CHINAEQUIPMENTRAILWAYSECTOR0926

1、3,000.024 september 2012asia pacific/chinaequity researchindustrial machinery / underweightchina equipment railwaysectorresearch analystsyang y. song852 2101 6550yang.y.songcredit-initiationrolling in the deepcontribution byscott chuifigure 1: multiple unit forecastmu units120%2,500.02,3842,350100%2

2、,000.01,8431,9411,8861,85780%1,500.01,000.0500.00.0-500.06881,15760%40%20%0%-20%20082009201020112012e2013e2014e2015enew hsr linesincreasing passenger trafficexcess supplytotalyoy growthsource: mor, credit suisse estimates we initiate coverage on the china railway equipment sector with anunderweight

3、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 2013 (figure 1), respe

4、ctively, 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 at commercial

5、banks 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 the main h

6、eadwinddriving 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

7、x, 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 appe

8、ndix 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

9、 this report. investorsshould consider this report as only a single factor in making their investment decision.credit suisse securities research & analyticsbeyond informationclient-driven solutions, insights, and accessmu(sets)yoygrowthrmbbncashflowfromoperationscommercialbankloancdbloanbondsred

10、emptiontotalfinancingmtnshorttermfinancingbondfundinggapcorpbondsconstructionfundinvestmenttargetcapitalizedinteresttreasury-224 september 2012focus charts and tablefigure 2: excess mu supply (set)figure 3: mors bank loans as a percentage of alldomestic commercial banks net capital (2005-pres)700exc

11、ess supply25%railway bank loan / commercial bank net capital600500400300mu demand cum (all new hsr)mu demand cum (conventional upgrades)% over supply24639420%15%10%16.0%14.0%12.0%10.0%8.0%9.9%12.0%14.7%15.1%14.9%2001286.0%100090151251511511515%4.0%2.0%0200720082009201020110%0.0%20082009201020111h12s

12、ource: 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 growth70060070 1514661025%20%18%23%22%22%5004003002001201501005020 5075 3746415%10

13、%5%13%9%9%7%1000%-5%20052006200720082009201020111h12cargo turnoverpassenger turnovermor net fixed asset (excluding construction in progress, inflation adjusted)source: mor, ndrc, bloomberg, credit suisse estimatesfigure 6: css estimates vs consensus/valuationsource:mor, credit suisse estimateseps (r

14、mb)consensuscs vs consensustp % downsideratingtp201220132012201320122013csrcnrtimes electricunuhk$4.0rmb3.4hk$15.10.250.250.970.300.341.120.320.321.110.370.371.34-22%-20%-12%-19%-8%-16%-21%-2%-29%average-18%-14%-18%source: company data, i/b/e/s, credit suisse estimateschina equipment railway sector3

15、24 september 2012rolling in the deepjudging from the load density on chinas railways (the highest in the world), there is nodoubt in our minds that china needs to build more railways. but as mor is facing afunding gap of more than rmb100 bn despite its maxing out debt funding resources on allfronts

16、(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 reality and so will the stock prices.we initiate coverage on chinas railway

17、 equipment sector with an underweight stance.we are constructive on the sector for its long-term demand story, but find the imminentearnings risk from softening mu demand in addition to mors funding constraints too greatfor us to be bullish today.mu demand enters a soft patchwe forecast 19% and 3% y

18、oy 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 forecasts we assume china will complete 3,255 km and 3,757 km hsrs in

19、 2012and 2013, respectively, per mors released construction plan, and consequently seeadditional downside if there were to be further construction delays due to fundingconstraints. we expect mu new orders to be delayed well into 2013. orders on hand atyear-end 2011 were 3,496 units, 80% higher than

20、our 2012e mu demand of 1,941 units.metro: solid growth but let us not get carried awaywe 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% cagr for metro cardemand during the period. we have compared the

21、forecasted metro investments by localgovernments 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 thecity budget; it is overly ambitious, in our view, since metro spending by beijing, shangha

22、iand guangzhou was only around 3-4% of their respective budgets during 2007-11.aspiration versus the funding realitywe estimate rmb464 bn of available funding for mors 2012 railway capex (figure 4).beijings rmb50 bn fiscal injection is far from enough for mor to reach its targetedrmb610 bn fixed ass

23、et investment (fai). the central government seems reluctant tobecome 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 thesystem, in our view.policy rhetoric is not the magic potionrailway

24、 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 limited, and thedownward revision in earnings will be the

25、 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, hk$4.00, and hk$15.10, basedon 10 x, 11x and 1

26、1x 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, slower-than-expected metro developmen

