Earnings for the first half of 2017 fell short of expectations
On July 14, Railway Construction Equipment released a performance forecast. Net profit returned to the mother in the first half of the year will fall 85% to 91% year on year, falling short of expectations.
Key points of interest
The interim results were lower than expected mainly due to the postponement of the General Railway tender. In the first half of the year, the company's revenue may have declined 40% to 46% year over year due to delays in the general bidding of the Railway Company. The decline in earnings became more severe due to reduced economies of scale.
Results for the second half of 2017 are expected to improve month-on-month, but full-year results may still be under pressure. We expect that the total amount of tenders worth more than 1 billion yuan will be released in July and August. As a result, the company's revenue in the second half of the year is expected to increase month-on-month. However, if there are no further tenders, the full-year results may still fall short of expectations.
2018 is something to look forward to. Due to the slowdown in new railway construction from 2011 to 2012, the mileage completed in 2016 fell 66% year on year, and in 2017 it fell 36% year on year, resulting in a decline in demand for railway maintenance machinery. However, we expect the mileage of newly completed railways to pick up in 2018, and the company's revenue will bottom out.
We look forward to the integration of railway construction equipment and heavy railway construction industry. The company announced that China Railway Construction will integrate railway construction equipment with heavy railway construction industry. Considering that heavy railway construction industry is the leader in railway turnouts and TBMs, we believe that potential integration is expected to enhance the manufacturing advantages of railway construction equipment. However, the impact is limited in the short term.
Valuation and advice
Considering the postponement of the general bidding for Railway Corporation, we lowered our profit forecasts for 2017 and 2018 by 18.2% and 17.7% to 446 million yuan and 512 million yuan respectively. At the same time, the target price was lowered by 25% to HK$3.28 (10 times the target price-earnings ratio for 2017). Maintain recommendations.
risks
The General Railway tender fell short of expectations.
