中国铁建(601186)

The construction sector regained market traction, led by 1) better-than-expected PPP review resultsand 2) the sector’s strong Q1 2018 growth. As we highlighted in our previous report, centralSOEs should face no downside risk in infrastructure investment, benefitting from rising PPP investmentand overseas expansion. CRCC-A secured fast earnings growth by increasing its exposure toPPP investment in Q1 2018, which exceeded market expectations. We initiate our coverage onCRCC-A with a BUY rating and target price (TP) of RMB12.50. CRCC-A is our top pick in the Ashareconstruction sector. We expect its earnings to grow at around 14% p.a. in 2018-2019E. AsCRCC-A is less geared than its peers, we think it will enjoy faster earnings growth via increasing itstakes in PPP investment. Our TP of RMB12.50 is based on our CRCC-H share valuation and the A/H premium (discount) assumption (Fig 5). The only downside risk to its earnings and TP is likelyfrom the Company’s conservative approach in pursuing PPPs and overseas business expansion.

InvestmentHighlights

Fast earnings growth secured by increasing exposure to PPP investment: With the slowdownin railway investment, CRCC-A secured earnings growth by increasing its exposure toPPP investment. CRCC-A reported earnings growth of 14.7% YoY in 2017 and 18.9% YoY inQ1 2018. The earnings growth was above market expectations, as the market was concernedabout a slowdown in PPP investment during the project review period. The government’sscrutiny of PPP projects ended in March. The results showed that the concern was overblown.A total 1,160 projects worth RMB1.2trn were removed from the PPP database. But 614 newprojects worth RMB13trn were added to the database, indicating a net increase in PPP investment.With tougher regulations, CRCC-A should be able to pick good-quality PPP projects tosustain its earnings growth in the next 2-3 years.

Margin expansion due to improving revenue mix: CRCC-A has been conservative in itsPPP business expansion. PPP investment�Crelated revenue accounted for only c10% of itstotal revenue in 2017. Its overseas business accounted for only around 5% of its total revenue.So its increasing exposure to PPP investment and overseas business drove a significantmargin improvement for the Company. PPP projects offer higher margins than its traditionalrailway projects. We expect CRCC-A’s margin expansion to continue in 2018-2019E. Weforecast that its gross profit margin will expand from 9.2% in 2017 to 9.4-9.7% in 2018-2019.? Strong balance sheet supports its PPP business expansion: CRCC-A has the lowest netgearing ratio of its peers. As at the end of 2017,its net debt/equity ratio was only 7.3% vs.64.2% for CCC and 33.8% for CRG. Its healthy balance sheet allows CRCC-A to further increaseits stake in PPP investment. Under the deleveraging environment, this gives the Companythe competitive strength to gain market share from its peers.

BUY with a TP of RMB11.80: We set our TP at RMB12.50. Our TP is based on our CRCC-Hshare valuation and the historical CRCC A/H premium (discount) (Fig 5).