CRRC reported 3Q results, with sales up by 2.7% and net profit down by 7.1% YoY. The earnings decline in 3Q came as no surprise due to high base. Gross margin stayed at high level at 21%, but SG&A cost rose by 9.6%, higher than top-line growth. In 9M23, sales and net profit rose by 5.5% and 2.1% YoY, slightly lagging behind the consensus forecast. We retain sales estimate unchanged, but slightly increase the SG&A forecast and trim the net profit estimate. We also trim the target price by applying the unchanged target multiple, 13.2x 23E P/E to derive the new TP HK$5.88. BUY rating is retained.
Key Factors for Rating
The shining catalysts for CRRC lie in the resumption of high-speed rail new order and clean energy equipment sales. The order of high-speed rail resumed in mid-2023 after three-year suspension during pandemic. With the passenger transport resuming back to peak level, the new order of high-speed rail resumes the normal demand. In addition, CRRC is a leading supplier of clean energy equipment, including wind turbine, solar module, and energy storage. In 9M23, the clean energy sales accounted for 10% of total sales for CRRC.
Sales rose by 2.7% YoY, net profit declined by 7.1% YoY in 1Q23, slightly below the consensus estimate. High base was one of the reasons while the high growth of SG&A cost was another reason for the decline in net profit. SG&A cost rose by 9.6% YoY, higher than sales growth, mainly due to the provisions.
In 9M23, sales and net profit rose by 5.5% and 2.1% YoY, below the consensus estimate of 7.8% YoY earnings growth in 2023.
New order grew by 18.75% YoY in 9M23, with 23%, 19%, 17%, 10%, and 4% respectively from urban rail, high-speed rail, locomotive, freight cargo, and passenger carriage.
Key Risks for Rating
If earnings growth will normalise gradually, CRRC's premium valuation might fade.
Valuation
We slightly cut earnings estimate in 4Q23. TP is adjusted to HK$5.88 by applying the unchanged target multiple, 13.2x 23E P/E. High-speed rail, locomotive, urban rail, and clean energy are the major drivers and catalysts for CRRC. BUY rating is retained.