Tuesday, September 15, 2015
China Merchants Securities (HK) Co., Ltd. Company Report Hong Kong Equity Research
China Railway Signal & Yiding JIAO +86 755 82908475 Communication Corp (3969 HK) [email protected] Global leader of railway communication & control system solutions ■ CRSC (or the “company”) is the world’s top rail transportation Initiation control system solution provider and the only industry chain-wide solution provider in the world that can offer design and integration, equipment manufacturing and system implementation services ■ Apart from its rail transportation business, CRSC will utilize IPO BUY and its own funds to actively participate in PPP projects; we expect 2015-17E revenue to grow 43%, 38% and 29.8% YoY Price HK$6.13 ■ Considering 2016E sector average P/E of 14.52x, we arrived at 12-month Target Price HK$7.15 (+17%) our TP of HK$7.15, corresponding to 2015-17E P/E of 20.0x, 15.2x (Potential upside) and 11.4x, or 2015-17E P/B of 2.14x, 1.92x and 1.69x, respectively
The company’s three key competitive advantages to last long Price Performance 1) CRSC is the natural monopoly in high-speed rail control system (%) 5 3969 HSI Index market. 2) It possesses national-grade R&D capabilities and extensive experience. 3) Customers prefer working with trusted and fixed suppliers 0 for safety and compatibilities of control system. -5
Huge room for future business growth -10 1) High-speed rail and urban transit control system market size was RMB25 bn in 2014 and 13.3% CAGR is expected for 2014-20E. 2) -15 Modern tram is springing up, with a control system market size of -20 RMB5.9 bn in 2020E. CRSC is likely to replicate its successful Aug/15 experience in other rail transportation products. 3) Its ample cash, Source: Bigdata minimum debt ratio and engineering experience should help in % 1m 6m 12m developing the PPP market. 4) Major OBOR beneficiary. 3969 HK (2.9) N/A N/A Forecasts and valuation HSI (10.1) (9.5) (12.3)
CRSC‟s 1H net profit grew 40% YoY, and we estimate 2015-17E EPS will be RMB0.31/0.40/0.54, up 5%/32%/33% YoY. The lower growth for 2015 Machinery & Equipment was due to IPO dilution and RMB400 mn one-off gain in 2014. Its current Hang Seng Index 21562 2016E P/E (12.30x) is lower than sector average (14.52x), and its ROA HSCEI 9729 (5.1%) is also below sector average (8.4%), but this will improve as it Key Data undertakes PPP projects. While CSRC is newly listed and thus lacks a 52-week range (HK$) 5.67-6.67 track record in the capital market, we expect its 2015-17E profit CAGR to Market cap (HK$ mn) 12069 reach 33.6%, better than sector average of 20.3%. We arrived at TP of Avg. daily volume (mn) 16.47 HK$7.15 in consideration of sector average P/E. Initiate with BUY. BVPS (HK$) 1.98 Financials Shareholding Structure No. of shares outstanding (mn) 8,235 RMB mn 2013 2014 2015E 2016E 2017E
Revenue 13,065 17,329 24,792 34,173 44,368 Growth (%) N.A. 32.6% 43.1% 37.8% 29.8% Net profit 1,260 2,033 2,379 3,171 4,251 Growth (%) N.A. 61.3% 17.0% 33.3% 34.0% EPS (RMB) 0.19 0.29 0.31 0.40 0.54 DPS (RMB) 0.02 0.00 0.41 0.06 0.08 P/E (x) 26.15 17.14 16.26 12.30 9.26 P/B (x) 3.48 2.79 1.74 1.56 1.37 ROE (%) 12.6% 17.4% 8.2% 8.7% 9.2% Source: Company data, CMS (HK) estimates
Please see penultimate page for additional important disclosures. China Merchants Securities (CMS) is a foreign broker-dealer unregistered in the USA. CMS research is prepared by research analysts who are not registered in the USA. CMS research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer. 1 Tuesday, September 15, 2015
Investment thesis
The company’s monopolistic advantages to maintain in the long term The company has practically monopolized China‟s railway control system market for long term as the railway sector is a closed market and the status quo is expected to last because: 1) the company‟s research capabilities regarding hardware, laboratories and technicians have piled up to the national level; 2) it is a primary industry standard maker who can always stay ahead of others in new product development; 3) as railway control system is an applied science, technologies are consummated by practical experience, an area in which the company romps ahead in the world; 4) customers prefer familiar providers for safety and compatibilities of control system; 5) the company forms a closed circle in the industry chain with its capabilities in design and integration, equipment manufacturing and system implementation and is able to streamline operations to save costs, making it hard for others to compete with. Advantages in traditional business to remain and expand The company boasts over 80% market share in the core of high-speed railway control system and has exclusive access to the core technologies of CTCS3, the sole high- speed railway standard in China. We expect 15.5% CAGR in 2014-20E in China‟s new- build high-speed railway control system market and the same growth for such operation of the company. The company participates in the “4-Es” integration tendering and is good at communication and signal but does not involve in power supply and electrification. As these two segments have lower technological requirements and the company holds one of the three “4-Es” integration tendering licenses, it has the means and measures to tap into the markets. The market size of these two sectors amounted to RMB21.3 bn in 2014 and is expected to expand at 15.5% CAGR in 2014-20E. There is huge room for the company to develop. Development of modern tram business The modern tram market is springing up. Tram becomes increasingly popular among city planners for its low building costs, short setup period, large capacity and use of clean energy. Fast growth is also permitted by the short approval process compared to metro. According to rail-transit.com and Frost & Sullivan, modern tram mileage in China and related control system market size will reach 3,000 km and RMB5.9 bn in 2020E respectively, representing a CAGR of 64% for 2014-2020E. As the forerunner of railway and urban transit control system, the company is expected to scoop up not less than 40% market share. Capital and experience to help PPP business to gain momentum The company had sufficient cash and only RMB318 mn of debt as at end-2014. It plans to raise RMB2.5 bn through debt financing in 2015. Compared to other transportation infrastructure enterprises with over 10% of net debt ratio, the company‟s liquidity is well- maintained and there is huge room for leverage operation. Control system of rail transportation accounts for about 6% of its total fixed asset investment (FAI). The company may tap into all infrastructure segments of rail transportation through the PPP model. Compared to other infrastructure companies, CRSC has sufficient capital; compared to other equipment manufacturers with sufficient capital, CRSC is equipped with system implementation capabilities and experience. We expect its urban transit PPP business to grow rapidly on the back of its own advantages. Expansion to overseas markets “One Belt, One Road” and “Made in China 2025” polices stimulate the oversea expansion of Chinese enterprises. We always believe that high-speed railway, as the representative of Made in China, will be the primary beneficiary of the two policies. CRSC is indispensable for exporting high-speed railway technologies as it possesses the core technologies. Apart from this, its CTCS3 technologies, developed based on Europe‟s ETCS, can integrate with overseas technologies seamlessly, allowing the company to expand into overseas markets quickly through acquisition.
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Focus charts Figure 1: Highly competitive 3-in-1 business model Figure 2: Huge potential in new business segments
Core business Competitiveness Upgrade & Tram maintenance Design & Medium integration
Equipment Medium Other new Overseas manufacturing to high business markets
System High implementation PPP
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
Figure 3: Segment revenue and growth forecasts Figure 4: Segment and overall gross margin forecasts 40% 50,000 RMB mn 35% 45,000 40,000 30% 35,000 25% 30,000 20% 25,000 15% 20,000 10% 15,000 10,000 5% 5,000 0% 0 2012 2013 2014 2015E 2016E 2017E
2012 2013 2014 2015E 2016E 2017E Design设计集成 & integration Equip.设备制造 manufacturing Sys.系统交付 implem . Other其他业务 business PPP 城轨业务Urban transit Railway铁路业务 PPP PPPPEP Overall总体
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
Figure 5: Expanding railway and urban transit control Figure 6: CRSC as world‟s top rail transportation control system new construction markets system provider in 2014 in terms of revenue 45.0 RMB CAGR of railway new construction 39.8 RMB bn bn 40.0 market size in 2014-20E: 14.2% 35.8 18 16 35.0 32.4 16 29.4 30.0 14 26.2 25.2 22.9 23 12 25.0 20.7 10 10 18.7 20.0 17.9 16.8 10 8 14.3 8 15.0 11.1 6 6 10.0 CAGR of urban transit new construction 4 5.0 market size in 2014-20E: 14.6% 2 0.0 2014 2015E 2016E 2017E 2018E 2019E 2020E 0 CRSC Ansaldo Bombardier Siemens Alstom Railway Urban transit
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
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Contents Company highlights ...... 5 Company profile 5 Competitive advantages 7 Business outlook 12 Earnings forecasts and valuation...... 20 Key forecasts 20 DCF valuation 24 Mainstream rail transportation control system in China 26 Still large room in China‟s railway market 26 Urban express rail transportation under rapid development too 28 Chinese manufacturers now among world‟s most technologically advanced in railway sector 30 Risk factors ...... 33 Appendix A: Company history and major events ...... 34 Appendix B: Biography of the company‟s management ...... 36 Appendix C: Business overview ...... 37 Overview of design and integration business 37 Overview of equipment manufacturing 39 Overview of system implementation 41 General business flow 42 Financial Summary ...... 44 Investment Ratings ...... 45 Disclaimer ...... 45
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Company highlights Company profile The company, being a central enterprise directly under the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), is the pioneer and leader in the rail transportation control system industry in China. Figure 7: Shareholding structure of the company
SASAC
CRSC Group SINOMACH CCT Group CRHC CICC Jiacheng
CRSC
Source: Company data, CMS (HK) As of 2014, the company was the largest rail transportation control system solution provider in the world. It has also been the only solution provider in the world that can provide design and integration, equipment manufacturing and system implementation services independently. More than 60 years of development allows the company to evolve from a follower of advanced technologies overseas to a proprietor of core techniques. The company now possesses CTCS-3 technology (a wireless train control system that uses track circuits to keep track of occupation of high-speed trains which operate at above 300 km/h to satisfy the minimum 3-minute tracking interval requirement), CBTC technology (a wireless automatic train control system primarily used in urban transit that integrates the functionality of automatic protection, autopilot and automatic monitoring) and CIPS technology (a comprehensive system integration technology for marshaling yards that is based on information sharing and aims at management integration, this world leading technology is mostly used for the management of cargo hubs). Leveraging its core technologies, the company has completed 7,000 projects in engineering design services and applied more than 70 proprietary system technologies in railway and provincial and municipal rail transportation. The company is also capable of manufacturing and maintaining signal and communication system products, including computer interlocking system for stations, track circuit, automatic blocking system, train control center, ATP onboard and RBC equipment. It has established 13 production facilities in nine cities in China. As for the system implementation services segment, the company is able to provide comprehensive engineering services such as construction, installation, testing and maintenance, covering areas of railway and urban transit control system project, communication system, electrical and M&E equipment, intelligent building and municipal project. The company is the unified supplier of the central train dispatch system at the headquarters of China Railway Corporation (CRC) and the provider of centralized traffic control systems for 16 railway administrations out of 18 in China. As at the end of 2014, in terms integration project mileage contracted for, the company had a market share of 65.2% in the high-speed railway control system market and 72.3% in the segment of trains of over 300 km/h. CRSC‟s products are also widely used in non-CRSC integration projects. In terms of contract value in 2011-2014, the company took up 40.1% of the urban transit control system market in China, with over 80% in the core control system market (including radio block center, track circuit, computer interlocking and train control center). The company is also the only rail transportation control system solution provider that participated in all of the major high-speed railway projects and six speed upgrade projects in China.
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Figure 8: 65.2% market share in high-speed railway Figure 9: 40.1% market share in urban transit control control system market (in terms of contracted mileage system market (in terms of 2011-2014 contract value) of completed integration projects as at end-2014) CREC (inclu. subsidiaries) 2.3% ZTE Others CRSC (inclu. 3.9% 20.1% subsidiaries) 40.1% FiberHome CRCC (inclu. 4.1% subsidiaries) CRSC 32.5% 65.2% CREE (inclu. subsidiaries) 5.4% BTCT 11.8% Thales SAIC 14.6%
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
The company‟s strong technological capabilities and 3-in-1 business model enable it to provide one-stop solutions to customers and create synergies to heighten economic benefits. The company demonstrates a balanced development of its businesses, namely design and integration, equipment manufacturing and system implementation services, with domestic rail transportation business taking the lead in terms of revenue from end- markets. Figure 10: 2014 revenue mix by industry chain Figure 11: 2014 revenue mix by end-markets segment Others 7% Other Overseas businesses businesses 7% 3% Domestic Design & urban transit integration 11% 28% System imple. services Domestic rail 31% transportation Equip. 79% manufacturing 34%
Source: Company data, CMS (HK) Source: Company data, CMS (HK) In terms of total revenue, the company was the world‟s top railway control system supplier in 2014. Its total revenue amounted to RMB17.3 bn (of which RMB16.1 bn being revenue from railway business) in 2014 and a CAGR of 28% was recorded for revenue in 2012-2014. The company was able to maintain a high gross margin while achieving fast revenue growth. In 2012-2014, its overall gross margin was above 24%, and its margins for design and integration and equipment manufacturing were above 31%.
