' 300407 CH CNY 15.68 640 Dec 28.5 21.2 1.3 0.6 4.1 3.5 n.a. n.a. 32.6 15.8 Beijing Dinghan Tech.'A' 300011 CH CNY 14.1 1,110 Dec 27.6 21.6 0.2 0.8 3.2 2.8 27.7 22.1 37.6 11.7 South Huiton 'A' 000920 CH CNY 10.87 680 Dec 34.0 25.3 0.9 0.7 5.2 4.5 n.a. n.a. 42.3 9.8 Xiamen Sunrise Wheel 'A' 002593 CH CNY 5.03 521 Dec 38.7 29.6 1.2 1.0 1.9 1.8 n.a. n.a. 16.1 4.9 CRRC 'H'* 1766 HK HKD 7.02 40,725 Dec 14.1 12.3 1.6 0.8 1.6 1.5 7.3 6.6 20.1 5.0 Zhuzhou CRRC Times 'H' 3898 HK HKD 38.4 5,778 Dec 12.1 10.9 1.1 0.9 2.1 1.8 10.0 9.0 38.2 19.8 CRCC High-Tech 1786 HK HKD 2.84 553 Dec 8.1 6.6 (4.0) 0.3 0.6 0.6 4.5 3.8 27.3 12.9 China Railway Signal 'H' 3969 HK HKD 6.28 12,553 Dec 13.1 11.0 0.7 0.6 1.9 1.7 5.7 4.8 25.3 10.4 Midas Hdg.* MIDAS SP SGD 0.215 300 Dec 11.9 10.4 0.2 0.7 0.5 0.5 8.2 7.5 29.7 6.8 Kinki Shary o# 7122 J P J PY 2536 158 Mar n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 11.2 2.0 Kawasaki Heavy# 7012 J P J PY 359 5,397 Mar 16.3 13.4 0.4 0.6 1.3 1.2 7.8 7.0 15.8 1.7 Average (A-share) 35.2~ 26.8 1.5 1.3 3.4 3.1 17.3 14.1 22.7 2.4 Average (H-share) 13.1 11.6 1.4 0.9 1.4 1.6 8.6 7.8 29.1 12.4
US/Europe Siemens SIE GR EUR 116.1 115,084 Sep 14.6 13.8 0.7 2.5 2.4 2.3 9.8 9.3 29.9 6.7 Bombardier 'B' BBD/B CN CAD 2.35 4,251 Dec n.a. 28.8 n.a. n.a. n.a. n.a. 7.8 5.6 9.6 (6.5) Alstom# ALO FP EUR 30.25 7,767 Mar 19.1 17.2 0.9 1.6 1.7 1.6 7.5 6.8 14.9 4.0 Trinity Industries TRN US USD 27.82 4,233 Dec 24.0 25.9 (0.5) (3.7) 1.0 1.0 8.4 8.5 24.7 7.3 Const Y Auxiliar De Ferr CAF SM EUR 38.05 1,522 Dec 19.3 13.9 0.2 0.4 1.6 1.5 9.0 7.7 6.4 2.7 American Railcar Inds. ARII US USD 36.56 698 Dec 15.4 14.3 (0.4) 1.8 1.3 1.3 7.7 8.3 25.4 11.4 F reightcar America RAIL US USD 16.49 205 Dec n.a. n.a. n.a. n.a. 0.8 0.8 18.4 11.3 7.7 2.4 Greenbrier Cos. GBX US USD 44.3 1,263 Aug 12.5 14.4 (0.7) (1.1) 1.4 1.5 4.3 5.0 20.6 6.9 V ossloh VOS GR EUR 57.09 1,063 Dec 28.3 21.2 0.0 0.6 1.6 1.5 10.7 9.3 21.0 0.2 Wabtec WAB US USD 87.49 8,396 Dec 21.7 18.8 1.1 1.2 3.3 2.9 16.5 15.1 30.8 10.4 LEM 'R'# LEHN SW CHF 1195 1,441 Mar 29.2 28.2 6.3 8.1 13.7 12.6 19.9 19.0 46.7 16.8 ABB 'R' ABBN V X CHF 22.54 51,682 Dec 19.5 17.2 0.6 1.3 3.6 3.5 11.3 10.3 29.3 5.6 Hollysys Atmtn.Techs. HOLI US USD 18.14 1,094 J un 13.0 10.4 (0.9) 0.4 1.4 1.3 7.9 6.0 37.8 21.9 Average 19.7 18.7 0.7 1.2 2.8 2.6 10.7 9.4 23.4 6.9 Grand average 23.1~ 19.7 0.8 1.1 2.6 2.4 10.7 9.2 23.0 5.4
~ Exclude Zhuzhou Times 'A' & Jinxi Axle 'A'
# FY17: FY18; FY18: FY19
Source: Thomson Reuters, *DBS Vickers
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Page 70 Asian Insights SparX
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Sector PE - Infrastructure construction Sector PE - Railway equipment
x x 40 35
35 30 30 25 25 20 +1SD :15x 20 +1SD :19x Average :15x 15 Average :10x 15 10 10 -1SD :12x 5 -1SD :5x 5 0 -08 -09 -10 -11 -12 -13 -14 -15 -16 r-09 r-10 r-11 r-12 r-13 r-14 r-16 g g g g g g g g g -08 -09 -10 -11 -12 -13 -14 -15 -16 p p p p p p p r-08 r-09 r-10 r-12 r-13 r-14 r-15 r-16 r-17 g g g g g g g g g A A A A A A Apr-15 A Apr-17 p p p p p p p p p Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Au Au Au Au Au Au Au Au Au A A A Apr-11 A A A A A A Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Au Au Au Au Au Au Au Au Au Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers
China Comm Construction (1800 HK) PE chart China Comm Construction (1800 HK) PB chart
