China Construction &
Infrastructure
Railway – A New Era to Kick
Off; Top Pick CRGL
Investment conclusion: We believe China will kick off
a new era of railway transportation in the next decade,
after massive investment in railway network expansion
and upgrades. China’s new network, rolling stock, and
railway stations, now working as an integrated system,
are emerging as a new driver in modern transportation.
We expect the railway system to reach 183,172 km by
2020, a 7.2% CAGR and 52.6% higher than the Ministry
of Railway’s (MoR) official target. Construction
investment is expected to reach Rmb3,885 bn during
2011-2015, vs. Rmb2,020 bn during 2006-2010. China
Railway Group (CRGL, HK$7.15, Overweight, price
target HK$8.90) remains our top pick in the sector.
Looking beyond MoR target: We expect the total
length of railway to reach 183,000 km by 2020, vs.
80,000 km by 2008, with high-speed lines growing
fastest – from 7,000 km to 13,000 km. This is 53%
higher than MoR’s official target of 120,000 km. We
expect four regional railway hubs to emerge, covering
80% of the population and 87% total China GDP. The
railways should regain share of the transportation
system on the back of mass investment in new line
expansion and upgrades. We highlight the growing
dilution impact of long-distance highways (3 hours
driving, >250 km) and short-distance airways (1 hour
travel, <1,000 km) on the passenger side, and on
long-haul freight transportation.
When to peak: We expect the domestic railway
construction upcycle to peak around 2013, with a 31.8%
CAGR for construction over the next three years.
Which stock do we prefer? We maintain our OW
rating on CRGL as our top pick in the space, given its
attractive secular trend and relatively reasonable
valuation. We expect CRGL’s normalized interim results
up 69.9% YoY to Rmb2,772 mn, which is largely in line
with our numbers, but beat consensus (10% higher).