2016 results are in line with expectations
Railway Construction Equipment announced 2016 results: revenue of 3.6 billion yuan, down 9.0% year on year; net profit of 467 million yuan, up 2.6% year on year, corresponding to profit of 0.31 yuan per share. In the second half of 2016, the company achieved revenue of 1.96 billion yuan, a year-on-year decrease of 10.2%; net profit of 252 million yuan, an increase of 10.0%, in line with expectations.
Equipment sales revenue declined; gross margin climbed 3.3 percent year over year. Due to the impact of the railway company's 135th large-scale road maintenance machinery and equipment procurement plan, manufacturing revenue and machinery and equipment sales revenue fell 19.2% to 2.3 billion yuan. Revenue from parts, repairs and track maintenance increased 25%, 6%, and 55%, respectively. The gross margins of equipment sales, spare parts, and maintenance businesses increased 3.3, 0.3, and 2.2 percentage points, respectively, over the same period last year. The company's overall gross margin increased 3.3 percentage points to 27.3%.
Expense rates have increased; operating cash flow has improved. The company's sales, management, and administrative expenses ratio increased 1.8 percentage points. Net profit margin increased 1.5 percentage points. In 2016, inventories and accounts receivable increased by $109 million and $916 million respectively, while accounts payable decreased by $142 million. Operating cash flow increased by $195 million.
Development trends
The scale of equipment procurement is expected to grow rapidly during the 13th Five-Year Plan period; the prospects for the high-speed rail and subway markets are improving. The procurement scale of large-scale road maintenance machinery is likely to increase by 40%, and revenue is expected to grow steadily. In addition, the company has received an order for a contact network inspection vehicle and signed an order for urban rail transit.
Profit forecasting
We lowered our earnings per share forecast for 2017 by 9% from RMB 0.39 to $0.36 in light of the postponement of the Railway General Procurement Plan. It was also introduced to 0.41 yuan in 2018.
Valuation and advice
Currently, the company's stock price corresponds to the predicted price-earnings ratio of 8.2 times in 2017. We maintain our recommended rating, but lowered our target price by 21.04% to HK$4.39, with room for 33.43% improvement from the current stock price.
risks
The tender was postponed.
