Focus of opinion
Investment suggestion
Railway Construction equipment announced its 2018 results: revenue increased by 32.6% year-on-year to 2.411 billion yuan, and net profit increased by 183.8% to 156 million yuan, or 0.1 yuan per share. The performance is in line with our expectations. We downgraded Railway Construction equipment to neutral, mainly considering the decline in the company's gross profit margin and the deterioration of cash flow. The reasons are as follows:
Profits hit bottom and rebounded, but profitability declined. Benefiting from the industry recovery in 2018, machinery sales in the company's largest business segment increased by 65.0% compared with the same period last year, and the company's net profit rebounded. But the company's gross profit margin fell 3.1 percentage points year-on-year to 24.0%, the lowest since it went public in 2015.
Cash flow worsened. The net cash inflow from operating activities fell to 2.61 billion yuan in 2018 from 7.97 billion yuan in 2017, mainly due to a decrease in sales rebates.
We expect the short-term volatility of the railway sector to increase. On March 28, the management of Railway Construction equipment said on the performance call that the Railway General Administration is expected to purchase only 800 locomotives in 2019. We believe that lower-than-expected bids for locomotives will increase short-term fluctuations in the sector.
What is the biggest difference between us and the market? China Railway Construction Corporation's high-tech equipment mainly produces railway maintenance equipment rather than locomotives, but we expect that the tender for locomotives will be lower than expected or that the purchase of railway equipment will be less than 120 billion yuan in 2019.
Potential catalyst: bidding for railway equipment.
Profit forecast and valuation
We raised our earnings per share forecast for 2019 by 25% to 0.12 yuan (previously 0.10 yuan), mainly considering the upward trend of the industry. At the same time, the profit per share in 2020 is expected to be 0.13 yuan.
Considering the decline in the company's gross profit margin and the deterioration of cash inflows, we downgraded the railway construction equipment to a neutral rating, but maintained the target price of HK $2.17. The target price corresponds to 15 times 2019 and 14 times 2020 earnings and is in line with the current share price.
Risk.
The rate of expenses has increased.
