CRRC Corp:H/A,Hold/Reduce,Busy start to 2017

Busy start to 2017 – After a series of major tenders so far this month, China RailwayCorp (CRC) announced yet another major tender for 586 units of electric locomotivetoday. The timing of all these tenders is earlier than usual and we estimate theaggregate tender amount may exceed RMB50bn. This may pose an upside risk toCRC’s intention to procure RMB100bn worth of rail equipment in 2017. The briefbreakdown of today’s locomotive tender is as below:

    91 units of 7,200kw electric locomotive for passenger transport with a maximumspeed of 160km/hr

    191 units of 9,600kw electric locomotive for freight

    304 units of 7,200kw electric locomotive for freightBased on historical tender results, we estimate the latest batch of orders could beworth RMB10-12bn.

    We think locomotive demand in China in 2017 will recover to the 800-1,000 unitslevel from around 260 units procured in 2016. This is the normalised annualreplacement demand for the installed fleet of c20,000 locomotives in China.

    Locomotive revenue contribution in 2016 is estimated to be 10% for CRRC Corp andwe expect the contribution to recover to 14% in 2017e.

    Prefer Zhuzhou CRRC over CRRC Corp – We are encouraged by the series ofmajor rail equipment tenders in January 2017 which could pose an upside risk to theprocurement budget. We prefer Zhuzhou CRRC Times Electric (3898 HK) overCRRC Corp. From valuation perspective, Zhuzhou is trading at 13.2x FY17 PERversus CRRC Corp trading at 15.4x. Not only would Zhuzhou benefit from therecovery of rail equipment orders, it would benefit more directly from the major MU(multiple units, high speed passenger train) and expansion in the broader industrialmanufacturing businesses.