Corporate China
CRRC Corporation Limited
Ratings Overview
Issuer Rating ▪ Pengyuan International has assigned a first-time global scale long-term issuer LT Issuer Credit Rating AA- credit rating (LTICR) of ‘AA-’ to CRRC Corporation Limited (CRRC). This is equivalent to a long-term China national scale rating of ‘AAAcn’. The outlook LT China National Scale AAAcn is stable.
Outlook Stable ▪ CRRC’s issuer credit rating is derived from the ‘a’ standalone credit profile
(SACP) and our assessment of the central government’s extremely strong
willingness to support in the event of a financial distress. CRRC is 51.19% Contents owned by CRRC Group Corporation, which is 100% owned by the Chinese central government. Its credit profile is closely linked to the creditworthiness of China’s central government (AA/stable). Key Rating Drivers ...... 2 ▪ The SACP of CRRC is supported by its strategic importance in the domestic Business Profiles ...... 3 rail transit equipment market, and is constrained by its relatively high Financial Profile ...... 5 geographic and customer concentration. Government Support ...... 6 Rating Outlook Liquidity ...... 7 Company Background ...... 7 ▪ The stable outlook for CRRC reflects our expectation that the Company will continuously maintain its strategic importance in domestic rail transit Peer comparison ...... 7 equipment market and our assessment of extremely strong central Rating Scores Summary ...... 9 government’s willingness to support the Company in the event of financial distress, can be maintained on a sustainable basis. The stable outlook on Related Criteria ...... 9 CRRC also mirrors our stable outlook on China’s sovereign rating.
▪ We would consider downgrading CRRC’s issuer credit rating if 1) substantial evidence shows that the central government’s willingness to support the Company weakens; 2) we downgrade our sovereign rating of China; and 3) the Company’s credit profile deteriorates significantly as some company- specific or industry-specific conditions, including China’s rail transit equipment
demand and CRRC’s leverage profile, are substantially worse than expected on a prolonged basis.
▪ We would consider upgrading CRRC’s issuer credit rating if we upgrade our sovereign rating of China, assuming that there is no material change in the central government’s willingness to support. Contacts Financial Summary Primary Analyst Name Simon Lee, CFA Table 1: Financial Ratios 2019A 2020A 2021F 2022F 2023F Title Associate Debt/EBITDA -0.7x -0.2x -0.4x -0.6x -1.0x Direct +852 3615 8346 EBITDA/Interest Expense 16.1x 16.0x 13.9x 13.2x 13.2x Email [email protected] Gross Debt/Capital 12.7% 13.9% 14.9% 14.6% 14.4% FFO/Debt NM NM NM NM NM Secondary Analyst OCF/Debt NM NM NM NM NM Name Vincent Ha, CFA FCF/Debt NM NM NM NM NM EBITDA Margin 10.4% 9.4% 8.9% 8.7% 8.5% Title Senior Director ROIC 10.5% 9.6% 9.3% 9.0% 8.8% Direct +852 3615 8307 Sources: Company, Pengyuan International NM - Not meaningful due to net cash position Email [email protected]
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Key Rating Drivers
Credit Strengths
• Strategic importance in domestic rail transit equipment market. CRRC is the largest supplier of rail transit equipment in the world and has near-monopoly market position in the domestic rail transit equipment market. The Company is the dominant manufacturer of multiple units (MUs), locomotives, freight wagons, passenger carriages and urban rail transit vehicles. By our estimate, the Company has contributed over 90% of China rail transit equipment market from 2017 to 2020. Its technical strength in manufacturing high-end of industry chain of rail transit equipment strengthens its strategic importance to the China’s railway and urban rail development plan. We believe stable fixed asset investment (FAI) of railway nationwide and strong development of urban rail transit will continue to support CRRC to maintain its leading market position in China in the next few years.
• Extremely strong support from the central government. CRRC is 51.19% owned by its parent CRRC Group Corporation, which is wholly-owned by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). CRRC has continuously received government support in the form of subsidies and tax rebates of RMB535 million, RMB586 million and RMB685 million from government in the past three years though the amount is not significant when compared to its huge operating scale. In our view, the SASAC has a strong influence over CRRC’s long term strategies, by appointing board members and senior management for the Company. The Company does not only dominate in the domestic rail transit equipment market, but also play an important role in Belt and Road Initiative expanding railway network globally. Given its strategic importance to and ties with the central government, we expect the central government will highly likely to provide extraordinary support to CRRC in the event of financial distress.
