China Infra. Construction
Stay on the right track
Jin Xu, MBA
Research Analyst
(852) 2203 6131
jin.xu@db.com
Stick to railway exposure and good management
While China will continue to increase government spending in various
infrastructure projects, we prefer exposure to rail due to its high sector growth
and low project cancellation/payment default possibility. Recent raw material price
correction is likely to stabilize infrastructure projects’ gross margins, but
management is key to earnings growth in terms of SG&A cost cutting and FX risk
management. We believe CRC will continue to outperform as the company is the
most rail-focused play and has decent quality management.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at http://gm.db.com or by calling 1-877-
208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
Sector Strategy
Top picks
China Railway Contr (1186.HK),HKD9.38 Buy
China Comm. Construction (1800.HK),HKD5.28 Buy
China Railway Group (0390.HK),HKD4.40 Hold
Companies featured
China Railway Contr (1186.HK),HKD9.38 Buy
2007A 2008E 2009E
P/E (x) – 24.5 18.8
EV/EBITDA (x) – 6.8 5.2
Price/book (x) 0.0 2.2 2.0
China Comm. Construction (1800.HK),HKD5.28 Buy
2007A 2008E 2009E
P/E (x) 40.5 11.7 10.1
EV/EBITDA (x) 17.6 6.4 6.2
Price/book (x) 6.5 1.6 1.4
China Railway Group (0390.HK),HKD4.40 Hold
2007A 2008E 2009E
P/E (x) 103.6 37.2 19.6
EV/EBITDA (x) 28.6 7.9 6.5
Price/book (x) 4.0 1.4 1.3
Relative share performance
-30%
-20%
-10%
0%
10%
20%
30%
40%
CRC CRG CCC
Rel to Hang Seng Rel to HSCEI
Related recent research Date
Extended construction boom
Jin Xu 29 Jul 2008
Global Markets Research Company
Rail and metro rail drive sector growth
Despite China’s weakening GDP growth (DB forecast 7% GDP growth by 2010),
government spending on infrastructure will continue to grow, mostly driven by rail
and metro rail spending. We believe China’s railway infrastructure spending will
grow at a 43% CAGR 2008-2010, while metro rail will grow at least 25% p.a.
Given the weakening shipping demand, China’s ports construction growth will be
in the low teens, just enough for provincial governments to fulfill their 11-5 plans.
Highway spending may even decrease, as China has almost completed the most
expensive national trunk line construction and will shift focus to village roads and
reconstruction.
GP margin stable but management is key to delivering growth
We see the infrastructure construction gross margin stabilizing, if not recovering,
due to raw material price correction and easing inflation. We also believe railway
companies will enjoy 0.5%-1% one-off margin gain over the next two years as
MoR gradually offers cost compensation for the high-speed lines. However, to
translate the organic sector growth into bottom-line growth, companies still need
effective and prudent management in cutting SG&A costs and managing FX risks.
CRC and CCC likely to outperform
After cutting earnings between 11%-42% for all three companies for FY08-FY2010,
our top pick is still CRC as the company has the highest percentage of rail-related
earnings (67% for FY08), and better cost & risk management (lower
SG&A/revenue and it booked much smaller FX losses than CRG). We are now
starting to like CCC as well because the stock is overly short and earnings growth
will be positive for FY09-FY2010. However, we downgrade CRG to Hold due to the
stock’s poor risk management, mining exposure, and stretching valuation.
New valuations: do not look at PE! DCF and EV/EBITDA preferred
As CRC and CRG’s net cash balance represent 30% and 18% of their market cap,
respectively, their PE multiples will naturally be high (we value cash at about 50x
PE). As such, we prefer DCF for absolute valuation and EV/EBITDA for relative
valuation. We value construction companies using DCF till 2013 and terminal
growth of 3% for CRC & CRG and 2.5% for CCC. With updated margin and sector
growth assumptions, we derive TPs of HK$12.1 for CRC, HK$6.8 for CCC, and
HK$4.5 for CRG. On an EV/EBITDA basis, CRC and CCC are also cheaper than CRC.
Thus, we maintain Buy on CRC, upgrade CCC to Buy and downgrade CRG to Hold.
Risks include China infrastructure spending and unexpected change in companies’
margins (see inside for details).

Table of Contents
Outlook............................................................................................... 3
CRC would continue to outperform ..........................................................................................3
Valuation: prefer DCF and EV/EBITDA ......................................................................................3
Risks ........................................................................................................................................3
Rail drives sector growth.................................................................. 5
Key points ................................................................................................................................5
Infrastructure investments to grow despite FAI slowdown......................................................5
Railway investments to grow 47% and 22% in 2009 and 2010 ...............................................6
Metro rail to grow at least 25% p.a. in 2009 and 2010.............................................................7
Ports investments growth flattish and highway spending decreasing......................................8
Earnings growth from margin expansion and risk mgmt ............ 11
Key points ...............................................................................................................................11
Construction EBITDA margin to improve over time ................................................................11
High margin businesses pose high risks too..........................................................................12
SG&A cost cutting and FX risk management important to earnings growth...........................13
CRC: Reiterate Buy, HK$9.8, TP HK$12.1....................................... 15
Most focused rail play and quality management.....................................................................15
TPHK$12.10 (down from HK$14.60); Reiterate Buy................................................................16
CCC: Upgrade to Buy, HK$ 5.51, TP HK$6.8 .................................. 18
An oversold defensive play with positive earnings growth.....................................................18
TP of HK$6.8; upgrade to Buy.................................................................................................19
CRG: Downgrade to Hold; HK$4.4, TP HK$4.50 ............................ 21
Higher risk profile and stretched valuation..............................................................................21
TPHK$4.50; downgrade to Hold .............................................................................................22