–potential new Ministry Of Railways tenders the first indication of recovery
China Securities Journal reported on 24 February 2012 that China‟s Ministry of Railways (MOR) will start a new round of tenders for high-speed trains, which it estimates could be worth RMB30-40bn and we estimate at ~RMB34bn.
Companies in the sector have limited information about the size or timing of this potential order. Whilst further details are unavailable, we believe this news may indicate that new orders for trains from MOR are imminent, which is likely to be a major positive for rail equipment companies.
We believe the shares of CSR Corporation (CSR) and Zhuzhou CSR Times Electric (Zhuzhou) will continue to perform strongly in this new order cycle, with our preference being for Zhuzhou given its high growth, potential for margin expansion and lower valuation.
Reports of new tenders an early indicator for orders
News that MOR is preparing for a new round of high-speed train tenders has been long awaited by the industry. It is a
welcome early indication that orders are coming for the sector. The details mentioned in the report suggest to us that this
process is not at a preliminary stage and has already passed through some initial procedures at MOR.
Size significant: The article reports the tender would be for 180 trains, estimated to be worth around RMB30-40bn. If we assume an average of 12 cars per train (based on historical order split between 8-car and 16-car trains), a 50:50 split of 250km/h and 350km/h trains, with 20% lower cost than previous orders, the derived estimated value is ~RMB 34bn.
Timing: Uncertain but we would expect it may take 3-6 months for the orders to be placed. Given that specifications should be similar to the existing trains, we think the process may not take as long as it did previously.
Investment implication
This is a clear leading indicator that orders are on the horizon, in our view. It does not change our view on earnings for
CSR and Zhuzhou in the near-term but does help build confidence that orders are in the process of being finalised.
The most direct beneficiary should be CSR Corporation (1766 HK, OP, HK$6.10, PT HK$6.60), which historically has gained 60% of all Chinese high-speed orders. Zhuzhou (3898 HK, OP, HK$19.06, PT HK$22.50) is likely to produce the majority of power converter products for any CSR orders won, in our view, after its RMB5.1bn order from CSR in 2010.
We prefer Zhuzhou to CSR due to its higher growth, potential margin expansion from semiconductor development, stronger balance sheet and cheaper valuation (at 12.6x 2012E PER, versus 16.3x for CSR).
