EUR 850.00 For Business Accounts Only

Morningstar | CRG will be the primary beneficiary of rising domestic infrastructure spending.

China Railway Group, or CRG, and its peer China Railway Construction operate as a duopoly in China's railway construction market. In 2014, CRG held about 46% market share in the domestic railway infrastructure segment, and about 50% in urban rail construction. The firm has been the main beneficiary of China's high-speed railway boom and has seen its revenue grow at a CAGR of 11% since 2009. With high-speed railway spending to average at CNY 800 billion-CNY 850 billion per year until 2020, we expect CRG's revenue growth to slow to a 5% CAGR.In light of a potential slowdown in railway investment, CRG has diversified. Railway as a percentage of total new contracts declined to 18% in 2017, with municipal works (metros, urban rail, and civil engineering) accounting for 57% of new infrastructure contract wins. CRG's noninfrastructure operations include infrastructure consulting, engineering equipment, and component manufacturing and property development. Collectively, these represented 16% of fiscal 2017 revenue but represent 26% of pretax profit (excluding intersegment). Noninfrastructure revenue is estimated to grow at 6%-7% per year until 2021, while property development will grow at a slower CAGR of 2%-3%, reflecting structural weakness in the domestic property market. Despite our forecast of solid five-year average revenue growth of 5%, we do not anticipate any significant improvement in CRG's fundamentals. The five-year average gross margin is likely to improve marginally to 9.9%; net margin will average at 2.4%; and adjusted ROIC will stay steady at 10%.