Restorative growth

The company held an annual performance conference; 2018 benefited from the resumption of the railway general tender, and the performance increased by 184%, in line with market expectations.

The order on hand at the end of 2018 is 1.37 billion yuan; the company's machinery sales are expected to grow steadily in 2019, and the overhaul business will maintain its current scale; the effect of cost control is remarkable.

Considering that the downstream customer of the company is single and the new market expansion is still in its infancy, the company's neutral rating should be maintained.

Demand recovery, company performance recovery growth

The company's net profit rose 184% year-on-year in 2018, in line with expectations. The sharp increase in the company's performance is mainly due to the low base caused by 2017, which was a small year of bidding by the General Railway Corporation. In 2018, the railway general bidding resumed, as the company's largest customer, led the company's performance improvement. In 2018, the company signed a new order of about 2.7 billion yuan to deliver 115 large-scale road maintenance machinery (2017: about 50) and 78 overhauled (2017: 80). The company's comprehensive gross profit margin fell 3.1 percentage points compared with the same period last year, mainly due to an increase in the proportion of low gross margin business. The company has orders of 1.37 billion yuan at the end of 2018, of which about 900 million yuan will be delivered in 2019, according to the company.

It is expected that the main business will continue to pick up steadily and the expansion of new business will be slow.

Looking forward to 2019: 1) the steady growth of machinery sales business, mainly due to the return to the normal pace of bidding; 2) the expansion of new markets such as subway and high-speed rail is still in its infancy. It is expected that the company's machinery sales in 2019 will still be dominated by traditional large-scale road maintenance machinery with low gross margin. 3) due to Beijing's development strategy, the company's planned overhaul production base in Beijing has been postponed, and the company's overhaul business is expected to maintain its current scale in 2019 (about 80 units / year); 4) the company's fee reduction measures in 2018 are effective. The company expects that the rate of management expenses (except R & D expenditure) will continue to decline in 2019 and continue to control sales expenses.

Raise the target price and maintain neutral rating

Due to the long time since we last updated the company's profit forecast, we re-forecast the company's profit for 2019-21 and expect the company's net profit to grow at an average annual compound rate of 21% in 2019-21. The company's profit growth is based on the steady expansion of China's railway road maintenance machinery market and the resumption of the bidding progress of the Railway General Administration. However, considering that the company has a single downstream customer, the new market expansion is still in its infancy, and the progress of overhaul business development is not as expected, we give the company a target price of HK $2.36 at 0.55 times 2019 forward price-to-book ratio (historical average). Maintain the company's neutral rating.

Catalyst: iron general bidding exceeded expectations

Risk: the iron general tender is not as expected.