• Extraordinary financial profile. The Company has low financial leverage and high debt-servicing capability. The Company has a track record of prudent financial policy. The capital expenditure has maintained below RMB10 billion compared to its strong funds from operations of over RMB20 billion in the past four years. The Company has reported a net cash position since 2017. The Company maintained a gross debt to total capitalisation of 14% in 2020, which was substantially lower than other peers in the same industry. Bolstered by healthy capital structure and strong cash flow, the Company maintained EBITDA interest coverage at 16.0x in 2020. We expect the Company to maintain its strong leverage profile with net cash position over the next three years.
Credit Weaknesses
• Relatively high business concentration. CRRC has relatively high geographic and customer concentration risks. Revenue from overseas accounted for only 7% of the Company’s total revenue in 2020. Impacted by the coronavirus pandemic and geopolitical tension, we expect the overseas expansion might be slowed in the next few years. The Company’s largest client, China State Railway Group Co., Ltd., accounted for 36% of the Company’s total sales in 2020. As China State Railway Group Co., Ltd. recently extended maintenance cycles for various vehicles, the possible slowed procurement from its major customer might put pressure on the cash flow generated from the Company’s sales of rail transit equipment such as MUs, locomotives, freight wagons and passenger carriages.
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Table 2: Key Credit Metrics (RMB mn) 2019A 2020A 2021F 2022F 2023F Financials and Profitability Revenue 229,011 227,656 243,414 256,121 269,918 EBITDA 23,832 21,416 21,640 22,252 22,948 EBITDA Margin 10.4% 9.4% 8.9% 8.7% 8.5% Return on Assets (ROA) 4.7% 4.3% 4.4% 4.3% 4.2% Return on Invested Capital (ROIC) 10.5% 9.6% 9.3% 9.0% 8.8% Cash Flow Measures Funds from Operations (FFO) 23,043 20,599 18,137 18,687 19,332 Operating Cash Flow (OCF) 28,976 -299 10,921 10,482 12,655 Free Cash Flow (FCF) 21,001 -7,984 3,025 2,195 3,952 Discretionary Cash Flow (DCF) 15,952 -12,960 -2,047 -3,021 -1,410 Capital Expenditure 7,975 7,686 7,896 8,287 8,703 Balance Sheet Measures Cash and Liquid Investments 54,085 39,292 49,716 55,413 65,043 Excess Cash 39,027 30,976 40,973 46,332 55,594 Total Debt 23,159 27,350 31,346 32,346 33,346 Adjusted Debt -15,868 -3,626 -9,627 -13,986 -22,248 Total Capitalisation 181,988 196,492 209,956 220,911 232,047 Leverage Measures Debt/EBITDA -0.7x -0.2x -0.4x -0.6x -1.0x EBITDA/Interest Expense 16.1x 16.0x 13.9x 13.2x 13.2x Gross Debt/Capitalisation 12.7% 13.9% 14.9% 14.6% 14.4% FFO/Debt NM NM NM NM NM OCF/Debt NM NM NM NM NM FCF/Debt NM NM NM NM NM DCF/Debt NM NM NM NM NM Debt/Equity -10.0% -2.1% -5.4% -7.4% -11.2% FFO/Cash Interest Expense 26.2x 22.7x 11.7x 11.1x 11.1x NM - Not meaningful due to net cash position Sources: Company, Pengyuan International
Business Profiles
Strategic importance in domestic rail transit equipment market CRRC is the largest supplier of rail transit equipment in the world in terms of revenue. CRRC is also one of the few companies in the global rail transit equipment industry, which has achieved the full coverage of product types. CRRC specialises in design, manufacture, testing, commissioning and maintenance of locomotives and rolling stock, high-speed trains with speed over 350 km/h, diesel multiple units (DMUs) and electric multiple units (EMUs) for urban, suburban and regional transport, trams and light rail vehicles, metro cars and passenger coaches, a full line of freight wagons. The Company has also expanded its new business such as electromechanical equipment, wind power equipment and new materials. CRRC is one of the largest manufacturers of wind turbine blades in China. It was ranked 361st in the Fortune Global 500 in 2020. Based on the latest financial announcement, CRRC generated RMB 227.7 billion of revenue in 2020, with total assets of RMB392.4 billion at the end of 2020. As