China Machinery:MU tendering size could reach 388 sets; Buy CNR H (on CL)/A, HOLI

Total MU tendering could reach 388 sets.

    China Railway Corporation (CRC) announced on August 25 evening that itis going to tender for 776 sets of Cab Integrated Radio CommunicationEquipment (CIR), implying that the total Multiple Unit (MU) tendering sizecould reach 388 train sets (each train set is typically installed with 2 CIRs).

    Reinforced confidence on above-expectation MU size.

    The total potential MU tendering size of 388 train sets beats our previousexpectation of c.300 sets; besides the 232 sets that were announced onAugust 22 (175 sets of 350km/h trains, 57 sets of 250km/h trains), weestimate that there could be another 50/10 sets of bespoke trains forcold/sandy regions respectively, while details of the remaining 96 trains areyet unknown. Both CSR and CNR’s MU backlog (mainly the trains tenderedby CRC in 2013) could support their production to October/November thisyear, hence we expect the aforesaid potential MU orders of 388 sets to bemainly delivered in 2015.

    We have reinforced confidence on China’s MU demand, as we view thisyear’s tendering as a reflection of strong high-speed rail (HSR) passengervolume growth which pushes CRC to purchase more trains to cope withthe density rise on existing lines and for the newly-built railways. Case inpoint, 75% of the 232 sets announced on August 22 have a designed speedof 350km/h, while only 10% of the 2015 new HSR lines are 350km/h linesper CRC’s schedule.

    Still bullish on rolling stock; Buy CNR H (on CL), CNR A, HOLI.

    We remain bullish on our China rolling stock coverage, and believe railwayconsumption growth will be the next driver for MU growth even after newlines completion peaks off. Our top pick continues to be CNR H (CLBuy),as we see it as having compelling risk-reward. It enjoys robust +22%earnings CAGR in 2014E-16E (vs. +12%/+18% for Zhuzhou/CSR) but tradesat a 28%/23% discount to Zhuzhou/CSR (H) on 2015E P/E. We also maintainCNR A/HOLI at Buy.

    Key industry risks include: 1) Faster-/slower-than-expected delivery for CRCorders; 2) higher-/lower-than-expected margins; and 3) stronger-/weakerthan-expected demand from overseas markets.