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Figure 12: Revenue CAGR of 28% in 2012-2014 Figure 13: Highest revenue from rail transportation business in 2014 globally RMB bn 20 RMB bn 17.3 20 18 16 16 14 13.1 15 12 10.6 10 10 10 10 8 8 6 6 4 5 2 0 0 2012 2013 2014 CRSC Ansaldo Bombardier Siemens Alstom
Source: Company data, CMS (HK) Source: Frost & Sullivan, CMS (HK) The technological capabilities enjoyed by the company allows it to effectively control capital expenditure (RMB1.43 bn in 2014) and maintain sufficient operating cash flow (RMB1.19 bn in 2014) and minimum finance costs (RMB15 mn in 2014), resulting in an excellent return on capital (8.1% ROA and 18.2% ROE in 2014). Table 1: Historical return of the company 2012 2013 2014 Return on assets 6.5% 6.4% 8.1% Return on equity 15.3% 14.0% 18.2% Debt-to-equity ratio 9.0% 3.5% 2.5% Source: Company data, CMS (HK)
Competitive advantages A one-stop solution provider for the entire industry chain Unlike other companies of similar nature, CRSC is not just a product supplier but an all-round total solution provider. Its business can be divided into three segments, namely design and integration, equipment manufacturing and system implementation services, which form a complete industry chain altogether. Within this industry chain, design and integration lay down the foundation which decides the directions of the other two components in the chain. On this level, standard means competitiveness. Overall, competition is not that stiff and oligopoly is not so unusual. Enterprises on this level possess the lightest assets but boast the highest gross margin, giving them prominent advantages. In that regard, CRSC itself is irreplaceable in a sense as it participated in the standard making process in China. The middle layer of the industry chain is equipment manufacturing. In this layer, competition becomes fierce as the number of players increases. Competitiveness is represented by technologies. Enterprises with better technologies can enjoy higher gross margin, but lasting technological advantages require high investment cost. This is challenging for all enterprises if they would like to continue to have technological advantages in the long run. Operating in this layer are companies like CRSC, Zhuzhou CSR Times Electric Company Limited (CSR Times 3898HK) and CRRC Corporation Limited (CRRC 1766HK). Although they produce different products, they all have to continue to invest a lot of capital to ensure technological advantages in order to maintain their leading positions. At the end of the industry chain is system implementation. Technological requirements on this level lower further and participants are mostly high quality labor-intensive enterprises. Their profitability depends on cost management, so cost is synonymous with competitiveness. Since the companies are dependent on costs for their profitability, gross margins are limited. In addition, as cost control relies heavily on economies of scale, enterprises in this sector face less competition despite lower gross margins. Sector representatives include CRSC, China Railway Group Limited (CREC 390HK) and China Railway Construction Corporation Limited (CRCC 1186HK). Based on our analysis above, CRSC covers all the three levels of the industry chain. This gives the company an advantage in the integration of the three levels for cost saving purpose. More importantly, the company is able to form a “closed circle” with its products. We believe this “closed circle” is crucial to its business. The company is like
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Apple in the sector of train control system. The common ground of CRSC and Apple is that they both set the standards and make the products. Apple develops its own operating system for its own mobile products. If it did not have its own operating system, its cell phones would not be as competitive as other companies which sacrifice gross margin for market share. On the other hand, if it did not produce its own cell phones, it would be difficult for its operating system to form an ecosystem to compete with other operating systems that are more compatible. Apple manages to realize a positive feedback loop for its products and standards in its “closed circle”. CRSC shares the same traits as it takes a leading role in formulating most train control system standards in China and, at the same time, manufactures the key conforming products. In this way, it achieves an effect that is greater than the sum of its parts which beefs up its competitiveness. This is where the company has the biggest competitive advantage compared to other similar enterprises. Figure 14: Structure of industry chain Figure 15: A “closed circle” in industry chain
Core business Competitiveness Products
Mutually facilitating Mutually Mutually reinforcing Mutually
Design & Medium integration
Equipment Medium
manufacturing to high
System High Standards implementation Closed circle
Source: CMS (HK) Source: CMS (HK)
Unique entry barrier making the company one step ahead The company is at an advantage in terms of technology, standard formulation, experience and customer loyalty thanks to the unique entry barrier. The railway market has long en a closed sector in China for national security reasons. Key technologies including rail infrastructure, train manufacturing and train control system are in the hands of state-owned enterprises. However, unlike rail infrastructure (CRCC and CREC) and train manufacturing (CSR and CNR, which merged after long-term competition), CRSC has long been supported by the government as the only carrier that embodies the highest level of train control technology in China. Although the railway market is opening up, the company is one step ahead of others as new entrants are required to have at least five years of experience. This makes the latecomers impossible to catch up with CRSC. Major products of the company enjoy market shares of over 80%. Meanwhile, out of the 18 railway administrations in China, 16 have adopted CRSC‟s centralized train dispatching command system. As at the end of 2014, the company was also the only centralized train dispatching command system provider of CRC.
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Figure 18: CRSC‟s market coverage as at end-2014
High-speed lines (in operation and under construction) integrated by CRSC High-speed lines (in operation and under construction) covered by CRSC’s equipment supply Cities with urban transit lines covered by CRSC’s products Railway administrations covered by CRSC’s products
Source: CMS (HK) As customers who are adding new train control systems would require high compatibility between its old and new systems and high safety coefficient, the extensive coverage and good reputation of the company could result in higher customer loyalty and translate into an implicit advantage of the company. Technological advancement maintained on strong R&D capabilities The company invests a great deal of effort in R&D despite its unparalleled competitive advantages in China‟s railway market, which is the key to its long-lasting advancement in technologies. In 2014, the company employed 3,399 R&D personnel, accounting for 23% of its headcount. This was higher than the average level of its domestic and international peers. Although CSR Times had a higher proportion of R&D personnel, the absolute number was almost 500 fewer than that of the company. Among the company‟s R&D team, 50 people enjoy government special stipend, 31 were awarded the Zhan Tianyou Railway Science and Technology Award, and 35 were awarded the Mao Yisheng Railway Engineer Award. The amount of RMB750 mn invested by the company in R&D in 2014 accounted for 4.3% of its total revenue, higher than the average of its domestic and international peers. The CAGR of R&D investment made by the company in 2012-2014 came in at 30%. It is worth mentioning that we believe the company‟s actual proportion of R&D investment should be higher than what appears in the table below. This is because domestic peers derive their revenue mainly from equipment manufacturing, but only 34% of the company‟s revenue comes from this segment. In fact, the company is able to reduce the pressure from R&D expenses on net margin while maintaining its R&D investment on the back of its 3-in-1 business model.
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Figure 19: Among the top R&D investors in 2014
7%
6%
5%
4%
3%
2%
1%
0%
Source: CMS (HK) In addition to the continuous investment in personnel and R&D, the company is also equipped with excellent laboratory facilities. As at the end of 2014, the company owned 61 science laboratories, including two CRTCC laboratories (China Railway Signal & Communication Shanghai Telecommunication Testing Center and Signal Product Examination Station of the Product Quality Examination Center under the MOR), three CNAS certified laboratories (Beijing National Railway Research & Design Institute of Signal & Communication Co., Ltd. (CRSCD) Testing Center, Signal Products Examination Station of the Product Quality Examination Center under the Ministry of Railway (MOR) and CASCO iCMTC Product Testing Laboratory) and five CMA certified laboratories. Furthermore, the company had two ministry-level engineering technology research centers, four academician workstations and 11 provincial enterprise technology centers. Figure 20: Laboratories of the company
Source: CMS (HK)
Maintaining highest safety standards In the rail transportation control sector, safe operation is paramount and system safety is one of the company‟s competitive advantages. The company has a system to guarantee product safety covering the entire industry chain and product lifecycle. It plans and specifies relevant provisions and workflows at each step of its product manufacture processes, from R&D, manufacture (including pre-delivery inspection), construction and system installation (including installation acceptance inspection), system integration (including follow-up services) to post-delivery contingency coordination for system equipment, in order to ensure the performance, functionality and safety of its products. The company classifies various products into level 0 to level 4 based on SIL standard when researching, developing and designing products, and requires the final design of its products to satisfy their respective level of safety standards with all of its core safety products meeting the most stringent SIL4 standard. For products that satisfy the SIL4 standard, the chances that their safety control malfunctions shall be limited to one time in 1,000 years to 10,000 years (10-9 ≤ Tolerable Hazard Rate < 10-8).
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The company had increased its safety production expenses from RMB47.5 mn in 2012 to RMB75.3 mn in 2013 and RMB120.0 mn in 2014, totaling RMB242.8 mn. As of December 31, 2014, the company had 537 registered engineers in its quality and safety control team, including 327 quality engineers and 210 safety engineers. They are responsible for monitoring the quality and safety of all key processes during product R&D, manufacture, construction and system integration, and are responsible for the appraisal and licensing of raw material suppliers. In the company‟s quality and safety control team, 419 members have professional experience for more than eight years. As of December 31, 2014, the company had collected a large quantity of product test cases in its database, including 946 test cases on CTCS-3, 446 test cases on CTCS-2, 159 test cases on CTCS 2+ATO, 2,520 test cases on urban transit CBTC/MATC and 10,389 test cases on interlocking, train control center, railway ATP Onboard, etc. The company incorporates the test cases into the laboratory database for scenario simulation testing in order to minimize safety risks. After the incident in 2011, the company proactively cooperated with relevant government authorities, took emergency measures and upgraded all relevant equipment and systems. After examining the malfunction of such on-site equipment, the company followed the instructions of the investigation panel and applied emergency measures to the LKD2-T1 train control center system equipment used for the Ningbo-to-Wenzhou High-Speed Railway. In 2013, CRC arranged to have the LKD2-T1 train control center system equipment used on the aforesaid lines replaced with the LKD2-T2 train control center system equipment, so as to fundamentally eliminate the potential safety hazard of the LKD2-T1 train control center system equipment. The safety platform used by LKD2- T2 train control center system, which satisfies SIL4 safety integrity level under the European EN50126, EN50128 and EN50129 standards, has been operating safely for 15 consecutive years since 2000. Since the completion of the upgrade and up to the latest practicable date, the LKD2-T2 train control system equipment of the line had been operating safely and stably. At the beginning of 2012, the mileage of high-speed railways in operation in the PRC was only 7,735 km and increased to 16,000 km by the end of 2014. Though the mileage of high-speed railways in operation had increased significantly, the company has not experienced any major safety accidents that involve casualties and severe injuries and the compliance rate of its products remained 100% in the sampling inspection conducted by the NRA each year. Also, the company has not been subject to any material product returns or recalls, or any material product liability or other legal claims arising from product quality issues. Since 2012, the company has kept a good product safety record and a large market share, which reflects, in part, that the company‟s products are still customers‟ preferred choice. Previous safety issues have motivated the company to improve constantly and such investments in product safety have become one of its competitive advantages. Porter five forces analysis Based on Porter‟s Five Forces, we conclude that CRSC has strong bargaining power against both upstream and downstream participants; substitutes for its products can hardly be found; it is difficult for new players to gain a foothold in this market; and no company in the existing market can compete with it on a full-scale basis. Therefore, the company has significant competitive advantages.
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Figure 21: Porter five forces analysis
New potential competitors
Almost no new potential competitors given the closed market and high skill and experience requirements
Bargaining power of Bargaining power of suppliers Competition between buyers companies Very limited bargaining Medium-to-strong power for suppliers due CRSC’s leading position bargaining power for to homogeneous unshaken as other companies CRSC thanks to its most products can only compete in certain advanced and safest parts of the industry chain products and a semi- open monopolistic market Substitutes
Overseas substitutes unable to enter the Chinese market due to national strategies
Source: CMS (HK)
SWOT analysis Figure 22: SWOT
Strengths Opportunities
Standard-making advantages, the pioneer in a number Huge upgrade and maintenance market potential in of aspects in China’s rail communication and signal respect of the rail transportation communication and system signal system Large customer base and high conversion costs for Exemplar of export of Chinese standards under “One customers Belt, One Road” High safety requirements that send new players away Huge development room for tram in the future
Only operating in the rail transportation sector System implementation business being eaten away Synchronized investment cycle in the rail transportation Failure to maintain technological advancement sector National rail transportation blueprint falling much short of Business highly sensitive to safety issues expectations
Weaknesses Threats
Source: CMS (HK) Business outlook In our opinion, the company‟s future business development will be divided into five key segments: 1) the maintenance and expansion of traditionally advantageous projects; 2) the expansion of the urban tram business; 3) the expansion of the system upgrade and maintenance business; 4) the expansion into overseas markets; and 5) the expansion into other new businesses.
