Due to the low valuation, the railway construction equipment is more eye-catching in the recent valuation screening. The company is currently valued at 10.4 times 2017 forecast earnings, while other peers are valued at 14.9 times 2017 forecast earnings. As the purchase of railway equipment will resume growth in 2018-20, we have raised the company's profit forecast and the target price to HK $5.00. Upgrade the rating to buy.
The main factors supporting rating
The market is chasing the undervalued, underperforming but more reliable "Belt and Road Initiative" theme company. Railway construction equipment is the company that meets the requirements. As the China Railway Corporation delayed the procurement of railway maintenance vehicles, we maintain a neutral evaluation of railway construction equipment. But with the advent of mid-2017, the situation will improve. Procurement data are usually low in the first two years of each five-year plan, but will improve significantly in the next three years. We expect the procurement of railway equipment to increase in 2018.
Railway construction equipment will benefit from the theme of "Belt and Road Initiative", as most of the railways in the "Belt and Road Initiative" area are ballast-laid high-speed railways, while the railway maintenance vehicles equipped with railway construction equipment mainly serve this kind of railways. The company will become an undervalued stock with the theme of Belt and Road Initiative.
CRE announced tonight that it will buy a 100% stake in Tiejian Yukun at a consideration of 110.6 million yuan. The purchase price corresponds to 1.06 times 2016 market net ratio. The two companies acquired by Tiejian Yukun have a total loss of 3.64 million yuan in 2016, which will not have a significant impact on the profit of Tiejian equipment, as the loss accounts for only 0.67% of the company's net profit in 2017. Acquisitions will not have a big impact in the near future, but the long-term synergy is obvious. Founded in November 2015 as a wholly owned subsidiary of China Railway Construction Corporation, Tiejian Yukun bought 100 per cent of CIDEON Engineering GmbH & Co. KG, a German design company, and CIDEON Schweiz AG, a Swiss design company, for 14.55 million euros in February 2016. The purchase price of Railway Construction equipment is 6.9% higher than that of Tiejian Yukun, which we think is mainly caused by the difference in exchange rate.
Main risks faced by rating
New order growth did not pick up in 2018
Valuation
The acquisition of Railway Construction equipment will have a negative impact on the company's share price, which will provide investors with opportunities to increase their holdings. We raise our earnings forecasts and increase the target price-to-earnings multiplier. The new target price corresponds to 37% upside and is upgraded to buy.
