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研究部 (Research Team)
輝立証券

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Zhuzhou CSR Times (3898.HK) Another Beneficiary under Gov's Policy

Thursday, March 19, 2009

5890

Zhuzhou CSR Times(3898)

Recommendation on 19 March 2009
Recommendation	Hold
Price on Recommendation Date	$8.450
Target Price	$8.470

Weekly Special - 3306 JNBY Design Limited

Summary

CSR is now jointly owned by China Southern Locomotive (CSR) and China Railway Construction (CRC). It produced 2 major kinds of products namely train-borne electrical system and electrical components, with revenue proportion of 84% and 16% respectively as of 1H 2008.

Domestic competition is not intense as CSR Times is one of the leading train-borne electrical system provider and integrator in China. The 11th Five Year Plan featured dedicated passenger railway lines and high-speed and safe rail transportation. We expect the growth rate of passenger coach and locomotives will continue in coming years.

CSR Times has quite a strong balance sheet that it is rich is cash and no short-term borrowing and no non-current liabilities as of 1H 2008. Using DCF model, 12-month target price is HK$ 8.47, implying 2008 P/E of 20x and 2009 P/E of 17.5x.

Company Description

CSR was listed in HK in 2006 and it is now jointly owned by China Southern Locomotive (CSR) and China Railway Construction (CRC). CSR is the largest shareholder accounting for 57% of shares.

CSR Times produced 2 major kinds of products namely train-borne electrical system and electrical components, with revenue proportion of 84% and 16% respectively as of 1H 2008. Train-borne electrical systems consist of train power converter, control system and operation safety equipment that is used for power supply and control train operation for locomotives, passenger cars and large railway maintenance vehicles. Electrical components consist of power semiconductor devices and sensors etc that are used mainly in the production of train-borne electrical systems.

CSR has primarily focused on domestic market that we expect the revenue contribution is over 90%. For export, train-borne electrical systems mainly go to HK and certain countries in Asia whereas electrical components primarily go to US and Europe.

Business Outlook

We look at the business outlook in 3 aspects: competition, downstream players and sales.

Domestic competition is not intense as CSR Times is one of the leading train-borne electrical system provider and integrator in China. For train power converter and control systems, its main competitors are 2 subsidiaries belonging to China Northern Locomotive and Rolling Stock (CNR). We expect the CNR subsidiaries and CSR Times share similar market share. For train operation safety equipment, CSR Times is one the only 2 suppliers in the State. For foreign competition, we think a CSR time that is 58% state owned would continue to outperform the foreign counterparts Currently, it has developed joint venture with some foreign competitors like Siemens and Mitsubishi Electric.

According to the IPO prospectus, apart from the Ministry of Railway (MOR) and local railway administration, rail vehicles companies like CSR and China Railway Construction (CRCC) have been the primary customers of CSR Times. While CSR and CCRC are the strategic investors of CSR Times, we think this help the company to maintain good and long-term relationship with customers.

The 11th Five Year Plan featured dedicated passenger railway lines and high-speed and safe rail transportation. Also electric locomotives procurement will outweigh diesel locomotives at a faster pace while DC power converters are replaced by AC power converters for larger hauling power, smaller energy consumption and more stable operation control. We expect the growth rate of multiple units and locomotives will continue in coming years. Therefore, this will boost the demand of the company's train-borne electrical systems sales.

Financial Analysis

CSR Times has quite a strong balance sheet that it is rich is cash and no short-term borrowing and non-current liabilities as of 1H 2008. The company has maintained net cash position since 2006 due to substantial cash inflow after IPO listing. IPO proceeds amounted to HK$ 2,198 mn and interest income of approx. HK$ 22.5 mn. The net gearing ratio significantly dropped from 13.3% in 2005 to –66.6% in 2006. As of 1H 08, the net gearing ratio was –26.7%.

Revenue in 1H08 soared 41% but its gross margin declined from 41.6% in 1H07 to 38.4% in 1H08 as the cost of sales increased at a faster pace for imported parts. Yet, operating profit grew 62%, in which 25% of this came from other income and gains. Investment income from financial instrument accounting 18% of other income & gains is likely to be one-off as its return varies in response to the changes in commodity price index and inflation index. For VAT refund which accounting 19.4% of other income & gains is likely to sustain in future due to the economy stimulus package in China.

Peers Comparison

Risk

i) Metal price like steel, aluminum and copper raised much more than expected

ii) Unfavorable regulatory change by the government or MOR about railway infrastructure development

Valuation

Using DCF model, 12-month target price is HK$ 8.47, implying 2008 P/E of 20x and 2009 P/E of 17.5x. We have double-checked the implied P/E with the forward P/E of CSR Times and the peer group. Our implied forward P/E is approximately equal to the historical mean of the company's forward P/E and mean+1 s.d. of the peer group.

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