a market heavyweight, CRRC’s revenue in 2020 was three times larger than the second and third largest suppliers of rail transit equipment, namely Siemens Mobility and Alstom respectively. CRRC has near-monopoly market position in the domestic rail transit equipment market. We estimate that the Company has contributed over 90% of domestic rail transit equipment market from 2016 to 2020. The Company is the dominant manufacturer of multiple units (MUs), locomotives, freight wagons, passenger carriages and urban rail transit vehicles. Other domestic participants such as Nanjing Kangni Mechanical and Electrical Co., Ltd. and Guangdong Huatie Tongda High-speed Railway Equipment Corporation, are far from the comparable scale to CRRC. CRRC has continuously increased research and development (R&D) investment in absolute amount and as a percentage of revenue, from RMB9.48 billion in 2016 to RMB13.35 billion in 2020, accounting for 4.1% and 5.9% of total revenue respectively. The 2020 figure was substantially higher than the peer average of 4.1%, reflecting the Company’s strong research and development capabilities to maintain its technological innovation in high-end rail transit equipment. In 2020, CRRC’s cross- border interconnection high-speed MU with a speed of 400 km/h was rolled off the assembly line, representing a milestone in China’s high-speed railway product development. As the majority of state-owned railway and metro operators prefer suppliers with stronger technical capability, we believe its technical strength in manufacturing high-end of industry chain of rail transit equipment strengthens its strategic importance to the China’s railway and urban rail development plan. We expect CRRC to maintain its leading market position in the future.
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Exhibit 1: China rail transit equipment market share (2020) Exhibit 2: CRRC's market share in China rail transit equipment market RMB bn China High Speed Railway Others 250 100.0% Technology 4% 1% 200 80.0% Nanjing Kangni Mechanical & Electrical 150 60.0% 1%
Inner Mongolia North 100 40.0% Hauler Joint Stock 1% 50 20.0% Guangdong Huatie Tongda High-speed Railway 0 0.0% Equipment Corporation 2016 2017 2019 2020 1% CRRC 92% CRRC's domestic revenue CRRC's market share (RHS)
Sources: Company, Wind, Pengyuan International Sources: Company, Wind, Pengyuan International Stable FAI of railway nationwide and strong FAI growth of urban rail transit construction The FAI of railway nationwide had maintained above RMB800 billion from 2014 to 2019. Impacted by the coronavirus pandemic, the FAI amounted to RMB781.9 billion, representing a year-on-year decrease of 2.6%. As of the end of 2020, the national railway mileage in operation reached 146,300 km, of which high-speed rail mileage reached 37,900 km. According to National Development and Reform Commission, the railway network in China will reach 175,000 km by the end of 2025, representing a CAGR of 3.6%. We acknowledge the majority of FAI of railway nationwide is used for railway infrastructure construction, railway equipment investment is still highly correlated to the FAI of railway nationwide. We believe the stable FAI of railway nationwide will support CRRC to maintain its operating scale of railway equipment segment in the next few years. The FAI of urban rail transit construction has strong growth from RMB384.7 billion in 2016 to RMB628.6 billion in 2020, representing a CAGR of 13.1%. As of the end of 2020, there was an aggregate of 45 cities in the mainland China (excluding Hong Kong, Macau and Taiwan) commencing the urban rail transit operation lines with a distance of 7,978.2 km. As of the end of 2020, a total of 67 urban rail transit network plans have been approved by the National Development and Reform Commission, with a total length of 7,085.5 km under construction. We expect the growth of FAI of urban rail transit construction to remain strong and CRRC will continue to expand its urban rail transit vehicles and urban infrastructure in the next 2-3 years.
