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1、3,000.0,24 September 2012Asia Pacific/ChinaEquity ResearchIndustrial Machinery/UNDERWEIGHTChina Equipment RailwaySector,Research AnalystsYang Y.Song852 2101 6550yang.y.songcredit-,INITIATIONRolling in the deep,Contribution byScott Chui,Figure 1:Multiple unit forecastMU units,120%,2,500.0,2,384,2,350
2、,100%,2,000.0,1,843,1,941,1,886,1,857,80%,1,500.01,000.0500.00.0-500.0,688,1,157,60%40%20%0%-20%,2008,2009,2010,2011,2012E,2013E,2014E,2015E,New HSR lines,Increasing passenger traffic,Excess supply,Total,YoY Growth,Source:MoR,Credit Suisse estimates We initiate coverage on the China railway equipmen
3、t sector with anUNDERWEIGHT stance.We are constructive on the sector for its long-termdemand story,but find the imminent earnings risk from softening MUdemand and MoRs funding constraints too great for us to be bullish today.We forecast 19%and 3%YoY declines in multiple units(MU)demand for2012 and 2
4、013(Figure 1),respectively,and expect the much-anticipated MUnew orders to be delayed well into 2013.Funding gap.Our calculation shows that MoR is facing a funding gap ofRmb100 bn+(Figure 4)despite its maxing out debt funding resources on allfronts(reaching the single enterprise concentration limit
5、at commercialbanks as shown in Figure 3 in addition to accounting for 30%of corporatebond issuance in 2012).Chinas railway investment declined 0.3%MoM in July and 4.5%MoM inAugust despite the investment target of MoR being raised twice since June.Going forward,we see earnings downward revision as th
6、e main headwinddriving stock performance.Our 2012 and 2013 earnings estimates are onaverage 18%and 14%lower than those of consensus,respectively.Weinitiate coverage on CNR with NEUTRAL,and CSR and Times Electric withUNDERPERFORM ratings,with target prices of Rmb3.40,HK$4.00 andHK$15.10,based on 10 x
7、,11x and 11x 2013E earnings multiples,respectively.Risks include a worse-than-expected traffic increase on HSRsor slower-than-expected HSR construction resulting in lower-than-expectedMU demand,slower-than-expected metro development results in lower-than-expected metro car demand.DISCLOSURE APPENDIX
8、 CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS.U.S.Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this r
9、eport.Investorsshould consider this report as only a single factor in making their investment decision.,CREDIT SUISSE SECURITIES RESEARCH&ANALYTICS,BEYOND INFORMATIONClient-Driven Solutions,Insights,and Access,MU(sets),YoYGrowth,Rmbbn,Cashflowfromoperations,Commercialbankloan,CDBloan,Bondsredemption
10、,Totalfinancing,MTN,Shorttermfinancingbond,Fundinggap,CorpBonds,Constructionfund,Investmenttarget,Capitalizedinterest,Treasury,-,2,24 September 2012Focus charts and table,Figure 2:Excess MU supply(set),Figure 3:MoRs bank loans as a percentage of alldomestic commercial banks net capital(2005-pres),70
11、0,Excess supply,25%,Railway Bank loan/Commercial bank net capital,600500400300,MU demand cum(all new HSR)MU demand cum(conventional upgrades)%over supply246,394,20%15%10%,16.0%14.0%12.0%10.0%8.0%,9.9%,12.0%,14.7%,15.1%,14.9%,200,128,6.0%,100,090,151,25,151,151,151,5%,4.0%2.0%,0,2007,2008,2009,2010,2
12、011,0%,0.0%,2008,2009,2010,2011,1H12,Source:MoR,Credit Suisse estimatesFigure 4:MoRs Rmb100+bn funding gap(2012),Source:Company data,Credit Suisse estimatesFigure 5:MoRs net fixed asset(excluding construction inprogress)growth vs.railway traffic growth,700600,70 15,146,610,25%20%,18%,23%,22%,22%,500
13、400300200,120,150100,50,20 50,75 37,464,15%10%5%,13%,9%,9%,7%,100,0%,-5%,2005,2006,2007,2008,2009,2010,2011,1H12,Cargo turnoverPassenger turnoverMoR net fixed asset(excluding construction in progress,inflation adjusted),Source:MoR,NDRC,Bloomberg,Credit Suisse estimatesFigure 6:CSs estimates vs conse