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Maintenance and expansion of traditionally advantageous projects The driver of the company‟s future business development is its existing advantageous business. The company has developed advanced technologies in relation to railway signal systems and equipment, primarily including a) DS6 series computer-based interlocking technology, b) CTCS-3/CTCS-2 system equipment technologies applied in train control centers, RBC equipment, temporary speed restriction servers and railway ATP Onboard, c) technologies applied in basic signal system equipment such as rail switch equipment, balise and relays, d) CTC/TDCS technologies applied in train dispatching command, and e) CIPS technologies applied in marshalling yards, mines and harbors. With regard to urban transit signal systems, the company has developed ATO and CBTC systems and has innovated Urbalis 888 model CBTC, which have been widely applied to a number of metro lines in Beijing, Shanghai, Changchun, Shenzhen and Wuhan. With regard to communication information systems, the company has developed products such as the railway integrated video monitoring system, the image quality diagnostic system, the video analysis system, the railway integrated intelligent monitoring system, the railway passenger service information system, the railway disaster prevention and safety monitoring system, the railway maintenance management system, the iron tower monitoring system and the metro centralized alarm system. It has successfully implemented these technologies in a number of railway and urban transit lines. On top of its technological advantages, the company plays a dominant role in the standard-making process of the railway control system thanks to its capacity as “national team” and its long-time R&D capacities. This will not be toppled by new players in the foreseeable future. The company accounts for over 80% and 40% market shares respectively in the high-speed railway control system market and urban high-speed railway market. Since customers from these two markets require high standards on safety and system compatibility, it takes new players a lot of time to gain their trusts and a great deal of efforts to achieve compatibility in all fronts. That is why customer retention rates in such markets are pretty high. Therefore, the company may maintain and improve its historical market share in the long run. In our opinion, due to the actual domestic demand for rail transportation facilities and the great influence of infrastructure projects on GDP, the PRC government will continue to increase its investment in rail transportation construction. In the 2015 PPP project base issued by the National Development and Reform Commission (NDRC), there will be 36 railway projects with a total project amount of RMB280 bn, representing 14% of the total; of which 17 are urban express line projects with a total project amount of RMB444.3 bn, representing 22% of the total. According to Frost & Sullivan, in 2020E, mileage of China‟s high-speed railways and urban express lines in operation will reach 40,000 km and 6,600 km respectively, representing CAGRs of 18% and 16% in 2014-2020E. In 2020E, the market size of new-build high-speed railway and urban express line control systems will reach RMB52 bn, representing a CAGR of 13.3% in 2014-2020E.
Figure 23: China‟s rail transportation mileage and Figure 24: China‟s new rail transportation control forecasts system market size and forecasts RMB bn 40 45 '000 km 40.1 CAGR of new-build HSR control system 33.7 35 market size in 2014-20E: 15.5% 40 CAGR of HSR mileage in operation 36.1 30.1 in 2014-20E: 16.5% 35 32.4 30 27.1 28.5 24.5 30 25 24.4 21.7 25 18.8 19.3 20.0 CAGR of urban transit mileage in 20 17.7 operation in 2014-20E: 17.6% 16.1 20 16.0 14.2 14.7 15.1 15 13.4 15 10.8 10 10 5.7 6.2 6.6 4.5 5.2 CAGR of urban transit control system market 2.5 3.8 5 5 size in 2014-20E: 10.2% 0 2014 2015E 2016E 2017E 2018E 2019E 2020E 0 2014 2015E 2016E 2017E 2018E 2019E 2020E 城市快速轨道交通Urban transit 高速铁路HSR 高铁HSR 城市快速轨道交通Urban transit
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
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Besides the increase in its market size due to the rise in rail transportation mileage, the company‟s expansion into the electric and electronics integration sector will also increase its market share significantly. The integration refers to communication, signal, power supply and electrification, among which the first two belong to the weak current segment while the latter ones are in the strong current segment. Currently, the general contracting model of integration tendering has become the mainstream business model of China‟s railway control system market. Only three companies, namely CRSC, CRCC and CREC, have obtained the integration qualification, and CRSC is the only one that can provide products and services throughout the industry chain. Although CRCC and CREC have advantages in the strong current market, we believe that due to lower general technical barriers in the strong current market, it is relatively easy for the company to tap into that market. Meanwhile, the company has also acquired some strong current-related companies to complement its weakness in that area. According to Frost & Sullivan, in 2020E, the integration market size will reach RMB83.4 bn, representing a CAGR of 15.5% in 2014-2020E. Since the company has almost not engaged in the strong current market, which accounts for over 60% of the integration market, there is huge room for market share expansion in the area.
Figure 25: Change in the integration tender model Figure 26: Integration market size and forecasts
90 RMB mn 80 Traditional Trend of Integrator tendering model tendering model 70 33.7 60 30.1 CRCC 27.1 Electrification & power 50 24.5 supply integration 21.7 40 18.8 Integration CREC 30 14.2 45.2 50.6 Communication & 20 36.8 40.7 signal integration 28.2 32.6 CRSC 10 21.3 0 2014 2015E 2016E 2017E 2018E 2019E 2020E Weak current Strong current
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
Expansion of modern urban tram business Besides railway and urban express line markets, the modern urban tram market is also emerging rapidly. Due to its low costs, short construction time, high carrying capacity and the use of clean energy, the tram system is becoming popular among city planners. According to the statistics of rail-transit.com, there are nearly 100 cities in China that have intentions or plans to build modern tram tracks, among which over 40 cities have taken action. Haizhu District, Zengcheng District, Liwan District, Luogang District and Guangzhou International Financial City in Guangzhou province have planned to build a total of over 250 km of modern tram tracks. Over 800 km of tram tracks are planned in the long run. Track plans have been commenced in Pudong New District and Songjiang District; tram studies have been conducted in respect of internal tracks in Hongqiao Business District and Disney, as well as tracks in Xuhui riverside greenbelt, Lingang New Town, Sichuan Road in Hongkou District, Renmin Road in Huangpu District and the Bund. The Notice on Strengthening the Plan, Construction and Administration of Urban Transit of the NDRC was approved in 2015, encouraging the development of urban transit such as light rail and tram. Also, since tram plans only need the approval of local government instead of the NDRC, the process is rather simple. We expect an explosive development in the tram market in the future. According to Frost & Sullivan, in 2020E, mileage of China‟s modern urban tram will reach 3,000 km while the control system market size will amount to RMB5.9 bn, representing a CAGR of 64% in 2014-2020E. As the leader of railway and urban express line control systems, the company is expected to gain strong momentum in the modern tram market.
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Figure 27: Modern tram mileage and growth forecasts Figure 28: Modern tram control system market size and forecasts 3,500 200% km RMB bn 180% 3,000 7 160% 5.9 2,500 140% 6 5.3 2,000 120% 4.6 100% 5 1,500 80% 4 3.6 1,000 60% 40% 3 500 2.1 20% 2 0 0% 0.9 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 1 0.3 Tram Mileage YoY (RHS) 0 2014 2015E 2016E 2017E 2018E 2019E 2020E Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
Rail transportation PPP business to be boosted by capital and experience Investment in rail transportation control system accounts for approximately 6% of total FAI in the rail transportation industry. If the company manages to participate in all segments of rail transportation infrastructure through PPP, the market it can embrace will expand more than 15 times. Although the entering of the railway market is unlikely at the moment, urban transit FAI already reached RMB274 bn in 2014. Meanwhile, the PPP business will indirectly increase the competiveness of the company‟s major activities, which will further consolidate its market share in the rail transportation control system market. Also, the government is encouraging private capital to enter the infrastructure construction market through PPP. With its experience in the rail transportation industry and capital, the company is simply responding to the trend by entering this market.
Figure 29: China‟s urban transit FAI market size and forecasts 600.0 RMB bn 477 500.0 421 374 400.0 340 301 320 300.0 274
200.0
100.0
0.0 2014 2015E 2016E 2017E 2018E 2019E 2020E 中国城市轨道交通投资规模Investment in China's urban transit
Source: Frost & Sullivan, CMS (HK)
The company‟s historical operations do not rely much on its debts. As of 2014, the company had the lowest net debt ratio and the highest cash-to-total asset ratio among its competitors, giving it the highest potential in leverage and the best liquidity in the sector. As at the end of 2014, the company owed RMB318 mn only. It intends to raise RMB2.5 bn through debt financing in 2015. By the end of 2015, the company‟s cash on hand will increase notably, making its net debt ratio decrease further. As for companies in the transportation infrastructure industry, their net debt ratios amount to over 10%, restraining their ability and intention to increase leverage. As for other companies in the equipment manufacturing industry, despite their relatively sufficient funds, they do not possess the company‟s construction capabilities and experience.
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Figure 30: Lowest net debt ratio among competitors Figure 31: Highest cash-to-total asset ratio
30% 25%
20% 20%
10% 15% 10% 0% 5% -10% 0% -20%
-30%
Net debt ratio Cash-to-total asset ratio
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
Expansion of system upgrade and maintenance business Besides growth brought about by the new-build market, the enormous rail transportation network in China implies a huge market in relation to system upgrade and maintenance. Since the designed life span of China‟s high-speed railway control systems is 8-10 years and such railways commenced operation in 2008, their control systems will need upgrading going forward.
Figure 32: High-speed railway construction calendar Figure 33: Potential of China‟s rail control system upgrade and maintenance market and forecasts
2020E 45 RMB bn 2019E 39 40 2018E 34 35 2017E 30 30 2016E 25 2015E 25 21 2014 18 18.7 20 15.7 2013 15 15 12.6 2012 9.8 7.5 2011 10 5.8 4.2 2010 5 2009 km 0 2008 2014 2015E 2016E 2017E 2018E 2019E 2020E 0 10,000 20,000 30,000 40,000 China's national railway China's urban transit
Source: MOR, CMS (HK) Source: Frost & Sullivan, CMS (HK) In China, the maintenance market has not fully unfolded. We believe this is mainly because companies would like to attract more customers with free services at its rapid development stage, during which revenue from new-build business comprises a major component of their income stream. We reckon that as the market stabilizes and product warranty expires, maintenance fees will come into play. Frost & Sullivan forecasts that in 2020E, the upgrade and maintenance market sizes of China‟s rail transportation will reach RMB57.7 bn. The company, however, has derived little revenue from such markets. On the other hand, Bombardier, an international peer, derived 18% of its total revenue from the maintenance operation in 2014. In the long run, the company‟s revenue structure will approximate to that of mature enterprises abroad, implying a significant increase in its revenue. Expansion into overseas markets With the launch of the “One Belt, One Road” program, expansion into overseas markets is now officially a must-do for an established PRC company. Among those “Made in China” exports, high-speed railway has already become a representative for its world-leading technologies. The exporting high-speed railway is not only “Made in China”, but also “Made with Chinese standards”. CRSC, as a major player in the standard-making process, will develop an intimate relationship with the “One Belt, One Road” policy.
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Table 2: Recent overseas projects Contract amount Designed Bidding Commen Completi (RMB Mileage Project name speed (km/h) Country or region time cement on bn) (km) Two-ocean railway Pending Brazil, Peru Pending Pending Pending 372 3000 U.K. HS2 400 U.K. Pending 2017 2025 301 540 Sino-Russia high-speed Russia (Moscow - railway 350 Kazan) 2015 2016 2018 372 770 Singapore- Malaysia high- speed railway 350 Singapore, Malaysia 2015 2015 2020 67 350 California high-speed railway 350 U.S. Pending Pending Pending 422 1280 Mexico high- speed railway 300 Mexico 2015 Pending Pending 27 210 Delhi-Chennai high-speed railway 300 India Pending Pending Pending 196 1754 Hungary- Serbia railway 200 Hungary, Serbia 2014 2015 2017 14 370 Sino-Thailand high-speed railway 160 Thailand 2014 2015 2021 145 800 Coastal railway 120 Nigeria 2014 2014 Pending 81 1400 Mombasa Harb-Nairobi railway 120 Kenya 2014 2014 2017 24 480 Kenya, Uganda, East Africa Rwanda, Burundi, railway 80 South Sudan Pending Pending Pending 86 2350 Sino-Nepal railway 200 China, Nepal Pending Pending Pending Pending 251 Source: Frost & Sullivan, CMS (HK)
Putting the “One Belt, One Road” strategic policy aside, the company is able to undertake general project management alone. In the rail transportation and infrastructure construction sectors, it provides one-stop solutions including project consultation, engineering design, logistics, installation and maintenance services in form of project contracting. In overseas business expansion, the company still holds technological advantages. Since the company‟s CTCS3 technologies match up with Europe‟s mainstream ETCS2 technologies, its products are also highly competitive in overseas markets. Meanwhile, the company has a lot of cash on hand, which allows it to tap into overseas markets by acquiring foreign companies. Currently, the company only derives 3% of its revenue from overseas business, which is lower than that of other local railway-related companies and far from close to that of its overseas peers. With the implementation of the “One Belt, One Road” policy and the progress in overseas M&A, its revenue from overseas business is expected to increase notably.
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Figure 34: Peers‟ revenue from overseas business in 2014 100% 80% 60% 40% 20% 0%
Source: Company data, CMS (HK)
Expansion into other new businesses In addition to above railway-related business opportunities, the company also strives to explore new business segments to complement its existing rail transportation business leveraging its own technological and R&D advantages. Such new segments mainly include: Wireless broadband: The company has formed an exclusive cooperation with the PRC companies that independently developed enhanced Ultra-High-Speed Wireless LAN technology. It has started to deploy this technology on high-speed train internet solutions, providing internet value-added services to meet the needs of high-speed railway passengers requiring broadband internet access in the same way as in stationary status. In addition, the company plans to leverage its existing broadband transmission technology to improve the R&D of wireless broadband transmission processing under high-speed environments. It will conduct research and development and formulate related standards for existing wireless communication systems and high-speed train broadband wireless communication systems, develop key technologies for high-speed train broadband communication, informatization and automation and create the track-train information interoperability for rail transportation, all of which will enable it to become a provider of both high-speed train broadband wireless communication system solutions and equipment, and system operation value-added services. Informatization: The company has successfully developed information systems such as railway customer service system and railway electricity information system, and plans to leverage its experiences in information system to develop railway passenger information processing, geographical information services and location-based intelligent decision-making based on cloud computing technologies. Along with system R&D, it also plans to develop electronic devices specially designed for informatization and provide informatization and industrialization combined system integration solutions, software products and key special equipment for enterprise, industry and municipal informatization. Integrated dispatching and communication: The company plans to conduct technological and industrial research on communication products used in multimedia dispatching based on its existing integrated dispatching and communication system platform and explore the application and development of multimedia dispatching technologies in rail transportation control systems. It will research and develop multimedia dispatching and communication products based on IP technology that can have a wide variety of applications, such as airports, nuclear power plants and harbors and application systems for specific industries. Security protection and monitoring: The company plans to improve the functions and key performance index of video surveillance system based on its existing video surveillance system platforms, and develop the existing three- tier surveillance platforms adopted in the PRC railway networks toward intelligent and high-definition railway video surveillance platforms with a unified technological architecture. It will conduct in-depth research on key technologies relating to urban transit and other non-railway video information integration platform systems, intelligent high-definition video products and intelligent video analysis products. The company plans to integrate video surveillance systems with other business systems and incorporate Internet of Things (IoT) technologies, such as the technology that links security surveillance systems to security services, in order to provide customized solutions for areas with higher safety requirements such as railways, airports and Smart Cities.