x x 18 2.5 16 2.0 +2SD: 1.8x 14 +2SD: 12x 12 +1SD: 1.4x +1SD: 9.8x 1.5 10 Avg: 7.6x Avg: 1x 8 1.0 6 -1SD: 5.4x -1SD: 0.7x 4 -2SD: 3.2x 0.5 -2SD: 0.3x 2 0 0.0 Jul-16 Jul-16 Jan-09 Jan-13 Jun-12 Jan-09 Jan-13 Jun-12 Feb-17 Oct-14 Apr-11 Oct-14 Feb-17 Sep-10 Apr-11 Sep-17 Dec-15 Sep-17 Sep-10 Nov-11 Dec-15 Nov-11 Aug-09 Aug-13 Mar-10 Mar-14 Aug-09 Aug-13 Mar-10 Mar-14 May-15 May-15 China Comm Construction-A (601800 CH) PE chart China Comm Construction-A (601800 CH) PB chart
x x 30 3.5
25 3.0 2.5 20 +1SD: 13.8x 2.0 +1SD: 1.7x 15 1.5 Avg: 9.3x Avg: 1.2x 10 1.0 -1SD: 4.9x -1SD: 0.6x 5 0.5 0 0.0 Jul-15 Jul-16 Jul-17 Jul-15 Jul-16 Jul-17 Jan-16 Jan-17 Feb-13 Feb-14 Feb-15 Jan-16 Jan-17 Sep-12 Feb-13 Feb-14 Feb-15 Sep-12 Mar-12 Aug-13 Aug-14 Aug-13 Aug-14 Mar-12
Source: Thomson Reuters, DBS Vickers
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China Railway Construction (1186 HK) PE chart China Railway Construction (1186 HK) PB chart
x x 30 3.0
25 +2SD: 20.4x 2.5 20 +2SD: 2x +1SD: 15.3x 2.0 15 +1SD: 1.5x Avg: 10.2x 1.5 10 Avg: 1.1x -1SD: 5.1x 1.0 5 -1SD: 0.7x 0 0.5 -2SD: 0.2x -2SD: 0x -5 0.0 Jul-16 Jul-16 Jan-09 Jan-13 Jan-09 Jun-12 Jan-13 Jun-12 Oct-14 Feb-17 Sep-10 Apr-11 Oct-14 Feb-17 Sep-17 Dec-15 Sep-10 Apr-11 Sep-17 Nov-11 Dec-15 Nov-11 Mar-10 Mar-14 Aug-09 Mar-10 Aug-13 Mar-14 Aug-09 Aug-13 May-15 May-15
China Railway Construction-A (601186 HK) PE chart China Railway Construction-A (601186 HK) PB chart
x x 40 3.5 35 3.0
30 2.5 +1SD: 2x 25 +1SD: 19.2x 2.0 20 1.5 Avg: 1.3x 15 Avg: 12.4x 1.0 10 -1SD: 5.5x 0.5 -1SD: 0.7x 5 0.0 0 Jul-10 Jul-16 Oct-11 Feb-14 Sep-17 Dec-12 Mar-08 May-09 May-15 Jul-10 Jul-16 Oct-11 Feb-14 Sep-17 Dec-12 Mar-08 May-09 May-15
Source: Thomson Reuters, DBS Vickers
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CRRC (1766 HK) PE chart CRRC (1766 HK) PB chart
x x 5.5 45 5.0 40 4.5 35 4.0 +2SD: 3.5x 30 3.5 +2SD: 25.2x +1SD: 2.8x 25 3.0 +1SD: 21.1x 2.5 Avg: 2.1x 20 Avg: 17x 2.0 15 -1SD: 1.4x -1SD: 12.9x 1.5 10 -2SD: 8.8x 1.0 -2SD: 0.8x 5 0.5 Jan-09 Jan-09 Oct-13 Oct-13 Nov-16 Nov-16 Mar-12 Aug-10 Mar-12 Aug-10 May-15 May-15
CRRC-A (601766 CH) PE chart CRRC-A (601766 CH) PB chart
x x 90 12.0 80 10.0 70 60 8.0 50 6.0 +1SD: 3.9x 40 +1SD: 32x 30 4.0 Avg: 21.9x Avg: 2.7x 20 2.0 10 -1SD: 11.7x -1SD: 1.5x 0 0.0 Apr-15 Apr-10 Apr-10 Apr-15 Dec-11 Nov-16 Aug-13 Aug-08 Dec-11 Nov-16 Aug-08 Aug-13 Source: Thomson Reuters, DBS Vickers
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Railway new contracts Subway new contracts
RMB bn RMB bn 400 300 350 250 300 200 250 200 150 150 100 100 50 50 0 0 2011 2012 2013 2014 2015 2016 1Q17 2011 2012 2013 2014 2015 2016 1Q17 CRCC Company A CRCC Company A
Total new contracts Total backlog
RMB bn RMB bn 1,400 2,500 1,200 2,000 1,000 1,500 800
600 1,000 400 500 200 0 0 CCC CRCC Company A CCC CRCC Company A 2014 2015 2016 1H17 2014 2015 2016 1Q17
Source: Companies
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Net gearing ratio Net operating cashflow
% RMB m 140 60,000 120 50,000 40,000 100 30,000 80 20,000 60 10,000 0 40 Net (10,000) Net 20 cash (20,000) cash 0 (30,000) CCCC CRCC Company A CRRC CCCC CRCC Company A CRRC
2014 2015 2016 1Q17 2014 2015 2016 1Q17
Gross profit margin Trade debtors collection days
% days 25 200 180 20 160 140 15 120 100 10 80 60 5 40 20 0 0 CCCC CRCC Company A CRRC CCCC CRCC Company A CRRC
2014 2015 2016 1Q17 2014 2015 2016
Railway total monthly FAI FAI in rolling stock industry in China
