- Newly merged CSR/CNR in China renamed CRRC.
- Short-term margin squeeze for suppliers but could be offset by long-term volume gains. Cut EPS by 29-40% for lower margins.
- TP down to SGD0.52 from SGD0.75, now at 1x FY15E P/BV from 1.5x. Maintain BUY with catalysts from contract wins.
China’s CSR/CNR have announced a merger via the conversion of one CNR share into 1.1 CSR shares. The new entity will be renamed CRRC. Other positive news flows for China’s high-speed railway (HSR) sector in the past two months included a resumption of Thailand’s HSR plan and talks for HSR projects in India and Russia.
Eyeing global stage
China has been eager to make headway in heavy-machinery and infrastructure-project exports. Creating a train-making giant reflects its ambition of producing mega state-backed conglomerates with the clout to grab international market share.
Impact on Midas
CRRC will command almost 100% of domestic railway locomotives and high-speed, normal & MRT trains. We believe it will have bigger pricing power over its suppliers, including Midas. This implies short-term margin squeeze. Longer term, suppliers may be compensated by bigger volume, especially if CRRC wins orders in the international market. Although they were the top two train makers in the world, CNR and CSR only had a combined global market share of 2-3% currently. We lower FY15E/16E EPS by 40/29% for lower margin assumptions and slower-than-expected earnings recognition. Our TP drops from SGD0.75 to SGD0.52, now at a more conservative 1x FY15E P/BV, from 1.5x. Nevertheless, maintain BUY. Catalysts are still expected from more contract wins.
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