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Smart cities/IoT: The company plans to leverage its technologies accumulated through existing communication technologies, the BeiDou Satellite navigation technologies and R&D of security protection and monitoring systems and disaster prevention systems, to provide more comprehensive application solutions for smart cities and to conduct in-depth research on technologies such as key business models for smart cities, basic platforms for cloud computing, high-speed and large capacity data storage and public information platforms. It plans to drive the improvement and promotion of overall solutions for smart city construction with a breakthrough in key project demonstration and application, enhance the R&D of basic platforms and business application systems for smart cities and gradually become an operator of smart cities.
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Earnings forecasts and valuation Key forecasts Based on the above analysis, we make some forecasts for the company‟s revenue by segment in 2015-17E. Our basic assumptions are as follows: 1) The company already enjoys relatively large market shares in the railway control system and urban transit markets and the technological advancement of the company will maintain in the long term. Thus, we believe growth of these two segments will be in line with that of the industry. 2) As one of the holder of the three licenses for the integration tendering, the company will have a larger market share going forward. We predict that its market share of strong current business will increase from 1% in 2015E to 5% in 2017E. 3) Given the company‟s first-mover advantages in rail transportation and as its competitiveness of core business will strengthen with the PPP model, we project market shares of 5%/23%/40% for the company in 2015-17E. 4) Leveraging its own capital and experience, the company will make inroads in the PPP business in 2016. According to our previous estimation, total investment in rail infrastructure will be 15 times of that in control system. To be cautious, we calculate the company‟s revenue from PPP business as ten times of that from tram control system. 5) We believe the maintenance market will start to ramp up in 2015 and growth will be fast on low bases. 6) The system upgrade business will commence in 2017 after eight years of high-speed railway operation with a small market size in the beginning. 7) Growth of the company‟s overseas business will be more volatile, but we reckon it will likely beat expectation with the support from the Chinese government (the exceeding part is not included in our forecasts). 8) The company‟s shareholding in CRSC CASCO increased from 49% to 50% at the end of 2014, so the revenue of the latter will be consolidated in 2015 but not in 2014. We believe its core business, which is metro control system, will grow in phase with the industry average. In view of the above, we project the company‟s total revenue growth at 43%/38%/30% in 2015-17E. The increase in 2015 includes the effect of CRSC CASCO, without which the company‟s revenue growth in 2015E would be 29%. For 2016-17E, high revenue growth is attributable to the ramp-up of its PPP business.
Table 3: Revenue forecasts by segment Revenue Growth RMB mn 2015E 2016E 2017E 2015E 2016E 2017E Railway 17,432 19,705 21,979 28% 13% 12% Urban transit 2,393 2,714 2,935 24% 13% 8% Strong current business 282 913 1,693 N.A. 224% 85% Tram 45 473 1,440 N.A. 950% 205% PPP N.A. 4,725 8,727 N.A. N.A. 85% Overseas business 865 1,298 2,206 50% 50% 70% Maintenance 110 234 364 N.A. 113% 56% System upgrade N.A. N.A. 550 N.A. N.A. N.A. Other business 1,299 1,429 1,572 10% 10% 10% CRSC CASCO 2,366 2,683 2,902 N.A. 13% 8% Total revenue (excluding CRSC CASCO) 22,426 31,490 41,466 29% 40% 32% Total revenue 24,792 34,173 44,368 43% 38% 30% Source: Company data, CMS (HK)
We also estimate the expenses and gross margins of the company‟s business segments. Our major assumptions are: 1) We readjust the business structure to reflect the gross margins of each segment more accurately. We reclassify railway control system, urban transit control system, overseas business, system upgrade and CRSC CASCO in the forecast table into design and integration, equipment manufacturing and system implementation services on a pro rata basis. Design and integration and equipment manufacturing are the segments where the company enjoys long-term technological advantages. We believe gross margins of these two segments will maintain for a long period of time. On the contrary, the system implementation services segment will see narrower gross margin on its lower technological barrier. 2) The strong current business is a new business to the company with relatively lower technological content. We
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believe gross margin will be low at first and turn higher as more experience is accumulated. 3) The barrier in tram control system business is not as high as those in high-speed railway and metro. Despite its first-mover advantages in high-speed railway and metro, the company will still face stiff competition. We estimate that gross margin of this business will represent a discount from those of high-speed railway and metro and stay at around 19.4%. 4) Based on industry experience, gross margin of the PPP business shall include EPC income (12%) and finance income (8%), making the gross margin at around 20%. 5) Maintenance is usually an important revenue source for a mature company. We believe gross margin of this business will be at least the same as that of design and integration.
Table 4: Revenue and gross margin based on business structure 2012 2013 2014 2015E 2016E 2017E Design & integration 31.2% 34.6% 33.3% 33.3% 33.3% 33.3% Equipment manufacturing 35.3% 35.0% 32.6% 32.6% 32.6% 32.6% System implementation services 11.4% 11.0% 9.5% 9.4% 9.3% 9.2% Tram control system N.A. N.A. N.A. 19.4% 19.4% 19.4% PPP N.A. N.A. N.A. 20.0% 20.0% 20.0% Others N.A. 9.5% 11.3% 11.3% 11.3% 11.3% Strong current business N.A. N.A. N.A. 5.0% 7.5% 10.0% Maintenance N.A. N.A. N.A. 33.3% 33.3% 33.3% Overall gross margin 27.5% 26.3% 24.2% 24.2% 23.3% 22.9% Source: Company data, CMS (HK)
We make forecasts on the company‟s income statement based on our analysis of revenue and gross margins. 1) We believe its sales and marketing expenses as well as general and administrative expenses will increase with revenue but their proportions to total revenue will shrink due to economies of scale. 2) Other income and gains will drop due to the lack of the two non-recurring gains amounting to RMB529 mn (gains on disposal of non-current assets held for sale and gains on re-measurement of fair value of original equity interests on subsidiary-acquisition date) recognized in 2014. 3) The increase in other operating expenses is mainly attributable to the rise in financing costs. 4) Higher finance costs are due to the interest expenses of loans amounting to RMB25 bn to be raised in 2015. 5) Lower share of profit of jointly controlled entities and higher minority interests are the result of changes in accounting after the increase in capital in CRSC CASCO. 6) As there is no material change to the income tax policy of the company, we continue to use its income tax rate of 17.5% in 2014. 7) Attributable net profit growth will slow in 2015 mainly on the decrease in the non-recurring gains under other income and gains mentioned above.
Table 5: Income statement forecasts and analysis RMB mn 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E Revenue 17,329 24,792 34,173 44,368 N.A. N.A. N.A. N.A. Growth 32.6% 43.1% 37.8% 29.8% N.A. N.A. N.A. N.A. Cost of sales -13,134 -18,795 -26,207 -34,218 N.A. N.A. N.A. N.A. Growth 36.5% 43.1% 39.4% 30.6% N.A. N.A. N.A. N.A. Gross margin 4,195 5,997 7,966 10,151 24.2% 24.2% 23.3% 22.9% Other income & gains 757 418 651 489 4.4% 1.7% 1.9% 1.1% Sales & marketing exp. -459 -594 -770 -890 -2.6% -2.4% -2.3% -2.0% G&A exp. -2,158 -2,748 -3,765 -4,377 -12.5% -11.1% -11.0% -9.9% Other operating exp. -29 -39 -39 -39 -0.2% -0.2% -0.1% -0.1% Finance costs -15 -66 -118 -116 -0.1% -0.3% -0.3% -0.3% Share of profit of JCE 183 82 107 139 1.1% 0.3% 0.3% 0.3% Operating profit 2,473 3,051 4,033 5,357 14.3% 12.3% 11.8% 12.1% Income tax -433 -534 -706 -938 -2.5% -2.2% -2.1% -2.1% Post-tax profit 2,040 2,516 3,327 4,419 11.8% 10.2% 9.7% 10.0%
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RMB mn 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E Minority interests 6 137 155 168 0.0% 0.6% 0.5% 0.4% Attributable net profit 2,033 2,379 3,171 4,251 N.A. N.A. N.A. N.A. Growth N.A. 17.0% 33.3% 34.0% N.A. N.A. N.A. N.A. Source: Company data, CMS (HK)
The following table shows our forecasts on and analysis of the key items under the company‟s balance sheet. 1) According to its disclosure, the company will invest RMB4 bn and RMB2.5 bn in the construction of office and laboratory facilities in 2015 and 2016 respectively. 2) Trade receivables will increase with revenue, but the trade receivable turnover rate will still be manageable as the company does not have material bad debt issues at the moment. 3) As the PPP business develops, franchise rights will increase accordingly. 4) According to its disclosure, the company will raise loans of RMB25 bn in 2015, bearing an interest at the historical level. 5) Based on the above, the company has a low gearing ratio and sound state of affairs with good solvency.
Table 6: Forecasts on and analysis of key balance sheet items RMB mn 2013 2014 2015E 2016E 2017E Property, plant & equipment 1,675 2,750 6,557 8,768 8,402 Inventories 2,048 2,861 3,703 5,200 6,847 Trade & bills receivables 6,311 7,920 10,094 14,174 18,664 Cash & cash equivalents 3,974 6,346 15,351 10,269 4,908 Franchise rights N.A. N.A. N.A. 4,725 13,452 Interest-bearing bank & other borrowings 234 228 2,728 2,500 2,500 Total assets 21,645 28,577 46,308 56,757 69,177 Inventory turnover 6.38 6.06 6.69 6.57 6.48 Trade receivable turnover 2.07 2.19 2.46 2.41 2.38 Current ratio 1.56 1.46 1.64 1.31 1.11 Quick ratio 1.37 1.26 1.47 1.14 0.93 Gearing ratio 0.54 0.56 0.49 0.54 0.57 Net debt ratio Net cash Net cash Net cash Net cash Net cash Source: Company data, CMS (HK)
The table below illustrates our forecasts on and analysis of the key items under the company‟s cash flow statement. 1) The company has sufficient cash flow from its traditional businesses. As its PPP business develops, the company will experience temporary operating cash outflow. However, the increase in gearing ratio will be beneficial to its return on equity given the low gearing at present. 2) Cash outflow from investing activities in 2015-16E is primarily attributable to the increase in fixed asset investment mentioned above. 3) Cash flow from financing activities will be negative in 2015-16E, but the company will still be able to make use of bond financing given its low gearing ratio. 4) Dividend payout ratio will stay at 15%, and a special dividend of RMB3,227 mn will be paid to shareholders in 2015 based on the shareholding as at the end of 2014.