RMB bn RMB bn % 200 160 100 180 140 80 160 120 140 60 100 120 40 100 80 20 80 60 -13.4% 60 40 0 40 20 (20) 20 0 0 (40) Jul Jan Jun Oct Feb Sep Apr Dec Nov Mar Aug May 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 6M16 6M17 2013 2014 2015 Vehicle procurement investment (LHS) 2016 2017 YoY growth (RHS)
Source: CEIC, Companies; DBS Vickers
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List of CPEC projects – Infrastructure
Project Length Estimated Contractor Completion Business Cost date model (US$M) Road KKH Phase ii (Thakot - Havelian Section 440 km 1,305 CRBC, CCC Mar-20 EPC Peshawar-Karachi Motorway (Multan-Sukkur 392 km 2,846 2018 Section) Khuzdar-Basima Road N-30 110 km Upgradation of D.I.Khan - Zhob, N-50 Phse I 210 km KKH Thakot- Raikot M35 remaining portion 136 km Railway Seeking Chnese funding Expansion and reconstruction of existing line 1,872 km 8,172 through Cinese Government EPC ML-1 Concessional Loan (GCL) Seeking Chnese funding Havelian Dry Port (450 M, twenty-foot 40 through Cinese Government EPC equivalent units) Concessional Loan (GCL) Capacity Dev elopment of Pakistan Railway s 12,363
Source: CPEC, DBS Vickers
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List of CPEC projects - Energy
Project Name MW Estimated Cont ract or Cost (US$M) CPEC-Energy 2x660MW Coal-fired Power Plants at Port Qasim Karachi 1,320 1,980 Independent Power Producer Priority Projects Suki Kinari Hydropower Station, Naran, Khyber 870 1,802 Independent Power Producer Pukhtunkhwa Sahiwal 2x660MW Coal-fired Power Plant, Punjab 1,320 1,600 Independent Power Producer Engro Thar Block II 2x330MW Coal fired Power Plant 1,320 2,000 Independent Power Producer TEL 1x330MW Mine Mouth Lignite Fired Power Project at Thar Block-II, Sindh, Pakistan ThalNova 1x330MW Mine Mouth Lignite Fired Power Project at Thar Block-II, Sindh, Pakistan Surface mine in block II of Thar Coal field, 6.5 million 1,470 tons/year Hydro China Dawood 50MW Wind Farm (Gharo, Thatta) 50 125 Independent Power Producer 300MW Imported Coal Based Power Project at Gwadar, 300 600 To be decided Pakistan Quaid-e-Azam 1000MW Solar Park (Bahawalpur) Quaid-e- 1,000 1,215 Independent Power Producer Azam UEP 100MW Wind Farm (Jhimpir, Thatta) 100 250 Independent Power Producer Sachal 50MW Wind Farm (Jhimpir, Thatta) 50 134 Independent Power Producer SSRL Thar Coal Block-I 7.8mtpa &SEC Mine Mouth Power 1,320 2,000 Independent Power Producer Plant(2x660MW) Karot Hydropower Station 720 1,420 Independent Power Producer Three Gorges Second Wind Power Project 100 150 Three Gorges Third Wind Power Project CPHGC 1,320MW Coal-fired Power Plant, Hub, Balochistan 1,320 1,940 Independent Power Producer Matiari to Lahore ?60kV HV DC Transmission Line Project 1,500 Independent Transmission Company Matiari (Port Qasim) - Faisalabad Transmission Line Project 1,500 Independent Transmission Company Thar Mine Mouth Oracle Power Plant (1320MW) & surface 1,320 1,300 mine CPEC-Energy Kohala Hydel Project, AJK 1,100 2,397 Actively Promoted Projects Rahimyar khan imported fuel Power Plant 1320 MW 1,320 1,600 Independent Power Producer 13,530 24,983 Source: CPEC, DBS Vickers
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List of CPEC projects - Gwadar