Exhibit 4: Fixed assets investment of urban rail transit construction in Exhibit 3: Fixed assets investment of railway nationwide in China China
RMB bn RMB bn 1,000 1.0% 700 25.0%
600 800 0.0% 20.0% 500 600 400 15.0% -1.0% 400 300 10.0% -2.0% 200 200 5.0% 100 0 -3.0% 2016 2017 2018 2019 2020 0 0.0% 2016 2017 2018 2019 2020
Fixed assets investment of railway nationwide Fixed assets investment of urban rail transit construction YoY Change (RHS) YoY Change (RHS)
Sources: National Railway Administration of China, Pengyuan International Sources: China Association of Metros, Pengyuan International Relatively high business concentration CRRC has a relatively high business concentration in terms of geographic and customer segmentation. In 2020, 40% of revenue is driven by railway equipment segment, followed by 25% from urban rail transit vehicles and urban infrastructure segment, 32% from new industry segment and 3% from modern service segment. In terms of geographical exposure, while the Company generated revenue from about 109 countries or regions across six continents, revenue contribution from overseas was still relatively low and accounted for 7% of the Company’s total revenue only in 2020. Given the ongoing
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coronavirus pandemic and geopolitical tensions, we expect the overseas expansion might be slowed in the next few years. Besides, the Company has relatively high customer concentration risks. The aggregate sales attributable to the Company’s five largest customers were 43.70% of the Company’s total sales in 2020, of which the Company’s largest client, China State Railway Group Co., Ltd., accounted for 36.39% of the Company’s total sales. As China State Railway Group Co., Ltd. recently extended maintenance cycles for various vehicles, the possible slowed procurement from its major customer might put pressure on the cash flow generated from the Company’s sales of rail transit equipment such as MUs, locomotives, freight wagons and passenger carriages. However, we expect the increase in demand from repair and maintenance of railway equipment could partially offset the adverse impact.
Exhibit 5: Revenue breakdown by segment (2020) Exhibit 6: Revenue breakdown by region (2020) Modern service Overseas 7% New 3% industry 32% Railway equipment 40%
Urban rail transit China vehicles and urban 93% infrastructure 25%
Sources: Company, Pengyuan International Sources: Company, Pengyuan International
Financial Profile
Extraordinary financial profile
We access CRRC has a strong leverage profile based on its low financial leverage and high debt-servicing capability. The Company has maintained a net cash position from 2017 to 2020. The gross debt to total capitalisation ratio increased slightly to 13.9% in 2020 from 12.7% in 2019. The ratio was still substantially below the peers’ average level in the same industry. At the end of 2020, the Company had a total debt of RMB27.4 billion and excess cash of RMB31.0 billion, resulting in a net cash position of RMB3.6 billion. Bolstered by healthy capital structure and strong cash flow, the Company has high debt-servicing capability. The EBITDA interest coverage maintained at 16.1x and 16.0x respectively in 2019 and 2020. Looking forward, we expect the Company to maintain gross debt to total capitalisation ratio at 14%-15% with net cash position in the next three years as the Company has strong cash flow with low financing needs to fund its capital expenditure.
We have a neutral assessment of the Company’s cashflow variations. CRRC has reported positive and consistent EBITDA and funds from operations (FFO) in the past four years. The sharp drop in the operating cash flow (OCF) in 2020 was mainly due to significant working capital outflow from the increase in receivables. As the majority of the CRRC’s receivables come from state-owned railway and metro operators, we expect the credit risk to be low. We expect the Company will continue to report positive operating cash flow and free cash flow in the next three years.
We assess the Company’s debt structure as neutral. As of the end of 2020, the Company had RMB19.4 billion of short-term debt. Although the short-term debt accounted for 71% of its total debt in 2020, the Company managed to maintain a net cash position as previously discussed. The current short-term debt concentration should not have a material impact on the Company’s liquidity and ability to repay the debt. We assess interest rate risk as neutral, as the majority of outstanding debts were based on fixed interest rates at the end of 2020. We have a neutral assessment on foreign exchange risk. We estimate that total borrowings denominated in foreign currency accounted for 22% of the Company total debt. As of the end of 2020, overseas orders accounted for 35% of the Company’s existing backlog. We expect the cash flow generated from overseas orders to act as a natural hedge to the foreign exchange risk.