Table 7: Cash flow statement forecast RMB mn 2013 2014 2015E 2016E 2017E Cash flow from operation 1,585 1,191 2,712 -1,314 -4,214 Net of PPP business 1,585 1,191 2,712 3,411 4,513 Cash flow from investment -1,354 1,504 -4,395 -2,900 -393 Cash flow from financing 689 52 11,116 -869 -754 Dividend paid to shareholders -151 0 -3,406 -476 -638 Net increase in cash 920 2,747 9,433 -5,082 -5,361 Source: Company data, CMS (HK)
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Peer comparison and relative valuation Compared to its peers, the company has the following advantages: 1) The company operates in a market with extremely high technological and entry barriers, thus its competitive edges can be maintained in the long term. 2) The company has many opportunities to development its business as it provides comprehensive services throughout the industry chain, including design, manufacturing and implementation. 3) The company‟s gearing ratio is significantly lower than peers, which gives it more room to participate in PPP projects. Downside of the company includes: 1) Gross margin of system implementation business is lower than that of peers. The entry barrier of the business is also low. 2) Compared to overseas companies, the company relies on fixed asset investment with a lower proportion of service income. 3) Its return on assets is not at the optimum level given its low gearing ratio. Although the company is the single largest in the field of rail signal and communication with no fully comparable peers, we reckon CSR Times and CRSC have relatively high comparability on high-tech, light assets and railways as their main markets. The current valuation of CRSC is lower than CSR Times, and we believe this is mainly due to the lack of market understanding and confidence towards the newly listed company. At present, CRSC has lower ROA than peers, but we think it is because the IPO funds have not been utilized and the company‟s gearing ratio is too low. With the commencement of PPP projects, CRSC‟s utilization of funds will increase significantly. We also expect its profit growth to be better than peers (mainly driven by the revenue contribution of PPP business). Based on sector average 2016E P/E of 14.52x, we arrived at the company’s TP of HK$7.15, corresponding to 2015-17E P/E of 20.0x, 15.2x and 11.4x, or 2015-17E P/B of 2.14x, 1.92x and 1.69x, respectively. We initiate coverage with BUY rating. Table 8: Peer comparison Company Ticker P/E P/E P/E EPS CAGR 2015E 2016E 2017E 2015-17E H-list average 17.39 14.52 12.27 20.3% CRSC 3969 HK 16.26 12.30 9.26 33.6% CSR Times 3898 HK 18.67 16.40 14.64 12.9% CRRC 1766 HK 17.24 14.85 12.92 15.5% A-list average 40.91 35.75 21.45 42.4% Jinxi Axle 600495 CH 38.33 34.07 N.A. N.A. TMT 600458 CH 43.49 37.42 21.45 42.4% International average 16.63 17.28 15.55 2.3% Alstom ALO FP 24.73 27.84 20.05 11.1% Nippon Signal 6741 JP 15.28 13.01 11.76 14.0% Ansaldo STS STS IM 21.75 20.29 20.25 3.6% Bombardier BBD/B CN 7.83 12.71 14.24 -25.8% Siemens SIE GR 13.53 12.56 11.43 8.8% Company Ticker P/B ROE ROA Debt-to-asset 2015E 2015E 2015E 2015E H-list average 2.63 15.6% 8.4% 12.1% CRSC 3969 HK 1.74 10.5% 5.1% 6% CSR Times 3898 HK 3.97 22.9% 15.2% 11.4% CRRC 1766 HK 2.18 13.5% 4.8% 19.0% A-list average 3.03 0.0% 0.0% 0.3% Jinxi Axle 600495 CH N.A. 0.0% 0.0% 15.2% TMT 600458 CH 3.03 4.8% 0.0% 36.1% International average 2.29 0.2% 0.0% 0.1% Alstom ALO FP 1.72 3.6% 0.3% 15.6%
Nippon Signal 6741 JP 1.11 7.3% 4.4% 0.0% Ansaldo STS STS IM 3.21 14.6% 0.0% 0.0% Bombardier BBD/B CN 3.20 69.9% 1.4% 31.1% Siemens SIE GR 2.23 20.5% 6.1% 27.3% Source: Bloomberg, Wind, CMS (HK) *Share prices as at September 11
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DCF valuation We believe CSR Times is the most comparable company among others. Based on the beta, risk-free interest rate, risk premium, asset structure and free cash flow of CSR Times, CRSC is valued at RMB6.12 or HK$7.46 under DCF valuation. This value corresponds to 20.0/15.2/11.4x 2015/16/17E P/E or 2.14/1.92/1.69x 2015/16/17E P/B. We believe the company‟s DCF value is slightly higher than its relative value. But with the commencement of PPP business, it will be difficult to estimate the company‟s cash flow accurately. We believe P/E valuation can better reflect the value of the company. Table 9: Key assumptions Assumptions Risk-free interest rate 3.7% Risk premium 12.1% Equity risk premium 9.6% Equity ratio 68.7% Debt ratio 31.3% Long-term borrowing 6.3% Incomerate tax rate 17.5% Stock beta 0.79 WACC 11.8% long-term growth assumption 2.0% Source: Bloomberg, Company data, CMS (HK)
Table 10: Forecasts on free cash flow Dominant forecast Semi-dominant forecast period 2015 period2016 2017 2018 2019 2020 2021 2022 2023 2024 Post-tax net op. profit after adjustment 2,516 3,327 4,419 5,744 7,353 9,265 11,396 12,535 14,332 15,765 D&A 392 496 585 585 585 585 585 585 585 585 Increase in working capital -362 -5,434 -9,516 -7,613 -6,090 -4,872 -3,898 -3,118 -2,495 -1,996 Capex -4,107 -2,613 -118 -118 -118 -118 -118 -118 -118 -118 Free cash flow -1,560 -4,223 -4,630 -1,402 1,729 4,859 7,965 9,884 12,304 14,236 Discounting years 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 Discount factor 0.95 0.85 0.76 0.68 0.61 0.54 0.49 0.43 0.39 0.35 Present value of free cash flow -1,476 -3,575 -3,507 -950 1,048 2,636 3,866 4,292 4,781 4,949 Source: Company data, CMS (HK)
Table 11: Calculation of value Calculation of equity value (RMB mn) Dominant/semi-dominant forecast value 12,066 Terminal value 51,708 Total enterprise value 63,774 Liabilities -12,533 Minority interests 812 Fair value of equity 50,429 Estimate price(RMB) 6.12 Source: Company data, CMS (HK)
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Table 12: Sensitivity analysis WACC RMB 11.8% 12.3% 12.8% 13.3% 13.8% 1.0% 6.78 6.10 5.48 4.93 4.43 1.5% 7.18 6.45 5.79 5.20 4.67 Perpetual growth rate 2.0% 7.63 6.83 6.12 5.49 4.93 2.5% 8.13 7.26 6.49 5.81 5.21 3.0% 8.69 7.74 6.91 6.17 5.52 Source: CMS (HK)
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Industry overview
Mainstream rail transportation control system in China Chinese Train Control System (CTCS) is the standard railway and tram control system in China. To adapt to the rapid development of China‟s high-speed railways and passenger-dedicated railways and to ensure rail transportation safety, the MOR developed CTCS based on Europe‟s ETCS specification. The ground sub-system of CTCS is comprised of balise, track circuit, wireless radio communication network (GSM-R) and train control center (TCC)/radio block center (RBC). Among them, GSM-R is not a piece of CTCS equipment but is an important component. Balise is a transmission device that can transmit data to the on-board sub-system. It may transmit fixed information and connect to trackside units to transmit variable information. Track circuit has the functions of track occupation check and continuous transmission of car information along the track and should adopt the UM series or digital track circuit. Wireless radio communication network (GSM-R) is a bilateral communication system between the on-board sub-system and TCC. TCC is a control system based on safety calculation. It gives movement authority to the on-board sub-system through the train-ground information transmission system based on the information of ground sub-systems or external ground systems such as track occupation information and interlocking status to ensure the safety of trains under the control of the TCC. The on-board sub-system is comprised of CTCS on-board equipment and wireless on-board module. CTCS on-board equipment is a control system based on safety calculation. It controls the movement of trains by exchanging information with the ground sub-system. Wireless on-board module is used for the bilateral information exchange between the on-board sub- system and TCC. CBTC (Communication Based Train Control System) is an automatic train control system based on wireless communication and is mainly used in metro. CBTC has the advantage of bilateral train-ground communication with large data flow and fast transmission for the easy implementation of automatic blocking system. This can greatly reduce the number of cables among sections, amount of one-off investment and daily maintenance and significantly increase traffic capacity among sections. It also allows two-way traffic and one-way continuous traffic and can easily adapt to the control of hauling trains of different speed, capacity and types. With CBTC, both train control and operation management can be realized since the bilateral wireless communication system allows the bi-directional transmission of safety and non-safety information such as that related to locomotive, maintenance and electrical services, including train number, crew number, car number, operating schedule, locomotive status and fuel consumption. CBTC can be used to establish CBTC-FAS as well as CBTC-MAS. Table 13: Types of rail transportation and their control systems Type of rail transportation Control system High-speed Operating speed of 300 km/h and above CTCS-3 railway Operating speed of 200 km/h and above CTCS-2 National Normal- railway Railway speed railway CTCS-0/CTCS-1 Intercity railway CTCS-2 Metro CBTC Urban transit Light rail CBTC
Source: Frost & Sullivan, CMS (HK)
Still large room in China’s railway market China‟s railway infrastructure is a result of demand and government adjustment. The government would generally take a more active role during economic downturn. At present, as China‟s economy is at its bottom, railway infrastructure shoulders the responsibility for propping up domestic demand. We reckon that railway infrastructure will maintain relatively high growth in the near future. In 2014, fixed asset investment (FAI) of RMB809 bn was completed in China‟s railway market. According to the forecast of Frost & Sullivan, China will complete FAI of RMB1.054 tn in the railway market by 2020 at a CAGR of 5.4%. There is 112,000 km of railways in operation in China and 16,000 km of which are high-speed railways, accounting for 14.3% of the total. Frost & Sullivan forecasts that there will be 158,400 km of railways in operation in China by 2020 with 40,100 km or 25.3% being high-speed railways. Based on this, mileage of normal-speed railways will increase at 3.5% CAGR while high- speed ones at 16.5% in 2014-2020E. Given the higher safety standard of high-speed railways for its higher speed, investment in train control system will expand accordingly.
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Figure 35: 4.5% CAGR expected for railway FAI Figure 36: Mileage forecast for railways in China completed in China in 2012-2020E
180 '000 km 1,200 RMB bn 1054 1014 160 973 933 1,000 894 140 40 850 32.4 36.1 809 120 28.5 800 20 24.4 100 16 600 80 60 108 111.6 115 118 400 96 102 104.1 40 200 20 0 0 2014 2015E 2016E 2017E 2018E 2019E 2020E 2014 2015E 2016E 2017E 2018E 2019E 2020E High-speed railway Normal-speed railway Railway investment in China
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK) Based on the report from Frost & Sullivan, we may project the approximate market size of railway control system with the estimated mileage. The following data will also be used for urban transit later on.
Table 14: Estimates on costs of rail transportation and control system Cost of control Upgrade cost of Maintenance cost of Life of Rail Total cost system control system control system control transportation (RMB100 mn/km) (RMB10,000/km) % of total (%) (RMB10,000/km) (RMB10,000/yr/km) system High- 8-10 speed/intercity 0.9-2 450-900 ~6% 500-1,000 29-35 yrs 8-10 Normal-speed 0.3-0.5 150-300 ~6% 200-350 5.4-6.5 yrs 15-20 Urban transit 3-10 1,800-2100 5% 2,000-2300 108-126 yrs Tram 1.3-1.6 600-800 ~6% - - - Source: Frost & Sullivan, CMS (HK)
The market size of railway control system amounted to RMB33.1 bn in 2014. According to Frost & Sullivan‟s forecast, the number will increase to RMB78.8 bn in 2020 at 15.6% CAGR. The CAGRs of new-build, maintenance and upgrade segments will be 14.2%, 14.4% and 19.8% respectively. The differences in segment growth rates are mainly because high-speed railway construction will slow down on network consummation, but maintenance and upgrade markets will enlarge as operating mileage increases and more sections will require equipment upgrade after 8-10 years of operation. The market mix in Europe in 2014 may shed some light on the future development of the Chinese market. The proportion of new-build business will drop whereas maintenance and upgrade businesses will become the main drivers in the market.
Table 15: Market segments of railway control system CAGR in % in 2014 in 2014-2020 % in 2014 % in 2020 Europe New -build 14.2% 54.5% 50.6% 41.8% Maintenance 14.4% 24.2% 24.1% 20.9% Upgrade 19.8% 21.2% 25.3% 37.3% Total 15.6% Source: Frost & Sullivan, CMS (HK)
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Figure 37: Forecasts for China‟s railway control system Figure 38: Market share of CRSC‟s high-speed railway market control system integration and equipment contracted for as at end-2014 in terms of value
90.0 RMB bn 80.0 70.0 20 Others 60.0 17 14 16% 50.0 11 19 8 17 40.0 16 7 14 13 30.0 7 11 20.0 8 40 CRSC 32 36 26 29 10.0 18 23 84% 0.0 2014 2015E 2016E 2017E 2018E 2019E 2020E Upgrade Maintenance New-build
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK) CRSC dominates the new-build segment of China‟s railway control system market. In terms of design capabilities, no rival can compete at the level of CRSC. On the industry chain level, no rival can provide the same services throughout the industry chain as CRSC does. As at the end of 2014, in terms of contracted integration mileage, CRSC accounted for 58.3% of the high-speed railway (200-250 km/h) control system market and has a 72.3% market share in the high-speed railway (300-350 km/h) control system market in China. As at the end of 2014, in terms of value, CRSC obtained 84.4% of high-speed railway control system integration and equipment contracts among completed projects. This means that the company enjoys a larger market share at the high-tech end of system integration and equipment manufacturing, while other players may only compete with the company at the implementation end where the technological content is low.
Table 16: Integration capabilities of high-speed railway control system Design Manufacturing Implementation CRSC High High High CREC Medium Incapable High CRCC Medium Incapable High CARS Incapable High Medium HollySys Incapable High Incapable Source: Frost & Sullivan, CMS (HK)
Urban express rail transportation under rapid development too With the growing urban population in China, congestion and environmental problems manifest and make the advantages of urban express rail transportation (mainly metro) more visible. At present, urban express rail transportation schemes have extended from tier 1 cities to tier 2&3 cities. In 2014, FAI of RMB274 bn in urban transit was completed in China. Frost & Sullivan forecasts that urban transit FAI of RMB477 bn will be completed in 2020, representing a CAGR of 9.7% in 2014-2020E. In 2014, mileage of urban transit in China was 2,700 km. With metro construction and completion reaching their peaks, Frost & Sullivan forecasts that urban transit mileage will amount to 9,600 km in 2020, representing a CAGR of 23.5% in 2014- 2020E.