14、nsus/valuation,Source:MoR,Credit Suisse estimates,EPS(Rmb),Consensus,CS vs consensus,TP%downside,Rating,TP,2012,2013,2012,2013,2012,2013,CSRCNRTimes Electric,UNU,HK$4.0Rmb3.4HK$15.1,0.250.250.97,0.300.341.12,0.320.321.11,0.370.371.34,-22%-20%-12%,-19%-8%-16%,-21%-2%-29%,Average,-18%,-14%,-18%,Source
15、:Company data,I/B/E/S,Credit Suisse estimatesChina Equipment Railway Sector,3,24 September 2012,Rolling in the deep,Judging from the load density on Chinas railways(the highest in the world),there is no,doubt in our minds that China needs to build more railways.But as MoR is facing afunding gap of m
16、ore than Rmb100 bn despite its maxing out debt funding resources on allfronts(reaching the single enterprise concentration limit Figure 3 at commercial banks,and accounting for 30%of corporate bond issuance in 2012),we believe the ministry willcontinue to struggle between aspiration and the funding
17、reality and so will the stock prices.,We initiate coverage on Chinas railway equipment sector with an UNDERWEIGHT stance.,We are constructive on the sector for its long-term demand story,but find the imminent,earnings risk from softening MU demand in addition to MoRs funding constraints too great,fo
18、r us to be bullish today.,MU demand enters a soft patch,We forecast 19%and 3%YoY declines in multiple unit(MU)demand for 2012 and 2013,respectively,(Figure 1)as our line-by-line supply demand analysis reveals 20%excesssupply for completed High Speed Railways(HSR)as of YE11(Figure 2).In our MUdemand
19、forecasts we assume China will complete 3,255 km and 3,757 km HSRs in 2012,and 2013,respectively,per MoRs released construction plan,and consequently see,additional downside if there were to be further construction delays due to fundingconstraints.We expect MU new orders to be delayed well into 2013
20、.Orders on hand atyear-end 2011 were 3,496 units,80%higher than our 2012E MU demand of 1,941 units.,Metro:Solid growth but let us not get carried away,We forecast the length of the metro line will increase from 1,673 km at year-end 2011 to3916 km by year-end 2015,or 561 km per annum,driving a 14%CAG
21、R for metro cardemand during the period.We have compared the forecasted metro investments by local,governments versus each citys 2011 fiscal budget,and found that among the 28 citieswith subways under construction,five cities metro investments were higher than 6%of the,city budget;it is overly ambit
22、ious,in our view,since metro spending by Beijing,Shanghaiand Guangzhou was only around 3-4%of their respective budgets during 2007-11.,Aspiration versus the funding reality,We estimate Rmb464 bn of available funding for MoRs 2012 railway capex(Figure 4).Beijings Rmb50 bn fiscal injection is far from
23、 enough for MoR to reach its targeted,Rmb610 bn fixed asset investment(FAI).The central government seems reluctant to,become a stop-gap for MoRs ever increasing funding needs,likely due to the materialdeterioration in MoRs return on asset(Figure 5)and incidences of corruption within the,system,in ou
24、r view.,Policy rhetoric is not the magic potion,Railway investment declined 0.3%in July and 4.5%in August MoM despite the investmenttarget having been raised twice since June.Trading at 13x 2012E consensus earnings,webelieve the additional benefit from policy rhetoric on valuation multiple is limite
25、d,and thedownward revision in earnings will be the main headwind driving the stock performance.Our 2012/13 earnings estimates are on average 18%/14%lower than those of consensus.We initiate coverage on CNR with NEUTRAL,and CSR and Times Electric withUNDERPERFORM ratings with target prices of Rmb3.40