Listed in both Shanghai and Hong Kong, CRRC is under the supervision of the two stock exchanges. We assess the Company’s financial policy to be prudent. The Company has a track record of maintaining capital expenditure below RMB10
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billion from 2017 to 2020, which is noticeably lower than the Company’s strong funds from operations of over RMB20 billion during the same period. Downward pressure on profitability
We assess the Company’s profitability to be medium with downward pressure mainly due to change in product mix. We foresee increasing revenue contributions from urban rail transit vehicles and urban infrastructure and new industry segment with lower gross margin than that of railway equipment segment in the next three years. The potential increase in prices of raw materials such as steel, aluminium and copper might also put pressure on the Company’s margin.
CRRC recorded a slight decline in revenue in 2020. The railway equipment segment recorded 26.5% decline in revenue as the demand for railway equipment was impacted significantly by the coronavirus pandemic and slower railway equipment procurement by its largest customer, China State Railway Group Co., Ltd. The sales volume of multiple units, locomotives, freight wagons and passenger carriages declined 12.5%, 38.9%, 30.5% and 85.5% respectively from 2019. On the other hand, urban rail transit vehicles and urban infrastructure segment recorded 32.1% growth as construction of additional urban rail transit mileage in China boosted the sales volume of rapid transit vehicles by 28.0%. New industry segment recorded 33.9% growth mainly due to the strong demand of wind power equipment and new materials. The Company’s blended gross margin declined to 22.3% in 2020 from 23.1% in 2019 mainly due to a change in product mix. The EBITDA margin decreased to 9.4% in 2020 from 10.4% in 2019.
We estimate CRRC to record a revenue growth of 6.9% in 2021. While we expect revenue growth of railway equipment segment to remain relatively flat, revenue growth of urban rail transit vehicles and urban infrastructure segment and new industry segment remains strong. As for the railway equipment segment, sales of multiple units accounted for over half of the railway equipment segment’s revenue. We expect the railway equipment procurement from China State Railway Group Co., Ltd. to remain slow in 2021 based on its shorter planned launch of new railway lines and extension of maintenance cycle. We estimate the sales volume of multiple units to remain low. The volume of railway passenger transport and railway freight transport is expected to recover in 2021, but the potential recovery is still below the pre-pandemic levels. We expect the sales volume of freight wagons and passenger carriages to rebound markedly. This also supports the sales volume of locomotives. As for urban rail transit vehicles and urban infrastructure segment, we expect the segment revenue to record a high single- digit growth in 2021. Fixed assets investment of urban transit railway in China remains solid. A substantial increase in operational rapid transit lines is expected to stimulate demand for rapid transit vehicles. We also estimate new industry segment revenue to maintain a relatively high growth of 10%-15% in 2021, supported by strong sales of wind power equipment. In terms of profitability, we expect the EBITDA margin will decrease to 8.9% in 2021 from 9.4% in 2020 and its return on invested capital (ROIC) will decrease to 9.3% in 2021 from 9.6% in 2020. Government Support
Our assessment reveals that the central government has an extremely strong willingness to provide support to CRRC in the event of financial distress. This is mainly due to the fact that CRRC is closely tied with and extremely important to the central government. This leads us to uplift its SACP of ‘a’ by two notches based on government support.
CRRC is 51.19% held by CRRC Group Corporation, which is 100% owned by the State-owned Assets Supervision and Administration Commission of the State Council. CRRC accounted for 89% of the parent company’s total assets at the end of 2019, of which CRRC’s Property plant and equipment (PPE) and equity investment accounted for 91% and 93% of the parent’s PPE and equity investment respectively. The majority of debts were booked under CRRC instead of the parent level. CRRC’s sales also contributed 96% of the parent company’s sales in 2019. Therefore, we consider the credit profiles of the two entities as closely linked and we expect CRRC to continually receive government support through CRRC’s parent.
We believe the formation of CRRC from the two giant domestic rail transit equipment manufacturers, China North Locomotive and Rolling Stock Corporation (CNR) and China South Locomotive and Rolling Stock Corporation (CSR), demonstrated the central government’s extraordinary support in favour of its near-monopoly position in the China rail transit equipment market. After merger, CRRC has continuously received stable government grants of RMB589 million, RMB535 million, RMB586 million and RMB685 million from government in the past four years though the amount was rather insignificant compared to its huge operating scale. Even though CRRC’s business is not originated directly from the government, the majority of CRRC’s revenue come mainly from railway and metro operators which are state-owned enterprises. The strong business connections between state-owned enterprises and the Company are unlikely to revert in the near future, in our view.