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Figure 39: Forecasts for urban transit FAI completed Figure 40: Forecasts for urban transit mileage 600.0 RMB bn 12 '000 km 477 500.0 9.6 10 421 8.5 400.0 374 340 8 7.3 320 301 6.2 274 300.0 6 5.1 4.1 200.0 4 2.7 CAGR of total urban transit mileage in operation in China in 2014-20E: 23.5% 100.0 2 0 0.0 2014 2015E 2016E 2017E 2018E 2019E 2020E 2014 2015E 2016E 2017E 2018E 2019E 2020E Total中国城市轨道交通运营总里程 urban transit mileage in China Urban transit investment in China
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
According to the report from Frost & Sullivan, the total value of China‟s urban transit market amounted to RMB15.3 bn in 2014, and the number will reach RMB43.9 bn in 2020E, representing a CAGR of 19.2% in 2014-2020E. Based on this, new-build, maintenance and upgrade segments should increase at CAGRs of 14.6%, 23% and 45.3%. The share of the new-build market is higher at the moment as China‟s express rail transportation control system is developing rapidly, but the maintenance and upgrade markets will register higher growth given their low bases. Figure 41: Forecasts for urban transit control Figure 42: Changes in control system segment system market
50 RMB bn 45 40 7 35 5 CAGR % in 4 30 12 in 2014- % in 2014 2020E 2 11 25 9 2020 1 7 New -build 14.6% 72.5% 71.1% 20 6 1 Maintenan 23.0% 22.9% 24.4% 15 1 5 4 25 ce 21 23 Upgrade 45.3% 4.6% 4.5% 10 17 19 11 14 Total 19.2% 100.0% 100.0% 5 0 2014 2015E 2016E 2017E 2018E 2019E 2020E Upgrade Maintenance New-build Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK)
The existing rail transportation system integration market is comprised of three components, namely urban transit control system, signal system and communication system. Based on the contract value in 2011-2014, these components accounted for 50%, 34% and 16% of the total respectively. In the rail transportation control system segment that took up the largest market share, CRSC was awarded RMB12.7 bn worth of contracts in aggregate in 2011-2014. This represented 40.1% of the total contract value, rendering the company in a commanding position in trial production. CRSC was the provider of the control system of Beijing Subway Line 1, the first metro line in China in 1971.
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Figure 43: China‟s urban transit system integration Figure 44: China‟s urban transit control system market market distribution in 2011-2014 in terms of contract mix in 2011-2014 in terms of contract value value
CRSC (inclu. Urban transit 20.1% subsidiaries) communication Thales SAIC system 16% 40.1% Urban transit 3.9% BTCT control system Urban transit 50% 4.1% signal system CREE (inclu. 34% 5.4% subsidiaries) 11.8% FiberHome 14.6% ZTE
Others
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK) In the urban transit signal system market, CRSC obtained contracts amounting to RMB10.8 bn during 2011-2014, representing a 51% market share. CRSC, Beijing Traffic Control Technology (BTCT), Zhejiang United Mechanical & Electrical, CRSC CASCO (CRSC‟s subsidiary) and China Academy of Railway Sciences (CARS) all have proprietary CBTC technologies. Given their lower prices and maintenance costs, metro companies tend to procure products from manufacturers with proprietary technologies. In 2011-2014, the company was awarded contracts to the value of RMB1.9 bn in the urban transit communication market, making up 18.3% of the segment. The segment is relatively fragmented as there are many kinds of signal sub-systems in the market. CRSC ranked first in terms of market share in all of the above three segments. The company accounted for 40.2% of the whole market in terms of contract value in 2011-2014, while the second largest player Thales SAIC took up only 14.6% of the market.
Figure 45: China‟s urban transit signal system market Figure 46: China‟s urban transit communication market mix in 2011-2014 in terms of contract value mix in 2011-2014 in terms of contract value
CRSC CRSC 9.3% 18.3% CREC (inclu. subsidiaries) Thales 34.4% 17.7% FiberHome SAIC
51.1% BTCT 16.4% ZTE
21.9% Others Neusoft 12.2% 11.7% 7.0% Others
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK) Chinese manufacturers now among world’s most technologically advanced in railway sector According to a report from Frost & Sullivan, total railway mileage in operation was over 1.4 mn km globally in 2014, with high-speed one amounting to 28300 km. As at the end of 2014, mileage in China came in second among other countries, accounting for 8% of the world‟s total mileage, whereas its high-speed railway mileage topped the chart. It is worth mentioning that in the three years between 2012 and 2014, new-build railway mileage in China represented 19.4% of the world‟s total whilst the number for high-speed railway represented 87%. It is expected
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that global railway mileage will amount to 1.665 mn km by 2020E and high-speed mileage in operation will reach 57,400 km, representing a CAGR of 12.5% in 2014-2020. In 2014, the global railway control system market size amounted to RMB97.1 bn. Within this, the high-speed railway market size stood at RMB27 bn, i.e. 27.8% of the entire market. By 2020E, the global railway control system market size is expected to reach RMB203.8 bn, with that of high-speed railway growing to RMB69.6 bn, representing 36.5% of the whole market. During 2014-2020E, the CAGR of high-speed railway control system will come in at 17.1%. Figure 47: Global railway and high-speed railway Figure 48: Global railway and high-speed railway mileage and forecasts control system market size and forecasts 1,800 '000 km 1,665 200 RMB bn 1,576 1,620 1,489 1,533 180 1,600 1,408 1,451 1,400 160 140 1,200 121 120 1,000 113 100 105 800 96 80 85 600 79 60 70 400 40 61 70 200 33 36 39 42 45 48 47 54 28 20 27 35 40 0 0 2014 2015E 2016E 2017E 2018E 2019E 2020E 2014 2015E 2016E 2017E 2018E 2019E 2020E
Railway mileage High-speed railway mileage High-speed railway market Normal-speed railway market
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK) According to Frost & Sullivan‟s report, global urban transit mileage amounted to 14,400 km in 2014 and will reach 26,000 km by 2020E, representing a CAGR of 10.1% for 2013-2020E. In 2014, the urban transit control system market size was RMB53.4 bn. The market is expected to expand to RMB104.9 bn by 2020E at a CAGR of 11.9% in 2014-2020E. The demand for urban transit remains huge in developing countries such as China, India and Brazil. These countries will become the major markets of urban transit in the future. Figure 49: Global urban transit mileage and forecasts Figure 50: Global urban transit control system market size
'000 km RMB bn 30 350 26 309 24 277 25 300 21 246 19 250 221 20 18 16 196 14 200 177 15 151 150 10 100
5 50
0 0 2014 2015E 2016E 2017E 2018E 2019E 2020E 2014 2015E 2016E 2017E 2018E 2019E 2020E
Source: Frost & Sullivan, CMS (HK) Source: Frost & Sullivan, CMS (HK) Major providers of rail transportation control system in the world include CRSC (China), Bombardier (Canada), Alstom (France), Siemens (Germany) and Ansaldo (Italy). According to Frost & Sullivan, CRSC ranked the first in sales revenue among global transportation control system providers in 2014. There are two main reasons behind the global leading position enjoyed by Chinese enterprises: 1) China‟s rail transportation market is the largest market with the fastest development in the world. Rail transportation control technologies require solid capabilities and vast hands-on experience. The rapid development of the Chinese market at the moment provides fertile ground for Chinese enterprises. 2) The rail transportation control system technologies of Chinese enterprises have aligned with international standards. China‟s CTCS was established with reference to Europe‟s ETCS and the products of CRSC are up to European standards on similar products. The CBTC technology used in metro also meets
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international standards and the domestic production of CBTC has been increasing for the metro in China. Figure 51: Revenue of top 5 railway control system providers in 2014 RMB bn 18 16 16 14
12 10 10 10 8 8 6 6 4 2 0 CRSC Ansaldo Bombardier Siemens Alstom
Source: CMS (HK)
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Risk factors The primary risks faced by the company are: 1) risks in relation to macro policies; 2) risks in relation to product safety; and 3) risks in relation to overseas markets. 1) Risks in relation to macro policies: Revenue from China is mostly derived from the construction of new projects. If the number of rail transportation infrastructure projects reduces significantly, the company‟s revenue will be materially affected. 2) Risks in relation to product safety: The company sets an extremely high quality standard for its products. Accidents caused by quality issues may directly result in major economic losses arising from claims and ruin the company‟s reputation, which will in turn affect its future business. 3) Risks in relation to overseas markets: It is a sure thing for the company to promote its products and services in overseas markets. However, as the company is not as familiar with overseas markets as it does with the local one, it may encounter problems related to product standards and laws and regulations, which will result in direct economic losses.
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Appendix A: Company history and major events The company‟s history traces back to the year of 1953, when the Signal & Communication Engineering Company and Signal & Communication Design Institute (the predecessor of CRSCD, one of the company‟s principal subsidiaries), were established by the MOR. In 1981, the MOR approved the establishment of CRSC Corporation Group, the company‟s controlling shareholder. CRSC Corporation Group is a large wholly state-owned enterprise supervised by SASAC, and was a major market participant in the rail transportation control system industry prior to the reorganization in 2010. The company was established as a joint stock company on December 29, 2010, pursuant to the approvals on the reorganization of CRSC Corporation Group issued by SASAC in 2010 and the promoters agreement dated December 2, 2010. CRSC Corporation Group injected its assets relating to rail transportation control system business into the company accordingly (“Reorganization”). After the Reorganization, such relevant business has become the company‟s principal business and the foundation for its development. The company‟s development history reflects New China‟s rail transportation development history. The milestones in the company‟s core businesses are as follows: 1953 The company‟s predecessors, Signal & Communication Engineering Company and Signal & Communication Design Institute, were established; 1960 The company participated in designing the first mechanized hump marshalling yard in the railway industry of the PRC; 1965 The company participated in the design of the signal and communication control system of Beijing Subway Line 1, which is the first metro line in the PRC; 1973 The 6502 big station relay interlocking system designed by the company unified for the first time the standard of station relay interlocking control system used in the railway industry of the PRC; 1981 The establishment of CRSC Corporation Group was approved; 1984 The first station computer-based interlocking system in the PRC, which was designed and developed by the company, was put into operation; 1986 Shanhaiguan up-track yard‟s “hump rolling route process control system”, which was designed by the company, was put into operation, and it is the first micro-computer-based automatic control system for hump rolling routes in the railway industry of the PRC; 1986 The company established CRSC CASCO, the first Sino-foreign joint venture in the railway industry of the PRC, and held 50% of its equity interests; 1988 The first national demonstration project of optical fiber communication in the railway industry of the PRC, which was designed by the company, was put into operation; 1994 The automatic blocking system engineering designed and constructed by the company was put into operation in Guangzhou-Shenzhen Railway Line, which was the first quasi high-speed railway line in the PRC; 2002 ZPW-2000A automatic blocking system equipment, which was developed by the company with proprietary intellectual property rights, passed the evaluation and promotion test of the MOR, unified and became the sole standard of automatic blocking system used in the railway industry of the PRC; 2003 From 2003 to 2006, the company successively designed and constructed the signal and communication systems in Datong-Qinhuangdao Railway Line‟s upgrade projects for capacity expansion to 200 mn tons and 400 mn tons per year, which was the first time in the world adopting the global system for mobile communications- railway (GSM-R) to realize synchronous control over multiple heavy haul locomotives; 2004 The project of urban transit control signal system of Dalian Express Line No. 3 (Phase I) was put into operation, which is the first domestically-manufactured urban transit control system in the PRC and was completed by the company (as the general contractor); 2006 The company undertook, as the general contractor, the control system design and integration project of the Beijing-Tianjin High-Speed Railway Line, which is the first high-speed railway with the speed of 350 km/h in the PRC, and it has been put into operation since August 1, 2008; the company‟s self-developed new generation of decentralized autonomous centralized traffic control system (CTC), which is the first new generation of
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decentralized autonomous centralized traffic control system (CTC) in the PRC, and its video monitoring system, were successfully put into operation in the Qinghai-Tibet Railway, which is the railway in plateau areas that covers the longest span of permafrost area and is at the highest altitude in the world, in 2006 and 2007 respectively, for the first time; 2007 The company‟s self-developed computer integrated process system for marshalling yard (CIPS) was successfully put into operation in Chengdu North Marshalling Yard, which is the world‟s first marshalling yard equipped with CIPS; 2008 The company completed, as the system integrator, the control system engineering project of Beijing Subway Line 10 (Phase I) (including the Olympic Extension, which is one of the key projects for the Beijing Olympic Games construction projects), which is the first metro line in the PRC that adopted a wireless communication based automatic train control system (CBTC); The technology standards for the operation of high-speed trains, of which the company was the leading developer, were promulgated; 2009 The company‟s self-developed CTCS-3 was put into operation for the first time in Wuhan-Guangzhou High- Speed Railway in the PRC. Through this project, the company developed a set of standards of the CTCS-3, became the leader in this technology in the PRC, and enabled the PRC to be among the most advanced technology developers in world‟s high-speed railway industry in a short period; 2010 The company was established; 2011 The company undertook the control system integration and construction project of Beijing-Shanghai High- Speed Railway, which is the longest high-speed railway built as a single project in the world at that time; 2012 The company undertook the control system integration and construction project of Harbin-Dalian High- Speed Railway, which is the world‟s first high-speed railway in frigid areas; the company‟s self-developed intermittent train control system was successfully operated in Beijing Subway Line 8; 2013 ZPW-2000A track circuit and switching machine developed by the company won the bid of Guangzhou- Shenzhen-Hong Kong High-Speed Railway (Hong Kong section); the company‟s self-developed modern tram control system was firstly put into operation in Shenyang Hunnan New District Modern Tram Phase I Line No. 1, 2, 3 and 5; 2014 The company‟s self-developed wireless communication based train control system (CBTC) won the bid of Beijing Subway Line 8.