26、,HK$4.00,and HK$15.10,basedon 10 x,11x and 11x 2013E earnings multiples,respectively,implying 2%,21%,and 29%potential downside from last close,respectively.Risks include a worse-than-expectedtraffic increase on HSRs or slower-than-expected HSR construction resulting in lower-than-expected MU demand,
27、slower-than-expected metro development resulting in lower-than-expected metro car demand.,China Equipment Railway Sector,4,24 September 2012Sector valuation matrixFigure 7:Valuation comparison table,P/E,EV/EBITDA,Company,Ticker,CRY,Price Rating,TP,Up/Down,2012,2013,2012,2013,CSR CorpChina CNR Corpor
28、ationCSR Times ElectricChina Railway ConstructionChina Railway GroupChina Comm.Construction Co LtdChina State ConstructionZoomlion(H)Sany Heavy IndustryLonking HoldingsLiugongShanghai ElectricDongfang Electric CorpHarbin Power EquipmentSiemensAlstomCaterpillar Inc.General Electric,1766.HK601299.SS38
29、98.HK1186.HK0390.HK1800.HK3311.HK1157.HK600031.SS3339.HK000528.SZ2727.HK1072.HK1133.HKSIEGn.DEALSO.PACATGE,HK$RmbHK$HK$HK$HK$HK$HK$RmbHK$RmbHK$HK$HK$US$US$,5.083.4621.356.733.376.378.798.798.961.318.293.0511.146.4479.1529.269222.53,UNUNRNRNRNRUUNURNOONOO,4.03.415.1NRNRNRNR8.58.51.88.0NR15.08.2882711
30、722,-21%-2%-29%n.a.n.a.n.a.n.a.-3%-5%37%-3%n.a.35%27%11%-8%28%-2%,16.613.617.88.88.86.815.510.19.88.416.39.36.65.511.311.89.614.7,14.310.315.58.17.96.112.48.98.36.214.78.66.75.111.79.88.713.2,8.78.713.33.97.35.814.36.77.45.214.96.15.57.28.97.77.87.9,7.57.211.43.76.95.311.75.15.64.213.05.64.96.97.46.
31、77.16.8,Average,11.2,9.8,8.2,7.0,Market cap,P/B,EBIT margin,EV/sales,ROE,Local CRY,US$,2012,2013,2012,2013,2012,2013,2012,2013,CSR CorpChina CNR CorporationCSR Times ElectricChina Railway ConstructionChina Railway GroupChina Comm.Construction Co LtdChina State ConstructionZoomlion(H)Sany Heavy Indus
32、tryLonking HoldingsLiugongShanghai ElectricDongfang Electric CorpHarbin Power EquipmentSiemensAlstomCaterpillar Inc.General ElectricAverage,60,14728,71823,14982,59371,80094,88130,46067,69568,0405,6079,32838,76122,3238,86769,1028,69061,086238,615,7,7584,5552,98610,6539,26112,2373,9298,73110,7917231,4
33、794,9992,8791,14489,68711,27861,086238,615,1.71.13.10.90.81.02.61.42.70.71.01.01.10.62.32.03.41.91.6,1.61.02.70.90.70.92.31.32.10.70.90.91.00.62.01.72.61.91.4,7%5%17%3%3%6%9%17%19%11%5%7%6%6%9%5%14%12%9.0%,7%6%17%3%3%6%10%17%18%12%5%8%7%6%9%7%14%14%9.4%,0.80.62.50.20.30.51.51.21.60.81.00.60.50.61.10
34、.71.41.10.9,0.70.62.20.20.30.51.30.91.20.60.90.50.50.61.00.61.21.00.8,1081811916191428961117111517381315,11918119152014261161115111718321415,Source:Company data,Credit Suisse estimates,I/B/E/S for not-rated companiesChina Equipment Railway Sector,2,3,3,3,3,3,4,5,6,7,8,10,11,14,15,17,17,20,22,23,27,3
35、0,30,35,35,36,41,41,42,47,48,53,55,57,5,24 September 2012Table of contentsFocus charts and tableRolling in the deepMU demand enters a soft patchMetro:Solid growth but let us not get carried awayAspiration versus the funding realityPolicy rhetoric is not the magic potionSector valuation matrixTable o
36、f contentsMU demand enters a soft patchOur MU demand estimate frameworkWidening MU supply-demand gapDeclining MU demand on new HSR linesMU demand from increasing trafficPutting everything togetherMU orders to be delayed to next yearMetro:Solid growth but lets not get carried awayRapid development bu
37、t still a long way to goFunding will be the main obstacleAspiration versus the funding realityMoRs Rmb100 bn+funding gap in 2012Beijing,we have a problemPolicy rhetoric not the magic potionHigh probability to miss FY12 investment target,ValuationRisksCSR Corporation Ltd.(1766.HK/1766 HK)Chinas leadi
38、ng train makerFocus charts and tablesChina CNR Corporation Ltd.(601299.SS/601299 CH)Margins set to improveFocus charts and tablesZhuzhou CSR Times Electric Co.Ltd.(3898.HK/3898 HK)Engine of the trainFocus charts and tablesAppendix I:Line-by-line MU demand estimateAppendix II:Rolling stock forecastsA