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CRRC does not only an important role in supplying domestic rail transit equipment, but also executing the Belt and Road Initiative which aims at expanding Chinese rail and transportation system globally. We believe the Company’s technical capacities are higher than most of its domestic peers. It would be extremely costly and time-consuming for the central government to substitute CRRC by other government related entities in our opinion. Given the Company’s dominant position in the rail transit equipment market in China, a potential default of CRRC could ultimately impact China’s railway and urban rail development.
We anticipate CRRC’s strong tie with and extremely importance to the central government to remain intact over the next 12- 24 months. Liquidity
We evaluate CRRC’s liquidity as strong. Its 12-month and 24-month cashflow adequacy ratios are at 1.9x and 2.1x respectively. CRRC has solid relationships with major banks such as Bank of China, Export-Import Bank of China, China CITIC Bank, China Minsheng Bank and China Development Bank. As of the end of 2020, the Company had RMB180.04 billion of bank facility, of which undrawn bank facility accounted for RMB162.58 billion. Even without considering the undrawn bank facility, we expect the Company’s abundant liquid assets on hand and strong funds from operations to be sufficient to cover its cash outflows, including its short-term debt payment, interest payment and mandatory capital expenditure in the next two years. We made the following key projections on CRRC’s liquidity:
• Estimated liquid assets on hand of RMB39.3 billion and RMB49.7 billion in 2021 and 2022; • Estimated funds from operations to be about RMB18.1 billion and RMB18.7 billion in 2021 and 2022; • Estimated short-term debt payment of RMB19.4 billion and RMB20.4 billion in 2021 and 2022; • Estimated cash interest of RMB1.6 billion and RMB1.7 billion in 2021 and 2022; • Estimated mandatory capital expenditure of RMB7.5 billion and RMB7.9 billion in 2021 and 2022 respectively. Company Background
Headquartered in Beijing, CRRC Corporation Limited is the largest supplier of rail transit equipment in the world. The Company’s main businesses consist of the research and development, design, manufacture, repair, distribution and leasing of railway locomotives, multiple units, rapid transit vehicles, engineering machinery, mechanical and electrical equipment, electronic devices and components, electronics and environmental protection equipment. The Company is also engaged in the provision of related technical services. The Company was formed on 1 June 2015 with the merger of China CNR Corporation Limited and CSR Corporation Limited. The parent company is CRRC Group Corporation, a state-owned enterprise supervised by the State-owned Assets Supervision and Administration Commission of the State Council. As of the end of 2020, CRRC Group Corporation held 51.19% of its share. Peer comparison
One domestic participant and four international participants were selected based on the consideration of similar business segments to conduct a comparison with the Company. Due to CRRC’s dominant position in rail equipment market in China, there are limited domestic peers with comparable operating scale. We select Shanghai Electric Group Company Limited, which is a power generation and electrical equipment manufacturer, as a comparable domestic peer. The international peers include Alstom SA, Stadler Rail AG, Hyundai Rotem Co., Ltd. and Siemens AG. In the peer comparison section, we do not assign ratings to other selected peers.