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Appendix B: Biography of the company’s management The company‟s technology-oriented business model depends on its excellent management team, which comprises:
Mr. Zhou Zhiliang, Chairman: Mr. Zhou Zhiliang, aged 50, has been the company‟s chairman since January 31, 2012, and is mainly responsible for overseeing the overall work of the board and formulating the company‟s strategies. Mr. Zhou has been the general manager of CRSC Corporation Group since January 2012. Mr. Zhou was a vice president of CRCC (listed on the Hong Kong Stock Exchange, stock code: 1186; listed on the Shanghai Stock Exchange, stock code: 601186) from October 2007 to January 2012, during which Mr. Zhou served as chairman of China Railway Construction Investment Group Co., Ltd. from March 2011 to January 2012. From December 2004 to October 2007, Mr. Zhou was a deputy general manager of China Railway Construction Corp. From November 2001 to December 2004, Mr. Zhou was the director of China Railway No.4 Survey & Design Group Co., Ltd. From November 1996 to November 2001, Mr. Zhou successively served as director of No.2 Railway Survey and Design Department, director of No.2 Railway Survey and Design Institute, and chairman of Labor Union of China Railway No.4 Survey & Design Group Co., Ltd. Mr. Zhou graduated from China University of Mining & Technology in July 1985 with a bachelor‟s degree in engineering and majored in hydrogeology and engineering geology, and from Tsinghua University School of Economic and Management with an EMBA degree in January 2008. In December 2010, Mr. Zhou was conferred the title of Professor of Engineering by Technological Qualification Review Committee for Senior Engineers of CRCC.
Ms. Li Yanqing, Vice Chairwoman: Ms. Li Yanqing, aged 59, has been the company‟s vice chairwoman since December 29, 2010, and is mainly responsible for assisting with the work of our chairman, and supervising the implementation of board resolutions. Ms. Li was the Deputy General Manager of CRSC Corporation Group from January 2000 to August 2001 and from December 2003 to May 2015. From June 1997 to January 2000, Ms. Li was successively the vice director and director of the Personnel Department of CRSC Corporation Group, director of Personnel and Education Department of CRSC Corporation Group, director of HR Department of CRSC Corporation Group. From September 1996 to June 1997, Ms. Li also served as the vice director of Students‟ Affairs Office of North Jiaotong University. From July 1988 to September 1996, Ms. Li was a lecturer of Faculty of Communication Control Department of North Jiaotong University, during which, Ms. Li was a visiting scholar at Education Department of UK University of East Anglia from May 1995 to May 1996. Ms. Li graduated from Railway Telecommunication Department of North Jiaotong University in March 1982, with a Bachelor‟s degree in engineering and majored in railway signal. In December 1992, Ms. Li was conferred the title of Senior Engineer by Ministry of Qualifications Review Committee for Senior Engineering (Management) Titles.
Mr. Yin Gang, Executive Director: Mr. Yin Gang, aged 52, has been appointed as an executive director since May 21, 2015 and president of the company since May 22, 2015, and is mainly responsible for overseeing the management of the Company‟s daily production and operations. From December 2010 to May 2015, Mr. Yin was a vice president of the company, during which, Mr. Yin served as the chairman of CRSCD from January 2012 to November 2012 and as board secretary of the company from April 2011 to May 2013. From August 2001 to May 2015, Mr. Yin was the deputy general manager of CRSC Corporation Group. From December 1996 to August 2001, Mr. Yin successively served as deputy general manager and general manager of Shenyang Railway Signal Factory (the predecessor of CRSC Shenyang). Mr. Yin graduated from Dalian Railway Institute in July 1983, with a bachelor‟s degree in engineering and majored in metal material and heat treatment. In December 1999, he was conferred the title of Senior Engineer by the Qualification Review Committee for Senior Engineering Technical Position of China Railway Signal & Communication Company.
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Appendix C: Business overview Overview of design and integration business CRSC‟s business line of design and integration mainly includes engineering design and system integration of rail transportation control system. Since its establishment, the company has completed over 7,000 signal, communication, power supply and automation engineering design projects. The company has undertaken the design of a series of trial projects promoted by the State Council and national key projects. The company has also undertaken and completed system integration projects for over 90 rail transportation lines. It has applied over 70 self-developed system technologies to the railway and urban transit sectors, and promoted more than 100 new technologies in the projects it undertook. Railway control system design and integration is the company‟s major design and integration business. Between 1997 and 2007, major PRC railways raised operating speed nation-wide six times. The company undertook a number of railway control system design and integration projects to provide proposals and construction blueprint for core control system equipment such as TDCSs, railway station computer-based interlocking systems, section automatic blocking systems and track circuits, which underpinned the upgrade and technological advancement of the PRC railway control systems. Since 2005, the company has undertaken and completed national control system integration projects for the PRC high-speed railway network, including the Beijing-Shanghai High-Speed Railway, Wuhan-Guangzhou High-Speed Railway and Harbin-Dalian High-Speed Railway, which in aggregate has exceeded 10,000 km in length and make the company the largest railway control system provider in the PRC in terms of mileage. In particular, according to the Frost & Sullivan Report, by the end of 2014, the company‟s winning bids covered 72.3% of the completed high-speed railways in the PRC with CTCS-3 systems in terms of mileage. In addition, it currently provides design and integration services for high-speed railway projects under construction, including Dongguan-Huizhou High-Speed Railway, Zhengzhou-Xuzhou High-Speed Railway and Hainan West Ring High-Speed Railway. The CTCS3 control system, to which the company has the intellectual property rights, is a key product of the company‟s railway business. The system is one of the core technologies that ensure a safe, reliable and effective operation of high-speed trains and a key subject in Joint Initiatives for the Self-innovation of China’s High-speed Trains of the Ministry of Science and Technology and MOR. Technology innovations of CTCS-3 level train control system have profound implications on the technological development and modernization of technical devices of China‟s railway control system. Thanks to the two-way train-ground information transmission through GSM-R wireless communication and the movement authority generated through radio block center (RBC), train operation requirements of running at 300～350km/h and separated by a minimum of 3- minute interval are met. Figure 52: Illustration of CTCS3 system
Operation Train-ground info. CTC/TDCS diagram CTC Train-ground info.
RBC
DMI Train control info. Temp. speed- Interlocking route GSM-R antenna restricting info. command
Wireless Route info. receiver Train control center Station EMU ATP module interlock equipment Track circuit encoding Balise messaging
Balise Track circuit Radar Balise antenna speedometer Speed sensor antenna Source: PRC government website, CMS (HK)
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Since the CTCS system is designed based on ECTS (the European train control system), there are some relevance between them. The CTCS3 system operating in China is equivalent to the mainstream ETCS2 system in Europe.
Table 17: Comparison between CTCS and ETCS Type of train Train Onboard control integrity Ground system equipment Adaptable ETCS system check composition composition Train-ground transmission top speed equivalent Interlocking + Transmitting to automatic Locomotive signal onboard sensor CTCS0 Track circuit 160km/h blocking + LKJ based on automatic blocking message Providing Main locomotive Transmitting to Interlocking + information on signal + LKJ onboard sensor CTCS1 Track circuit automatic routes and 160km/h (safety model) + based on automatic blocking + LEU kilometers with BTM blocking message balise Providing information on ETCS1 + routes and railway loop or Interlocking + LKJ + ATP (with Transmitting to line parameters 250km/h wireless automatic locomotive signals onboard sensor and speed (adaptable to transmission CTCS2 Track circuit blocking + LEU and balise based on automatic allowed with 300km/h (supplementi + train control message receiving blocking message balise (including theoretically) ng center functions) temporary speed- intermittent restricting and balise) splitting phase) Providing information on routes and railway Transmitting to line parameters Interlocking + onboard sensor and wireless- automatic ATP + GSM-R based on automatic transmission Adaptable to CTCS3 Track circuit blocking + LEU ETCS2 receiving module blocking message trains movement 350km/h + train control (when compatible command with center + RBC with CTCS2) balise (including temporary speed- restricting command) Special Transmitting train Integrity Train positioning sections that ATP + GSM-R movement CTCS4 check by (balise or GPS) require low ETCS3 receiving module command train itself + RBC speed and wirelessly low density Interlocking + Providing automatic Providing continuous blocking + ATP (receiving information on messages by intermittent balise messages, parameters of Track arc or connecting to track Below ETCS1 balise and fixed routes allowed to axle counter circuit when 250km/h (supplementary information by onboard compatibility with continuous STM module) equipment with existing train control messages may balise is needed be added) Transmitting Providing Interlocking + Track arc or ATP + GSM-R continuous information on Below ETCS2 occupation axle counter receiving module messages through kilometers with 350km/h check + RBC GSM-R balise Special Transmitting train Integrity Train positioning sections that ATP + GSM-R movement ETCS3 check by (balise or GPS) require low receiving module command train itself + RBC speed and wirelessly low density Source: Comparison of different train control systems in Europe and China, CMS (HK)
Urban transit control system design and integration is also one of the company‟s major design and integration businesses. Since the company began to design and integrate the control system for the Beijing Subway Line 1 in 1961, the first metro in the PRC, it has participated in the design and integration of over 100 urban transit control
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system projects in over 20 cities, including Beijing, Shanghai, Nanjing, Suzhou, Ningbo, Hangzhou, Wuhan, Guangzhou, Shenzhen, Shenyang, Harbin, Dalian and Urumqi. Currently, all urban transit lines for which it has provided design and integration services have maintained stable, efficient and reliable operation, demonstrating the company‟s outstanding design and technical capabilities. For its metro business, the company is the system integrator of Beijing Subway Line 10 (Phase I), the first metro line in the PRC that adopted the CBTC system. Primarily seen in urban transit, the wireless-based CBTC train control system runs in a simple, flexible and efficient manner and helps trains operate by way of moving block. The system significantly reduces train intervals and can adapt to the dense and efficient subway operation environment. On the other hand, the CTCS train control system is developed for high-speed railways. Despite the similarities between CBTC and CTCS-3 train control system, the latter requires a track circuit to check train occupation. Given their close ties, the company‟s metro and railway businesses deliver enormous synergies together. The company also provides design services in other fields. It provided design services for certain information system projects, including the Beijing Rail Transportation Construction Security Monitoring and Emergency Command Center project, the Beijing Rail Transportation Security Protection and IoT project, the Beijing Rail Transportation Command Center project, the Beijing Rail Transportation Automatic Fare Collection Center project and the Beijing Rail Transportation Passenger Information System Center project. Table 18: Summary of major systems provided by the company System name CTCS-3 train control system Railway train control system CTCS-2 train control system CTCS-0 train control system C2+ATO train control system Intercity railway train control system Integrated dispatching system FZL300: CBTC system Urban transit control system FZL300: MATC system FZL100: digital track system Integrated automation system of CIPS marshalling yard Automated freight system Automatic hump control system Multi-machine control system of heavy- haul wagons CTC Automation and supervision system of TDCS train operation dispatching and Signal collection system commanding Integrated electrical works supervision system Railway comprehensive video monitoring system Communication information and service Railway passenger service information products platform GSM-R wireless radio communication network service quality test system Railway signal AX series relays ZD(J)9 series electric rail switch Basic equipment and products Heating system for melting snow at railway junctions Digital railway signal system Source: Frost & Sullivan, CMS (HK)
Overview of equipment manufacturing Major products that the company develops, manufactures, sells and maintains include signal system products, communication information system products and other products. The company‟s signal system products comprise the key equipment and systems which coordinate the safe and efficient operation of trains. Signal products also transmit trains‟ operational information and improve the working
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conditions of the railway staff. These products include station computer-based interlocking systems, automatic blocking systems, train control centers, railway ATP Onboard equipment, track circuits, CIPS and RBC equipment. These products help control the train operation, train dispatching and command, station interlocking, and marshalling yard control and management. Table 19: Major signal system products of the company Product name Description Station computer-based interlocking Maintains interactions among signals, switches and routes to ensure system safety of train operation. Controls the number of, and distance between, trains in a particular section to prevent train collision. Railway signal specifications have been Automatic blocking system standardized nationwide based on the products developed with the company‟s proprietary technologies. Based on information such as the location of each train within its monitoring scope, interlocking route, temporary speed limits, it controls Train control center track circuit encoding and active balise information and grants movement authority to trains. Railway ATP onboard equipment Monitors the operation status of trains and achieve automatic protection. Uses steel rail of certain section of railways as conductor to automatically Track circuit and continuously detect whether the track is occupied. Generates movement authority and other control information for trains, RBC which are transmitted to onboard train control equipment through wireless communication. CIPS Centralizes the monitoring and control of marshalling yards. Source: Company data, CMS (HK)
The company‟s communication information system products mainly include specialized wired and wireless communication systems, computer and information exchange software and hardware products, information collection and sensor products, railway comprehensive video monitoring systems and CIR equipment. The company‟s communication information system products are widely used in railway transmission, railway data communication, GSM-R, station-yard communications, station-yard broadcasts, clock systems, dispatching telephone systems, comprehensive safety communications, as well as in fields such as municipal administration. Table 20: Major communication information system products of the company Product name Description Achieves real-time video monitoring, video recording, alarm linkage, Railway comprehensive video electronic maps, equipment management, TV management, network monitoring system management and system log. Achieves centralized management of train wireless communication channels, selects proper channels for track-train communication based CIR on business requirements and network conditions, and provides transmission services for various track-train voice and data transmission. Integrates the specialized wireless communication system equipment including the TETRA main system and related equipment and provides Urban transit specialized wireless secondary development equipment and software required by wireless communication system dispatching operations, in order to facilitate the dispatcher to dispatch and command the train operation and maintenance staff. Covers wireless signal and communication areas with medium-to-weak Fiber optic repeater weak zone coverage or no signals to ensure full coverage of wireless signal, which is equipment adopted widely in numerous railways, urban transit lines, lakebed and cross-ocean tunnel. Source: Company data, CMS (HK)
The company‟s other products mainly include signal cables, communication cables and specialized cables as
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well as locomotive instrumentation and electric control devices for railways and urban transit.
