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] 25 May 2021 Page | 1 RA02050200019 Corporate China 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. 25 May 2021 Page | 2 RA02050200019 Corporate China 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.