27、t resulting in lower-than-expected metro car demand.china equipment railway sector424 september 2012sector valuation matrixfigure 7: valuation comparison tablep/eev/ebitdacompanytickercryprice ratingtpup/down2012201320122013csr corpchina cnr corporationcsr times electricchina railway constructionchi

28、na railway groupchina comm. construction co ltdchina state constructionzoomlion (h)sany heavy industrylonking holdingsliugongshanghai electricdongfang electric corpharbin power equipmentsiemensalstomcaterpillar inc.general electric1766.hk601299.ss3898.hk1186.hk0390.hk1800.hk3311.hk1157.hk600031.ss33

29、39.hk000528.sz2727.hk1072.hk1133.hksiegn.dealso.pacatgehk$rmbhk$hk$hk$hk$hk$hk$rmbhk$rmbhk$hk$hk$us$us$5.083.4621.356.733.376.378.798.798.961.318.293.0511.146.4479.1529.269222.53ununrnrnrnruunurnoonoo4.03.415.1nrnrnrnr8.58.51.88.0nr15.08.2882711722-21%-2%-29%n.a.n.a.n.a.n.a.-3%-5%37%-3%n.a.35%27%11%

30、-8%28%-2%16.613.617.88.88.86.815.510.19.88.416.39.36.65.511.311.89.614.714.310.315.58.17.96.112.48.98.36.214.78.66.75.111.79.88.713.28.78.713.33.97.35.814.36.77.45.214.96.15.57.28.97.77.87.97.57.211.43.76.95.311.75.15.64.213.05.64.96.97.46.77.16.8average11.29.88.27.0market capp/bebit marginev / sale

31、sroelocal cryus$20122013201220132012201320122013csr corpchina cnr corporationcsr times electricchina railway constructionchina railway groupchina comm. construction co ltdchina state constructionzoomlion (h)sany heavy industrylonking holdingsliugongshanghai electricdongfang electric corpharbin power

32、 equipmentsiemensalstomcaterpillar inc.general electricaverage60,14728,71823,14982,59371,80094,88130,46067,69568,0405,6079,32838,76122,3238,86769,1028,69061,086238,6157,7584,5552,98610,6539,26112,2373,9298,73110,7917231,4794,9992,8791,14489,68711,27861,086238,6151.71.13.10.90.81.02.61.42.70.71.01.01

33、.10.62.32.03.41.91.61.61.02.70.90.70.92.31.32.10.70.90.91.00.62.01.72.61.91.47%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%0.80.62.50.20.30.51.51.21.60.81.00.60.50.61.10.71.41.10.90.70.62.20.20.30.51.30.91.20.60.90.50.50.61.00.61.21.00.81081811916191428

34、96111711151738131511918119152014261161115111718321415source: company data, credit suisse estimates, i/b/e/s for not-rated companieschina equipment railway sector233333456781011141517172022232730303535364141424748535557524 september 2012table of contentsfocus charts and tablerolling in the deepmu dem

35、and 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 of contentsmu demand enters a soft patchour mu demand estimate frameworkwidening mu supply-demand gapdeclining mu demand

36、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 but still a long way to gofunding will be the main obstacleaspiration versus the funding realitymors rmb100 bn+ funding g

37、ap in 2012beijing, we have a problempolicy rhetoric not the magic potionhigh probability to miss fy12 investment targetvaluationriskscsr corporation ltd. (1766.hk / 1766 hk)chinas leading train makerfocus charts and tableschina cnr corporation ltd. (601299.ss / 601299 ch)margins set to improvefocus

38、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 forecastsappendix iii: company financials and operating metrics comparisonchina equipment railway sector313447rmbbnmu

39、demand(unit)yoygrowthyoygrowthmufleet(unit)624 september 2012mu demand enters a soft patchmultiple units (mus) are train sets running on high speed railways (or hsrs, which refer tonewly built high-speed passenger dedicated lines (pdls) with an average speed of 250km/hour or higher in addition to up

40、graded 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 increasingly important source of the rollingstock companies revenues (figure 8), in this section we focus on the sup

41、ply and demandpicture of mus in china.figure 8: cnrs and csrs revenue mix14012010080604020-figure 9: what an mu looks like200620072008200920102011locomotivepassenger coachfreight carmumetrosource: company data, credit suissesource: wikipediaas shown in figure 10, we forecast 19% and 3% yoy declines

42、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 constructedlines as more hsrs will be built in areas with less passenger traffic and (3) 10% growth inmu demand on the f

43、our 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 10: mu demand forecastfigure 11: mu fleet forecast3,0002,5002,0001,50068%1,15759%1,8432,38429%1,941 1

