Focus on the Beijing subway system market. Beijing accounted for the largest share of China's subway system investment in 2009-10, investing in 51 projects with a total contract amount of RMB 2.55 billion. China Urban Rail Technology (Zhongcheng Rail) focuses on developing the Beijing subway system market. With rich project experience and good cooperative relationships with the Beijing subway network, Zhongcheng Rail has become the largest provider of Beijing subway network layer system services. In 2009-2010, the company obtained 11 out of 12 network level urban rail transit projects in Beijing, with a market share of 92% of the total contract amount.
The relevant technology has been authorized. In the field of public transportation systems, Midtown Rail has relevant specific technology to meet the different needs of its customer base. Subsidiaries EYajie Hong Kong and EYajie Beijing have both obtained non-exclusive and non-transferable technology licenses from Vix IP, an Australian urban rail system technology company, to use Vix IP's technology until July 2014. Once the license expires, it will be evaluated and renewed every 3 years. The Hong Kong technology license allows the company to use Vix IP's technology in Hong Kong, Macau and Taiwan, while the license from Evijet Beijing allows the company to use Vix IP's ACC technology in China.
The development of the Beijing subway is the main driving force for the company's growth. We estimate that the main driving force behind the growth of Midcity Rail is the booming Beijing subway market. The total mileage of the Beijing Railway is expected to increase by 288 kilometers over the 2012-15 period. Meanwhile, the number of subway lines in Beijing is also expected to increase from 15 in 2011 to 29 in 2015. We estimate that the system design and implementation division of the Midcity Rail will benefit from the expansion of the Beijing subway system. Demand for system maintenance and after-sales service will also rise in response, which is beneficial to the system maintenance division of Midtown Rail. Strong demand for subway station equipment, including smart card readers, is also expected to drive Midtown Rail's hardware and spare parts sales.
Currently, Midtown Rail's stock price is 6.8 times and 5.4 times the predicted earnings per share for fiscal years 13 and 14. The price-earnings ratio of Hong Kong-listed peers was 11.9 times. We believe that the prospects for railway infrastructure development in Beijing are promising, and there should be a chance that the stock price of Zhongcheng Rail will be re-valued and that the valuation gap with peers will be narrowed. Since it is listed on the GEM market, we used a price-earnings ratio of 10x for fiscal year 13 as the valuation of Midcity Rail. Compared with the 11.9 times price-earnings ratio of peers listed on the Hong Kong Main Board, there is a 20% discount. Our target price is HK$1.30, representing an upward potential of 47.4%. First rated buy.
The main risk is that the business is concentrated in the Beijing region and related technology requires Vix IP authorization.