EUR 850.00 For Business Accounts Only

Morningstar | China Railway Group Results Below Morningstar Estimates; FVE Maintained at HKD 7.50. See Updated Analyst Note from 01 Apr 2019

No-moat China Railway Group, or CRG, reported 2018 second-half results below our estimates. As a result of the adoption of a new accounting policy, the group booked a one-off impairment loss of CNY 5.3 billion during the latter six months of 2018. Excluding the impairment, CRG’s second-half operating profit would have been more in line with our estimates. The 60 basis points uptick in gross margin was driven by rising contribution from public-private-partnership projects, which require the group to invest a significant amount of cash and carry much longer payback periods. As China’s financing environment continues to tighten, we expect the constructor to cut back on the number of investment-driven contracts, leading to lower margins for CRG 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 7.50 (CNY 6.40) on CRG and see the company as fairly valued.

Company management thinks infrastructure investment will be one of the key drivers for the country’s economic development in the near term. 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. However, we think such a stimulus will be short-lived, and further slowdown on the country's infrastructure spending is inevitable over the longer term. We now expect China Railway Group to record a net profit of CNY 16 billion in 2019, a 2% decrease from that of 2018.