中国中铁(601390)

With business diversification and a recovery in the mining business, CRG-A’s earnings in 2017 exceededmarket expectations. Including its one-off asset impairment loss of >RMB6bn, its net profit in2017 still rose 29.4% YoY. The strong growth momentum continued in Q1 2018, with net profit rising21.9% YoY. We think central SOE construction companies should be able to secure steady earningsgrowth from PPP investment and overseas expansion support by the central government. CRG-A outperformed CRCC-A and CCC-A CYTD, as it delivered the highest earnings growth in 2017and Q1 2018. We initiative coverage on CRG-A with a BUY rating and target price (TP) of RMB9.10.We expect its earnings to grow at a CAGR of 14% in 2017-2019E. Its plan for a debt-to-equity swapmeans CRG has a strong incentive to boost its earnings in 2018, especially after it made a substantialone-off asset impairment in 2017. Our TP is based on our H-share valuation and A/H premium(discount) assumption (Fig 5).

Investment Highlights

Earnings beat in 2018 and 1Q18: CRG-A reported revenue growth of 8.8% YoY in 2017 and10.1% YoY in 1Q18, led by increasing exposure to PPP investment and overseas expansion.Earnings rose even more with margin expansion, led by an improving revenue mix, effectivecost control and the recovering mining business. The Company reported its gross profit marginexpanded from 7.9% in 2016 to 9.1% in 2017. After some one-off asset impairment, the Companyreported its net profit margin expanded by 0.3ppt YoY in 2017. The margin expansioncontinued in Q1 2018, thanks to its fast-growing municipal construction business and overseasexpansion.

Steady earnings growth expected to continue from rising PPP investment and overseasexpansion: We were concerned that the slowdown of its traditional railway business wouldconstrain its earnings growth in 2018. But CRG-A achieved faster growth than we expecteddue to increasing exposure to PPP investment. We remain confident that CRG-A will continueto be one of the key beneficiaries of rising PPP investment. The government review of PPPprojects turned out to be less negative than the market expected. With the addition of somenew projects, total investment in all approved PPP projects by the end of April suggested a netincrease in total project value compared to that at the end of December 2017. This should helprestore market confidence in the construction sector. With the improving quality in PPP projectsdatabase, CRG-A is able to pick even higher-quality PPP projects to secure healthier growthfor the Company.

Debt-to-equity swap plan to fund future PPP investment: CRG-A’s leverage is not thatexcessive compared to that of CCC, but its net gearing is higher than that of CRCC. The Companyannounced on 6 May that it is planning a debt-to-equity swap with the subject assetsbeing the equity rights of certain subsidiaries of the Company to be acquired by investors in thedebt-to-equity swap. As it may constitute a material asset restructuring, trading of its A-shareswas halted from 7 May. This should help CRG-A reduce its leverage, providing more room for itto raise debt for future PPP investment.

BUY with a TP of Rmb9.40: We set our TP to RMB9.10. Our CRG-A share TP is based onour CRG-H share valuation and the historical CRG A/H premium (discount) (Fig 5).