China Construction and Railway Equipment/Component...

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US 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 this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

04 April 2014

Asia Pacific/China

Equity Research

Engineering & Construction / Industrial Machinery / Multi-Industry-3 (Capital

goods - Engineering (Asia)) / OVERWEIGHT

China Construction and Railway Equipment/Component Sector

INITIATION

Focus on stimulus and back-end equipment

Figure 1: Railway equipment new orders and railway FAI growth

0

2

4

6

8

10

12

14

16

Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13

Equipment new order (Rmb bn, trailing 12M)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2010 2011 2012 2013 2014 2015

Construction FAI yoy Equipment FAI yoy

Source: Company data, Credit Suisse estimates

We initiate coverage on the Chinese railway and construction sector with an

OVERWEIGHT stance, and OUTPERFORM ratings for Hollysys, CSR and

CSCI, CRCC and CRG and NEUTRAL ratings for ZZCSR and CCCC.

■ Equipment improving with extra growth from urban rapid transit. We

believe railway equipment demand will continue improving, driven by better

networking and potentially rising maintenance demand, with better loading

factor as the critical game changer. We believe urban rapid transit is another

area that will offer strong growth in China after an investment boom in high

speed railways, consistent with China's aggressive urbanisation plan.

■ Stimulus offers upside to slowing railway infrastructure. We see long-

term potential for building railway and believe railway construction is always

a good candidate to help pump up the economy, if needed. NDRC's recent

railway project approvals and Premier Li's just-announced railway fund

opening to outside investors demonstrate strong government commitment.

■ Railway reform to unlock huge value. We expect visibility for orders, pricing

transparency and payment to substantially improve. Railway development

fund and listing of attractive operating assets owned by CRC should trigger a

virtuous circle through better funding and improving payment, with asset

injection as an alternative. Recent cargo pricing regime changes not only

improve profitability but also confirm government commitment, in our view.

■ Stock calls. We like equipment stocks (HOLI and CSR) with strong order

flow and recurring earnings, and railway constructors from the stimulus

angle with undemanding valuation (CRC and CRG). CSCI stands out with its

unique business model, and is well positioned to benefit from new

urbanisation plan.

Research Analysts

Edmond Huang, CFA

852 2101 6701

[email protected]

Baiding Rong

852 2101 6703

[email protected]

04 April 2014

China Construction and Railway Equipment/Component Sector 2

Focus charts and table Figure 2: Railway construction FAI growth and equipment

FAI growth (YoY)

Figure 3: China metro length (km)

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2010 2011 2012 2013 2014 2015

Construction yoy Equipment yoy

-

1,000

2,000

3,000

4,000

5,000

6,000

2004 2006 2008 2010 2012 2014E 2016E

Source: MOR, CRC, NDRC, Credit Suisse estimates Source: MOR, CRC, NDRC, Credit Suisse estimates

Figure 4: Railway equipment new orders (Rmb bn, trailing

12M average)

Figure 5: Constructors' new orders (Rmb bn)

0

2

4

6

8

10

12

14

16

Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13

-

100

200

300

400

500

600

700

800

900

1,000

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

CCCC CRC CRG

Source: Company data, Credit Suisse estimates Source: Company data

Figure 6: Valuation comparison

Ticker Rating TP Price Mkt Cap P/E(x) P/B(x) ROE (%) EV/EBITA Dividend Yield EPS CAGR

(local) (local) (US$bn) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2013-15

CCCC 1800.HK N 6.00 5.63 10.3 5.6x 5.2x 0.7x 0.6x 12.9% 12.7% 5.3x 4.8x 4.6% 5.0% 11%

CRC 1186.HK O 9.20 7.43 9.2 6.6x 6.0x 0.8x 0.7x 12.9% 12.8% 4.0x 3.7x 2.4% 2.6% 11%

CRG 0390.HK O 4.85 2.92 9.2 7.4x 6.6x 0.7x 0.7x 9.9% 10.3% 6.8x 6.2x 2.0% 2.3% 10%

CSCI 3311.HK O 17.30 13.62 6.8 15.1x 12.4x 2.8x 2.4x 20.1% 21.2% 11.4x 9.4x 2.0% 2.4% 28%

CSR 1766.HK O 8.10 6.67 10.5 14.4x 12.2x 1.8x 1.6x 13.3% 14.2% 6.1x 5.3x 2.1% 2.5% 19%

ZZCSR 3898.HK N 28.90 26.60 4.0 15.6x 14.0x 2.4x 2.1x 16.4% 15.9% 10.6x 9.6x 1.9% 2.1% 13%

Hollysys HOLI.OQ O 29.10 21.96 1.2 14.6x 12.9x 2.5x 2.1x 18.7% 17.9% 11.2x 9.5x 0.0% 0.0% 24%

Weighted avg 10.2x 8.9x 1.4x 1.3x 12.0% 12.2% 6.3x 5.6x 2.6% 2.9% 12%

Source: IBES, Company data, Credit Suisse estimates

04 April 2014


Table of contents China Construction and Railway Equipment/Component Sector 1 Focus charts and table 2 Focus on stimulus and back-end equipment demand 4 Railway equipment demand improving with extra growth from urban rapid transit 6 Stimulus offers upside to slowing railway infrastructure 12 Railway reform to unlock huge value if executed well 14 CSCI to benefit from new urbanization program on the back of its unique business model

