Investment highlight
CRE is the second largest manufacturer of large railway maintenance machinery in the world, with a market share of 23% in the global market and 80% in the domestic mainland.
New railway lines and increased permeability drive steady business growth: 1) demand from new railway lines: we expect the mileage of general-speed railway operation to increase by 19694 km from 2015 to 2020, an additional demand of 1063 units; 2) demand from existing railway lines: we expect the demand for unentered railway lines to reach 455 units. The total demand from 2015 to 2020 is expected to reach 1519 units, an average of 253 units per year, with a corresponding compound growth rate of 7.7%.
The beneficiaries of the booming aftermarket: the average life of railway machinery is 20,26 years, which needs to be overhauled every 10 to 13 years. We expect the company to overhaul 31, 72, 87 and 106 machines respectively from 2014 to 2017, with a corresponding compound growth rate of 51%. The contribution of overhaul revenue in 2017 is expected to reach 13.6% (10.9% in 2015).
Market expansion: high-speed rail, subway and overseas markets: 1) high-speed rail market: railway construction equipment has made a breakthrough in the field of catenary system inspection vehicles, with an order of 528 million yuan; 2) in the field of urban rail transit, the company has obtained orders for rail milling and grinding machinery, the market size is expected to reach 1 billion yuan in 2020; 3) in 2015, the company sold three stable cars to overseas markets for the first time (35.1 million yuan). We believe that high-speed rail, subway and overseas markets will be the drivers of future growth.
Financial forecast
We expect earnings per share to be 0.34 yuan in 2016 and 0.39 yuan in 2017.
Valuation and suggestion
The stock currently trades at 2016 times earnings and 9.8 times earnings in 2017. For the first time, it covers the "recommended" investment rating, with a target price of HK $5.56, corresponding to a price-to-earnings ratio of 14 times 2016 and in line with the current valuation of H-share companies.
Risk
Industry policy is worse than expected; market competition is deteriorating.