44、,8861,8572,35027%80%70%60%50%40%30%20%16,00014,00012,00010,0008,00096%82%54%10,61972% 8,7336,79214,826 120%12,476 100%80%60%1,000500720688-4%-19%-3%-2%10%0%-10%-20%6,0004,0002,0007201,4082,5654,40829% 22%17% 19%40%20%-2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e-30%-2007 2008 2009 2010 2011 2012

45、e2013e2014e2015e0%mu demandmu demand yoymu fleetmu fleet yoysource: company data, credit suisse estimateschina equipment railway sectorsource: company data, credit suisse estimates4724 september 2012our mu demand estimate frameworkwe forecast mu demand by incorporating the length of the hsr, the ave

46、rage 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 make a round trip,including the 10-hour traveling time and 1.6 hours/1,000 km time for maintenance (figure12). assuming mus depart eve

47、ry 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 train sets is 77.figure 12: mu maintenance scheduledistance (km)maintenance time (hours)level ilevel iilevel iiilevel ivlevel

48、 vmaintenance hours/1,000 km3,00030,000120,000240,000480,0001.561.52626288source: company data, credit suisse estimateswe have back tested our method on tokaido hsr, beijing-shanghai hsr and taiwanhsr as shown in figure 13 and found that our calculation works reasonably well withvariance against act

49、uals ranging between -5% and 6%.figure 13: train set estimates versus actualsfirsttrain setsnumberdeparturelastrushdemandlengthoftimedepartureaveragehour(for bothdifferencehigh speed railway(km) departures(one dir)time travel timeinterval directions)actual(e-a)tokaido shinkansentaiwanbeijing-shangha

50、i hsr552.6345131833661755:306:306:530:0023:0018:402:302:005:5400:03:180:130:0914129107133301036%-5%4%source: company data, credit suisse estimatesmethodology for train frequency estimatesan important input for estimating train set demand is the frequency of train departuresrequired on the line. we u

51、se a 10-minute interval for main north-south hsrs (in line withthe train schedule on the beijing-shanghai hsr), and a 17-minute interval for main east-west hsrs given the east-west passenger traffic has historically been less than 60% ofthe north-south traffic (figure 23).for intercity hsrs, we esti

52、mate the departure interval based on the size of population ofthe major cities along the line and the polynomial correlation between the population andtrain schedule as shown in figure 14.china equipment railway sectortraininterval(minute)sets-00824 september 2012figure 14: intercity hsr departure f

53、requency vs.population80figure 15: estimated train departure frequency vs. actual(intercity hsrs)10070605040nanchang -jiujiangsanya - haikouchangchun -jiliny = 0.021x2 - 2.2787x + 72.201r = 0.89989080706050403020guangzhou -zhuhaishanghai -hangzhoushanghai -nanjing30201010beijing - tianjinshanghai -

54、nanchang - shanghai - changchun sanya - guangzhou beijing -nanjingjiujiang hangzhou- jilinhaikou- zhuhaitianjin102030 40population (mn)506070estimated interval (minutes)actual interval (minutes)source: company data, credit suisse estimatessource: company data, credit suisse estimateswidening mu supp

55、ly-demand gapusing our demand estimate framework, we have analysed chinas mu supply versusdemand and found that excess supply has widened (figure 16 and figure 17), most likelydue to delayed hsr construction and slower-than-expected passenger traffic growthwithout the corresponding slowdown in rolli

56、ng stock orders.figure 16: mu demand vs. supply (set)figure 17: excess mu supply (set)700600mu demand cum (all new hsr)mu demand cum (conventional652250200annual mu sales breakdown50040030020010090090upgrades)mu sets (mor)176251512851281514472461513941511501005000610252008625782009440625620105703211

57、62011hsr demand from new lineshsr demand from increasing schedule20072008200920102011upgraded conventional lineexcesssource:mor, credit suissesource: mor, credit suissedemand: mu demand is the number of mus required to provide the hsr service per theoperators schedule. we have calculated mu demand o

58、n a line-by-line basis and estimatethat 394 sets are required for the hsr lines constructed prior to year-end 2011 (figure 16and figure 18). adding 151 mu sets required for the upgraded conventional lines, wereach total mu demand estimate of 545 sets by ye11. we note that dispatching muswithin a net

59、work rather than on a line-by-line basis allows more flexible usage and hence aless number of trains; our simple mu demand estimate fails to capture this factor.mu supply is simply the number of mus owned by a railway operator (mor in the case ofchina). as at year-end 2011 mor had 652 mu sets in ope

60、ration, 107 sets or 20% higherthan our demand estimate, suggesting over-supply.china equipment railway sector006935293545924 september 2012figure 18: 2011 mu demand estimate for hsr linesmu (sets)traingradeconstructionincluding 10%averageintervalhsr linesqinhuangdao-shenyanghefei-nanjinglength404166(km/