EUR 850.00 For Business Accounts Only

Morningstar | China Railway Construction Results in Line ; FVE Maintained at HKD 11.50

No-moat China Railway Construction, or CRCC, reported 2018 second-half result in line with our estimates. As expected, the constructor took on less public-private-partnership projects, or PPP, investment-driven new contracts in 2018. As China’s financing environment continues to tighten, we expect the constructor to keep cutting back on the number of PPP, leading to lower margins in the years to come. The negative impact on profitability, however, will be offset by a lower level of capital expenditures going out. As a result, we maintain our fair value estimate of HKD 11.50 (CNY 9.80) on CRCC and see the company as fairly-valued.

As competition in the domestic infrastructure business continues to intensify, China Railway Construction is shifting its strategy outward the overseas markets. Under our coverage of Chinese constructors, China Communication Construction and China State Construction International generate sizable portions of income outside of China. We believe CRCC’s move will soon erode these two early starters’ competitive positions abroad. Moreover, doing business overseas will gradually expose CRCC to political risks, as we believe there is an added layer of complexity when a Chinese SOE operates overseas, as perceived national security concerns and public opposition can block contracts and halt construction. Lastly, increased transparency in the bidding process abroad will also lead to lower margins over the longer-term.

In the near term, however, we see China boosting its economy through pumping money into infrastructure. Recently, the central government approved the issue of CNY 2.15 trillion in special purpose bonds to boost infrastructure spending, a more than 50% increase from the amount authorized last year. We believe such a stimulus will be short-lived, and further slowdown on the country's infrastructure spending is inevitable over the long term. We now expect CRCC to record an operating profit of CNY 29 billion in 2019, a 3% decrease from that of 2018.