39、ppendix III:Company financials and operating metrics comparisonChina Equipment Railway Sector,313447,Rmbbn,MUDemand(unit),YoYgrowth,YoYgrowth,MUFleet(unit),6,24 September 2012MU demand enters a soft patchMultiple units(MUs)are train sets running on high speed railways(or HSRs,which refer tonewly bui
40、lt high-speed passenger dedicated lines(PDLs)with an average speed of 250km/hour or higher in addition to upgraded conventional railways with an average speed of200 km/hour or higher).Typically,an MU set comprises eight units of cars and the longerversion 16 cars.Since MUs have become an increasingl
41、y important source of the rollingstock companies revenues(Figure 8),in this section we focus on the supply and demandpicture of MUs in China.,Figure 8:CNRs and CSRs revenue mix14012010080604020-,Figure 9:What an MU looks like,2006,2007,2008,2009,2010,2011,Locomotive,Passenger coach,Freight car,MU,Me
42、tro,Source:Company data,Credit Suisse,Source:Wikipedia,As shown in Figure 10,we forecast 19%and 3%YoY declines in MU demand for 2012and 2013 respectively,based on(1)excess supply of MUs for completed HSRs accordingto our line-by-line supply demand analysis,(2)lower MU density on newly constructedlin
43、es as more HSRs will be built in areas with less passenger traffic and(3)10%growth inMU demand on the four vertical and four horizontal/intercity HSRs per annum driven byincreasing traffic(but we see potential downside as the load factors are mostly below the80%cut-off for adding new trains).,Figure
44、 10:MU demand forecast,Figure 11:MU fleet forecast,3,0002,5002,0001,500,68%1,157,59%1,843,2,38429%,1,941 1,886,1,857,2,35027%,80%70%60%50%40%30%20%,16,00014,00012,00010,0008,000,96%82%54%,10,61972%8,7336,792,14,826 120%12,476 100%80%60%,1,000500,720,688,-4%,-19%,-3%,-2%,10%0%-10%-20%,6,0004,0002,000
45、,720,1,408,2,565,4,408,29%22%17%19%,40%20%,-,2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E,-30%,-,2007 2008 2009 2010 2011 2012E2013E2014E2015E,0%,MU demand,MU Demand YoY,MU Fleet,MU Fleet YoY,Source:Company data,Credit Suisse estimatesChina Equipment Railway Sector,Source:Company data,Credit Sui
46、sse estimates,4,7,24 September 2012Our MU demand estimate frameworkWe forecast MU demand by incorporating the length of the HSR,the average speed of thetrain and departure frequencies.Using a 1,000 km HSR as an example,if the averagetrain speed is 200 km/hour,it would take 11.6 hours for an MU to ma
47、ke a round trip,including the 10-hour traveling time and 1.6 hours/1,000 km time for maintenance(Figure12).Assuming MUs depart every 10 minutes on this line,we calculate it will take 70 trainsets(11.6 hours divide by 10 minutes)to meet the schedule.Adding 10%contingencybuffer,this lines demand for t
48、rain sets is 77.Figure 12:MU maintenance schedule,Distance(km),Maintenance time(hours),Level ILevel IILevel IIILevel IVLevel VMaintenance hours/1,000 km,3,00030,000120,000240,000480,0001.56,1.52626288,Source:Company data,Credit Suisse estimatesWe have back tested our method on Tokaido HSR,Beijing-Sh
49、anghai HSR and TaiwanHSR as shown in Figure 13 and found that our calculation works reasonably well withvariance against actuals ranging between-5%and 6%.Figure 13:Train set estimates versus actuals,First,Train sets,Number,departure,Last,Rush,demand,Length,of,time,departure,Average,hour,(for both,Di
50、fference,High Speed Railway,(km)departures,(one dir),time travel time,interval directions),Actual,(E-A),Tokaido ShinkansenTaiwanBeijing-Shanghai HSR,552.63451318,3366175,5:306:306:53,0:0023:0018:40,2:302:005:54,00:03:180:130:09,14129107,13330103,6%-5%4%,Source:Company data,Credit Suisse estimatesMet