Table 21: Other major products of the company Product name Description Mainly consists of signal cables and communication cables for railway and urban transit, such as railway signal cable, railway digital signal cable, balise digital transmission cable, long distance symmetric Cable communication cable, rail transportation axle counter cable, railway through ground wire, control cable, communication optical cable, radio- frequency coaxial cable and leaky coaxial cable. Controls a locomotive‟s forward and backward motion as well as Locomotive electric control device braking and traction. Metro traction power supply system Provides a train with energy during traction and reduces the drop in product direct current voltage. Provides various indicating instruments installed and used on a Locomotive instrumentation locomotive, such as pressure gauges and speedometers. Provides smart power supply to railway signal control systems and Power system communication systems. Includes lightning protections for power systems and signal systems Lightning protection and lightning protection solutions for automation systems. Source: Company data, CMS (HK)
The company manufactures its products primarily in its own production facilities. Currently, it has a total of 13 production bases in nine cities in the PRC, including the biggest signal relay production facility and switch machine production facility in the world. Table 22: Principal production facilities of the company Department or subsidiary that operate the Location of production production facilities facilities (city) Major products BRSC Beijing Signal system products CRSC Shenyang Shenyang, Liaoning Province Signal system products CRSC Xi‟an Xi‟an, Shaanxi Province Signal system products CRSC Shanghai Shanghai Signal system products TRSC Tianjin Signal system products Signal system products, communication information CRCEF Chengdu, Sichuan Province system products CRSC Jiaozuo Cable Jiaozuo, Henan Province Cables CRSC Tianshui Cable Tianshui, Gansu Province Cables Source: Company data, CMS (HK)
Overview of system implementation The company provides rail transportation control system implementation services, covering mainly product installation engineering services associated with automatic train control systems, communication and information systems, and power supply and electrification for railways and urban transit. The company‟s system implementation services also include certain types of construction work such as electrical and mechanical equipment installation, smart building, property construction and municipal projects. Its projects cover all provinces of the PRC. In addition, it also participated in overseas construction projects in Asia, Africa and South America. The company has won China Construction Engineering Luban Awards (National High-quality Projects), China Civil Engineering Zhan Tianyou Awards, 16 National High-quality Project Awards as well as 32 ministry-level high-quality project awards. For railway control system implementation, since its establishment, the company has built railway control systems for over 100 railway lines, including the Beijing-Tianjin High-Speed Railway, the Wuhan-Guangzhou High-Speed Railway, the Beijing-Shanghai High-Speed Railway and the Harbin-Dalian High-Speed Railway. As of December 31, 2014, the major railway control system projects that the company was constructing include the Harbin-Qiqihar High- Speed Railway, the Dongguan-Huizhou Railway, the Fujian-Jiangxi section of Hefei-Fuzhou High-Speed Railway,
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the Guizhou East section and Yunnan section of the Changsha-Kunming High-Speed Railway, and the Zhengzhou North Marshaling Yard. For urban transit control system implementation, the company participated in the construction of the control system of Beijing Subway Line 1, the first metro in the PRC which commenced operation in 1971. It has installed signal systems for urban transit control system projects including Beijing Subway Line 2, Shanghai Metro Line 10, Wuhan Subway Line 2 and Phase 1 of Kunming Subway Lines 1 & 2. The company has participated in urban transit control system upgrade projects, including the signal system upgrade of Beijing Subway Line 1, the signal system upgrade of Shanghai Metro Lines 12 and 13, and the signal system overhaul of Shanghai Metro Line 1. It has also been participating in the first metro construction projects in cities such as Ningbo, Wuxi, Nanning, Changchun, Shenyang and Urumqi. As of December 31, 2014, the company had undertaken or participated in a total of 308 urban transit projects. The company carries out a large number of our system implementation projects through professional contracting. As a contractor, the company carries out construction based on the designs and schedule provided by the design team and client of each project and is responsible for the overall project construction. In some other cases, the client oversees the construction with the assistance of a professional supervisor. For certain projects, the company carries out construction based on the construction drawings and designs provided by clients and is only responsible for its construction works, while clients are generally responsible for procurement of raw materials and control over project progress. The company intends to expand its general project management business by leveraging its strengths in engineering design, system integration and the power supply business it has been developing. The company owns a wide range of technologies in the installation, testing and maintenance of signal and communication equipment and related products, including, among others, CTCS-3 train control system testing method, ZPW-2000A jointless frequency shift automatic blockage equipment installation and testing method, urban transit ATC digital track circuit testing method, rail transportation TETRA system construction and testing method and GSM-R wireless network optimization testing method. The company has obtained nine patents, and seven of its engineering techniques are designated as National-grade Normalized Construction Methods by the PRC Ministry of Construction. Its National-grade Normalized Construction Methods comply with national policies and standards for engineering construction. They represent the highest industry standards in the PRC, and are able to ensure project quality and safety, improve construction efficiency, reduce project costs, save resources and protect the environment. The development and application of these construction methods promote technological innovation and improve the management of the company‟s engineering capabilities and technology.
General business flow The company is able to design implementation plans that integrate full-system standards and equipment configuration, blueprint detailed construction plans, and provide specialized products and equipment. The company‟s general business flow is as follows: Figure 53: Business flow
Manufacturing & Project execution procurement of Construction Bidding Contract signing planning components & preparation equipment
Sub-system & Acceptance upon Project closing Trial run general system Installation completion testing
Source: CMS (HK) In respect of the construction time, it takes around 1 year and 1.5 to 2 years for the construction of a typical railway control system and an urban transit project respectively.
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Figure 54: Typical timetable of a domestic railway Year 1 Year 2 Year 3 Year 4 Preparation Subgrade construction Bridge construction Track work Electrification installation Control system construction Car procurement Railway project Trial run
Year 1 Year 2 Year 3 Year 4 Preparation Subgrade construction Track work
Platform construction Control system construction Car procurement
Urban transit project Trial run
Source: Frost & Sullivan, CMS (HK) The company‟s project contracts are fixed price contracts. The costs of a project are determined by its professional cost consultants and cost engineers based on a set of project costs determination procedures. The company carefully estimates the project costs prior to tendering. Its project cost control measures require it to monitor and adjust a variety of resources and expenditures consumed in the construction process to ensure compliance with our original cost estimates, while ensuring that the construction schedule, safety and quality meet the project requirements. The selling price of its products sold domestically and abroad is not subject to the regulations imposed by the Chinese government. The company generally adopts cost-plus pricing for competitive products. It may also use the market-based pricing mechanism when it comes to a relatively competitive sector. The company‟s gross margins of both design and integration sector and equipment manufacturing sector have maintained at over 30%, while that of system implementation services has remained at around 10%, which demonstrate the company‟s accurate pricing ability. For product sales contracts, the company generally determines customer‟s payment terms based on a number of factors, including the previous transactions with the customer, market practices, sales volume, the customer‟s current financial position and the prevailing market situation. The company generally requires customers to pay 10% to 30% of the contract value before it makes deliveries, and then pay the rest of the contract value in installments at the delivery of the goods, at the completion of inspection and acceptance by the customer, and at (i) the completion of system testing by the customer or (ii) within 30 days after commencement of actual operation as stipulated in the contracts. Under few circumstances, the company may require the customers to settle the payment before delivery of the goods or upon receipt of the goods. Its product sales contracts also require performance deposits and warranty deposits. The amounts of such deposits vary greatly depending on the types of product it sells. Under its integration or system implementation contracts, it is generally required to provide the customers with various types of deposits during the term of the project, such as performance deposits and warranty deposits. Performance deposits are often provided in the amount stipulated in the contracts and in the form of a letter of guarantee issued by commercial banks. Upon the completion of a project, customers usually withhold an amount representing 5% of the contract value as warranty deposits, which will be returned to it without interest after the acceptance upon completion of the project and the operation of the project as stipulated in the contract. Based on the above prepayments and deposits mechanism, the company‟s trade and bill receivable turnover days during the year remain at the level of 150 days. Despite the fact that the company‟s payable turnover days are longer than its receivable turnover days, its overall financial structure is stable
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Financial Summary
Balance Sheet Profit & Loss Statement RMB mn 2013 2014 2015E 2016E 2017E RMB mn 2013 2014 2015E 2016E 2017E Current assets 16,635 21,827 35,554 38,608 42,199 Revenue 13,065 17,329 24,792 34,173 44,368 Cash 3,974 6,346 15,351 10,269 4,908 Cost of sales (9,625) (13,134 (18,795 (26,207 (34,218 Trade & bill receivables 5,998 7,324 9,535 13,388 17,630 Gross profit 3,439 4,195) 5,997) 7,966) 10,151) Prepaid lease payments 34 47 83 92 100 Other income & gains 155 757 418 651 489 Other receivables 3,373 5,070 6,657 9,348 12,309 Sales & marketing exp. (370) (459) (594) (770) (890) Inventories 2,048 2,861 3,703 5,200 6,847 G&A expenses (1,706) (2,158) (2,748) (3,765) (4,377) Pledged deposits 124 163 212 297 391 Other operating expenses (192) (29) (39) (39) (39) Others 1,084 14 14 14 14 Finance costs (14) (15) (66) (118) (116) Non-current assets 5,011 6,750 10,754 18,149 26,978 Share of loss of JCE 161 183 82 107 139 Fixed assets 1,675 2,750 6,557 8,768 8,402 Operating profit 1,473 2,473 3,051 4,033 5,357 Prepaid lease payments 1,314 2,012 2,280 2,525 2,756 Income tax (234) (433) (534) (706) (938) Long-term receivables 838 601 566 794 1,046 Post-tax profit 1,239 2,040 2,516 3,327 4,419 Others 1,184 1,388 1,352 1,337 1,322 Minority interests (22) 6 137 155 168 Concession 0 0 0 4,725 13,452 Owners of parent 1,260 2,033 2,379 3,171 4,251 Total assets 21,645 28,577 46,308 56,757 69,177 EPS 0.19 0.29 0.31 0.40 0.54 Current liabilities 10,638 14,994 21,632 29,389 38,148 Trade payables 5,244 6,986 9,021 12,673 16,684 Financial Ratios Other payables & accruals 5,029 7,553 9,775 13,725 18,073 2013 2014 2015E 2016E 2017E Short-term liabilities 234 228 2,728 2,500 2,500 YoY growth rate Others 131 228 109 491 891 Revenue N.A. 32.6% 43.1% 37.8% 29.8% Non-current liabilities 1,009 1,107 1,140 1,136 1,184 Operating profit N.A. 67.9% 23.4% 32.2% 32.8% Long-term liabilities 187 165 198 194 242 Net profit N.A. 61.3% 17.0% 33.3% 34.0% Others 821 942 942 942 942 Profitability Total liabilities 11,646 16,101 22,772 30,525 39,333 Gross margin 26.3% 24.2% 24.2% 23.3% 22.9% Share capital 7,000 7,000 8,235 8,235 8,235 Net margin 9.6% 11.7% 9.6% 9.3% 9.6% Premium & reserves 2,982 4,664 14,489 17,184 20,798 ROE 12.6% 17.4% 10.5% 12.5% 14.6% Attributable interests 9,982 11,664 22,724 25,420 29,033 ROA 5.8% 7.1% 5.1% 5.6% 6.1% Minority interests 17 812 812 812 812 Liquidity Total equity 9,999 12,475 23,536 26,231 29,844 Debt to asset 0.54 0.56 0.49 0.54 0.57 Total liabilities & equity 21,645 28,577 46,308 56,757 69,177 Net debt to equity Net cash Net cash Net cash Net cash Net cash Liquid ratio 1.56 1.46 1.64 1.31 1.11 Cash Flow Statement Quick ratio 1.37 1.26 1.47 1.14 0.93 Operating efficiency RMB mn 2013 2014 2015E 2016E 2017E Inventory turnover 0.19 0.29 0.31 0.40 0.54 CF from OA 1,585 1,191 2,712 -1,314 -4,214 Asset turnover 0.23 0.17 0.33 (0.16) (0.51) Pre-tax profit 1,473 2,473 3,051 4,033 5,357 AR turnover 1.43 1.78 2.86 3.19 3.62 D&A 262 414 445 544 635 AP turnover 0.02 0.00 0.41 0.06 0.08 Finance costs 14 15 66 118 116 Valuation Investment income -161 -183 -82 -107 -139 P/E 26.15 17.14 16.26 12.30 9.26 Working capital chg. 192 -561 -314 -5,348 -9,422 P/B 3.48 2.79 1.74 1.56 1.37 Others -195 -967 -453 -553 -761 CF from IA -1,354 1,504 -4,395 -2,900 -393 Capital expenditure -553 -1,434 -4,514 -3,030 -535 Source: Company data, CMS (HK) estimates Other investments -802 2,938 119 130 141 CF from FA 689 52 11,116 -869 -754 Debt issues -534 66 2,500 -276 0 Interest paid -40 -15 -66 -118 -116 Dividends paid -151 0 -3,406 -476 -638 Others 1,414 1 12,088 0 0 Net increase in cash 920 2,747 9,433 -5,082 -5,361
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Investment Ratings Industry Rating Definition OVERWEIGHT Expected to outperform the market index by > 10% over the next 12 months NEUTRAL Expected to outperform or underperform the market index by 10% or less over the next 12 months UNDERWEIGHT Expected to underperform the market index by >10% over the next 12 months
Company Rating Definition BUY Expected to outperform the market index by > 10% over the next 12 months NEUTRAL Expected to outperform or underperform the market index by 10% or less over the next 12 months SELL Expected to underperform the market index by >10% over the next 12 months
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