Project Name Estimated Contractor Cost (US$M) CPEC Gwader Gwadar East-Bay Expressway 140.6 Mix of Chinese Government Projects Concessional Loan and Grant New Gw adar International A irport 230 Chinese Gov ernment Grant Construction of Breakwaters 123 Mix of Chinese Government Concessional Loan & Grant Dredging of berthing areas & channels 27 Chinese Government Concessional Loan Development of Free Zone 32 Chinese Government Concessional Loan Necessary facilities of fresh w ater treatment, w ater supply 130 Chinese Government Grant and distribution Pak China Friendship Hospital 100 Chinese Government Grant Technical and V ocational Institute at Gwadar 10 Chinese Gov ernment Grant Gwadar Smart Port City Master Plan Bao Steel Park, petrochemicals, stainless steel and other industries in Gwadar Dev elopment of Gwadar Univ ersity (Social Sector Development) Upgradation and development of fishing, boat making and maintenance services to protect and promote livelihoods of local population 793 Source: CPEC, DBS Vickers
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Pan Asia Railway Network: new railway projects
Batch 1 Location Length Status Estimated Railway (km) Cost (US$m) Eastern Route Rail link from Phnom Penh to Ho Chi Minh City V ietnam/Cambodia 384 Re-consideration 600 Poipet-Sisophon Cambodia 48 Under construction Central Route Yuxi-Mohan Railway China 503 Under construction Boten-V ientane Railway Laos 421 Open in late 2020 7,000 Bangkok-Nong Khai Railway Thailand 873 Start construction in 2017 11,360 Bankok-Hat Yai/Padang Besar Railway Thailand Under planning Kuala Lumpur-Singapore High Speed Rail Malaysia to Singapore 350 Under discussion 15,000 Western Route Dali-Ruili Railway China 330 Under construction 2,000 Lashio-Mandalay Railway My anmar Existing railway Yangon-Mandalay Railway Myanmar Existing railway (need to be upgraded) Yangon-Bangkok Railway Myanmar to Thailand Feasibility study Spur lines Savannakhet-Lao Bao Railway Laos 220 Under construction 4,000 Mu Gia-Tan Ap-V ung Ang V ietnam 119 Feasibility study V ientiane-Thakhaek-Mu Gia Laos 446 F easibility study Extending SKRL to Surabaya Indonesia Possibility study Railway linking Dawei Port (Myanmar) to Kanchanaburi My anmar to Thailand F easibility study (Thailand)
Highway Network AH123 Dawei- Myittar Myanmar 56 AH 123 Myittar-Thai Border Myanmar 104 AH1 Tamu-Mandalay-Meiktila-Yangon-Bago-Payagyi- Myanmar 229 Thaton-Myawadi AH2 Meiktila-Loilem-Kyaing Tong-Tachilek Myanmar 307 AH12 Nateuy-Oudomxai-Luang Prabang-V ientiane Laos 293 AH15 Banlao-Nam Phao Laos 98 Upgrade Class II or III sections with high traffic v olume ASEAN
Port Colombo Port City Sri Lanka delay ed 1,400 Gwadar Pakistan Progressing 1,000 Kuantan Port Malaysia Under expansion Dawei Port My anmar Initial phase 1,700 Enhancement of 47 ports ASEAN
Batch 2 Estimated transportation related FAI (1st-5th year) ASEAN 53,175
Batch 3 th th Estimated transportation related FAI (6 -10 year) ASEAN 74,156 Source: DBS Vickers, News, Baidu, MPAC2025
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Overseas projects won by Chinese companies
Company A Company A CRCC RMB 21bn - RMB 8.1bn THB 20tn - Ecological bridge - Railway Agricultural Factory
CRRC CCCC CRCC RMB 1.1bn US$ 841mn - Port US$ 2.7bn - CRCC - Rail cars US$ 2bn - Airport Railway US$ 5.2bn - Railway CRCC MYR 3.5bn Company A - Railway RMB 1.2bn - highway CRCC US$ 1.5bn - CRCC CCCC Expressway US$1.7bn - US$ 841mn - Hydropower Port Company A RMB1.3bn - CCCC CCCC subway US$ 2.3bn - US$ 1.5bn - Port Railway
Company A CRCC Company A RMB 9.9bn - US$2.3bn - RMB1bn - transmission Railway Airport
Source: Companies, DBS Vickers
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China High Speed Rail Network