Table 3: CRRC’s Peers Alstom Alstom SA (Alstom) is France-based international manufacturer of rail transport equipment. The company offers a range of equipment including rolling stock, systems, services as well as signalling for passenger and freight railway transportation. The company’s railway services include maintenance, modernisation, management of spare parts, support and technical assistance services. Alstom serves customers worldwide. In FY2020, 48% of its revenue is generated from sale of trains, followed by 18%, 18% and 16% from signalling and services and system segment respectively. Stadler Rail Stadler Rail AG (Stadler Rail) is a Switzerland-based company engaged in the design and manufacturing of rail vehicles. The company’s product portfolio includes suburban and regional transport trains, light rail vehicles, trams, high-speed and intercity trains, city transport vehicles, locomotives, passenger trains and tailor-made vehicles. The train segment accounted for 81% of its total revenue in FY2020, while the remaining is contributed by locomotives, light rail vehicles, metros and tailor-made segments. Hyundai Hyundai Rotem Co., Ltd. (Hyundai Rotem) is a company mainly operates its business through three segments. The Railway system segment Rotem is engaged in the manufacturing and sale of railway vehicles such as electric multiple units, high-speed trains, light rail vehicles, magnetically levitated vehicles, trams and diesel multiple units. The plant and machinery segment manufactures and sells steel facilities and automotive
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equipment. The defence system segment is engaged in the manufacturing and sale of defence materials and trams. The majority of its revenue is driven from railway system in FY2020. Siemens Siemens AG (Siemens) is a Germany based multinational conglomerate company. The company focuses on areas of electrification, automation, and digitalisation. Siemens also provides engineering solutions in automation and control, power, transportation, and medical diagnosis. Siemens Mobility is one of the company’s segments focusing on intelligent and efficient mobility solutions for urban, interurban and freight transportation. Siemens Mobility has four core business units, namely mobility management, dedicated to rail technology and intelligent traffic systems, railway electrification, rolling stock, and customer services. Shanghai Shanghai Electric Group Company Limited (Shanghai Electric) is principally engaged in design, manufacture and distribution of electric power Electric and industrial equipment. The company has three main business. Energy equipment business includes the manufacture and sale of wind turbines and components, nuclear power equipment, thermal power equipment and power transmission and distribution equipment. Industrial equipment includes the manufacture and sale of elevators and motors; modern service industry includes the contracting of construction projects of thermal power and transmission and distribution projects. The three segments accounted for 37%, 28% and 35% of its total revenue respectively in FY2020. Source: Company, Pengyuan International
The peer comparison table below shows that CRRC had a stronger profitability than the selected peers’ average in terms of EBITDA margin and ROIC. CRRC had the lowest financial leverage in terms of gross debt to capitalisation, with a net cash position. CRRC also had a strong debt-servicing capability. CRRC had a better operating efficiency than international peers in terms of cash conversion cycle mainly due to its longer payable days outweighs the long receivable days and inventory days, based on our assessment.
Table 4: Peer comparison table (FY2020) (RMB mn) CRRC Alstom* Stadler Hyundai Siemens** Shanghai Rail* Rotem Electric Financials Revenue 227,656 63,488 22,691 16,306 448,579 137,285 Gross Margin 22.3% 17.8% 10.2% 8.8% 35.3% 16.9% EBITDA 21,416 6,487 1,853 739 64,352 9,090 EBITDA Margin 9.4% 10.2% 8.2% 4.5% 14.3% 6.6% Return on Assets (ROA) 4.3% 4.2% 3.8% 1.9% 3.7% 2.1% Return on Invested Capital (ROIC) 9.6% 11.9% 11.2% 4.7% 6.3% 5.0% Cash Flow Measures
Funds from Operations (FFO) 20,599 5,295 1,692 549 57,145 2,464 Operating Cash Flow (OCF) -299 3,685 -1,500 330 63,049 3,734 Free Cash Flow (FCF) -7,984 1,564 -3,620 67 50,849 -2,675 Discretionary Cash Flow (DCF) -12,960 -8,036 -4,503 45 25,931 -3,802 Capital Expenditure 7,686 2,121 2,120 263 12,200 6,409
Balance Sheet Measures Cash and Short-term Investments 39,292 16,900 6,849 3,235 133,106 35,782 Total Debt 27,350 12,284 11,334 7,010 376,472 59,311 Adjusted Net Debt -3,626 -4,615 4,484 3,754 243,366 23,530 Equity 169,142 25,416 6,305 8,174 289,679 66,401 Total Capitalisation 196,492 37,700 17,638 15,183 666,151 125,712 Leverage Measures