Source: China Discovery
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Trans-Eurasia Rail Network
Source: Trans-Eurasia Logistics, Wikipedia
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DBS Bank, AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 24 Jul 2017 17:11:34 (SGT) Dissemination Date: 24 Jul 2017 19:17:53 (SGT)
Sources for all charts and tables are DBS Bank, DBSVI, DBSVTH, AllianceDBS unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd, AllianceDBS Research Sdn Bhd (“AllianceDBS”). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd, AllianceDBS.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
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DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or 2 his associate does not have financial interests in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in China Communications Construction Company Limited (1800 HK), China Railway Construction Corporation Limited (1186 HK), China State Construction International Holdings Limited (3311 HK) and CRRC Corporation Limited (1766 HK) recommended in this report as of 20 Jul 2017.
DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in China State Construction Engineering Corporation Limited (601668 CH), CRRC Corporation Limited (601766 CH) and Midas Holdings Limited (MIDAS SP) recommended in this report as of 30 Jun 2017.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services:
3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Midas Holdings Limited (MIDAS SP) as of 30 Jun 2017.
4. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Midas Holdings Limited (MIDAS SP) in the past 12 months, as of 30 Jun 2017.
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Disclosure of previous investment recommendation produced:
5. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Asian Equities Sales, Sales Trading and Research Contacts
Sales Heads Tel: Email: Singapore Kenneth Tang 65-6398 6951 [email protected] Hong Kong Andrew Au 852-2820 4992 [email protected] Hong Kong Christy Lam 852-2971-1939 [email protected] London Graham Booth 44-20-7618 1881 [email protected] New York Elaine Yu 1-212-826 3553 [email protected] Thailand Narisara Viseskosin 662-657 7759 [email protected] Indonesia Ricardo Silaen, CFA 6221 3003 4911 [email protected]
Sales Trading Contacts Tel: Email: Singapore Vivian Goh 65-6398 6927 [email protected] Hong Kong Franco Law 852-2971 1828 [email protected] London Charles Davies 44-20-7618 1883 [email protected] New York Brenda Wong 1-212-826 3558 [email protected]
Research Contacts Tel: Email: Regional Timothy Wong 65-6682 3691 [email protected] Singapore Janice Chua 65-6682 3692 [email protected] Hong Kong Carol Wu 852-2863 8841 [email protected] Malaysia Wong Ming Tek 603-2604 3970 [email protected] Thailand Chanpen Sirithanarattanakul 662-657 7824 [email protected] Indonesia Maynard Priajaya Arif 6221 3003 4930 [email protected]
DBS V ickers Securities - Regional Offices HONG KONG MALAYSIA SINGAPORE DBS Vickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose 12 Marina Boulevard 68 Des Voeux Road Central Capital Square, 8 J alan Munshi Abdullah Level 40 Central, Hong Kong 50100 Kuala Lumpur Marina Bay Financial Centre Tel: 852-2820 4888 Tel: 603 2604 3333 Tower 3, Singapore 018982 Fax: 852-2868 1523 Fax: 603 2604 3921 Tel: 65-6878 8888 Participant of The Stock Exchange of Hong Kong Limited
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