Debt/EBITDA -0.2x -0.7x 2.4x 5.1x 3.8x 2.6x EBITDA/Interest Expense 16.0x 14.7x 26.2x 3.5x 10.1x 4.4x Gross Debt/ Capitalisation 13.9% 32.6% 64.3% 46.2% 56.5% 47.2% Debt/Equity -2.1% -18.2% 71.1% 45.9% 84.0% 35.4% FFO/Debt NM NM 37.7% 14.6% 23.5% 10.5% OCF/Debt NM NM -33.4% 8.8% 25.9% 15.9% FCF/Debt NM NM -80.7% 1.8% 20.9% -11.4% DCF/Debt NM NM -100.4% 1.2% 10.7% -16.2% FFO/Cash Interest Expense 22.7x 12.0x 24.0x 2.6x 8.9x 1.2x
Operating Efficiency Receivable Days 127.2 71.3 34.3 48.9 105.5 123.9 Inventory Days 127.7 87.8 127.8 38.0 111.6 91.2 Payable Days 271.0 156.8 71.0 70.5 126.9 277.2 Cash Conversion Cycle -16.1 2.2 91.1 16.4 90.2 -62.1 NM -Not meaningful due to net cash position *Fiscal year ended 31 March 2020 **Fiscal year ended 30 September 2020 Sources: Company, Pengyuan International
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Rating Scores Summary
Business Profile Strong Industry and Operation Risk Profile Strong Macroenvironment Risk Low
Financial Profile aa+ Preliminary Leverage Profile aa+ Cash Flow Variations Neutral Debt Structure and Financial Policy Neutral Financial Volatility Neutral Investments 0 notch Final Leverage Profile aa+ Profitability Medium
Indicative Credit Score (ICS) a
Adjustment Factors Corporate Structure and Governance Neutral Liquidity Strong Supplementary Analysis Neutral
Standalone Credit Profile (SACP) a
External Support Parental Support N/A Extremely Government Support strong Issuer Credit Rating (ICR) AA-
Note: ratings mentioned in this report are unsolicited rating.
Related Criteria
General Corporate Rating Criteria (15 March 2018)
Financial Adjustments and Ratio Definitions (07 May 2018)
Government-Related Entities Rating Criteria (31 August 2018)
National Scale Ratings Mapping (18 May 2021)
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DISCLAIMER Unsolicited ratings – non-participative rating – not disclosed
Pengyuan Credit Rating (Hong Kong) Company Ltd (“Pengyuan International”, “Pengyuan”, “the Company”, “we”, “us”, “our”) publishes credit ratings and reports based on the established methodologies and in compliance with the rating process. For more information on policies, procedures, and methodologies, please refer to the Company’s website www.pyrating.com. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.
All credit ratings and reports are subject to disclaimers and limitations. CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.
CREDIT RATINGS ADDRESS ONLY CREDIT RISK. THE COMPANY DEFINES THE CREDIT RISK AS THE RISK THAT THE RATED ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS MUST NOT BE CONSIDERED AS FACTS OF A SPECIFIC DEFAULT PROBABILITY OR AS A PREDICTIVE MEASURE OF A DEFAULT PROBABILITY. Credit ratings constitute the Company’s forward-looking opinion of the credit rating committee and include predictions about future events which by definition cannot be validated as facts.
For the purpose of the rating process, the Company obtains sufficient quality factual information from sources which are believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses during the rating process. The issuer and its advisors are ultimately responsible for the accuracy of the information provided for the rating process.
Users of the Company’s credit ratings shall refer to the rating symbols and definitions published on the Company’s website. Credit ratings with the same rating symbol may not fully reflect all small differences in the degrees of risk, because credit ratings are relative measures of the credit risk.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.
The Company reserves the right to take any rating action for any reasons the Company deems sufficient at any time and in its sole discretion. The publication and maintenance of credit ratings are subject to availability of sufficient information.
The Company does not receive compensation for its unsolicited credit ratings. The rated entity did not participate in the rating process. The unsolicited credit rating has not been disclosed to the rated entity or to its related party before being issued.
The Company reserves the right to disseminate its credit ratings and reports through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.
The Company’s credit ratings and reports are not indented for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubt, please consult the relevant regulatory body or professional advisor and ensure compliance with applicable laws and regulations.
In the event of any dispute arising out of or in relation to our credit ratings and reports, the Company shall have absolute discretion in all matters relating to resolving the dispute, including but not limited to the interpretation of disclaimers and policies.
Copyright © 2021 by Pengyuan Credit Rating (Hong Kong) Company Ltd. All rights reserved.
25 May 2021 Page | 10 RA02050200019