17 Stock calls 19 Appendix 20 China State Construction International Holdings (3311.HK / 3311 HK) 22 Leverage on a smart business model 24 Hollysys Automation Technologies Ltd. (HOLI.OQ / HOLI US) 32 Grow strongly on two drivers 34 Financials 43 Valuation 45 Risks 46 Management profile 47 Appendix 48 CSR Corporation Limited (1766.HK / 1766 HK) 50 Recovering orders to revitalise growth 52 China Railway Construction Corporation Limited (1186.HK / 1186 HK) 58 Undemanding valuation, exposure to potential stimulus; initiate with OUTPERFORM 60 China Railway Group Limited (0390.HK / 390 HK) 65 Initiate at OUTPERFORM on better cost control and financial management 67 Zhuzhou CSR Times Electric Co. Ltd. (3898.HK / 3898 HK) 72 Improved growth profile on the back of rising new orders 74 Margins likely slightly down due to product mix change 75 IGBT development: Pain before gain 76 Financials 77 Key investment risks 79 China Communications Construction Co Ltd (1800.HK / 1800 HK) 80 To grow at slow pace given stretched balance sheet 82

04 April 2014


Focus on stimulus and back-end equipment demand Railway equipment demand improving with extra

growth from urban rapid transit

We believe railway equipment demand will continue improving, driven by gradually

improving HSR operation, better networking and potentially rising maintenance demand.

Better loading factor is the critical game changer, without which increasing addition in high

speed railway would only end up with idle capacity that will discourage future new orders.

Worsening flight delay due to frequent haze has also been very helpful. We believe urban

rapid transit is another area that will offer strong growth in China after investment boom in

high speed railways, consistent with China's aggressive urbanisation plan.

Stimulus offers upside to slowing rail infrastructure

We believe China needs to invest more in the West and also cargo in the future and see

room for upward revision when the government needs a stimulus package to pump up a

weakening economy. Railway is always a good candidate to help pump up the economy

given enormous consumption of raw materials and employing many people. The recent

NDRC's Rmb142 bn railway project approvals and the railway fund just announced by

Premier Li demonstrate strong government commitment. Without it, railway infrastructure

spending would remain unexciting in 2014-15, with potential downside risk after 2015.

Railway reform to unlock huge value if executed well

We believe that the on-going MOR reform, despite certain delays, will continue to drive

forward and unlock huge value and consequently benefit the overall economy by providing

cost effective and environment friendly modes of transport. We expect visibility for orders,

pricing transparency and payment to substantially improve. Introduction of outside

investors through railway development fund and listing of attractive operating assets

owned by CRC should trigger a virtuous circle through better funding and improving

payment, with asset injection to existing listed vehicles as an alternative. Recent cargo

pricing regime changes not only improve profitability of the railway cargo operators, but

also confirm government's commitment to the long-awaited railway reform.

CSCI to benefit from new urbanisation programme

driven by its unique business model

Newly initiated urbanisation should be the next driving force for infrastructure investment in

the longer term. Hybrid ownership is encouraged which would lead local governments to

raise capital by selling down assets, given their difficulty in further leverage. This should

provide great opportunities for those with strong balance sheet, access to cheap funding

and foreign identity such as CSCI to cherry pick fundamentally sound projects.

Stock calls

We like stocks at the back end that will continue to enjoy strong order flow with potentially

increasing contribution in recurring earnings, including Hollysys and CSR. We rate CRG

and CRCC OUTPERFORM as major beneficiaries from the stimulus plan with focus on

railway, with undemanding valuation. CSCI stands out among constructors due to its

unique business model that strikes a good balance between profitability and cash flow,

and should benefit from the newly initiated urbanisation plan. Major risks to our calls

include delayed government stimulus, rising interest rate and overseas execution risks.

04 April 2014


Figure 7: Valuation comparison

Ticker Rating Price Mkt Cap P/E(x) P/B(x) ROE (%) EV/EBITA Dividend Yield EPS CAGR

(local) (US$ bn) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2013-15

Constructor

CCCC 1800.HK N 5.63 10.3 5.6x 5.2x 0.7x 0.6x 12.9% 12.7% 5.3x 4.8x 4.6% 5.0% 11%

CRC 1186.HK O 7.43 9.2 6.6x 6.0x 0.8x 0.7x 12.9% 12.8% 4.0x 3.7x 2.4% 2.6% 11%

CRG 0390.HK O 3.92 9.2 7.4x 6.6x 0.7x 0.7x 9.9% 10.3% 6.8x 6.2x 2.0% 2.3% 10%

CSCI 3311.HK O 13.62 6.8 15.1x 12.4x 2.8x 2.4x 20.1% 21.2% 11.4x 9.4x 2.0% 2.4% 28%


Railway equipment & components

CSR 1766.HK O 6.67 10.5 14.4x 12.2x 1.8x 1.6x 13.3% 14.2% 6.1x 5.3x 2.1% 2.5% 19%

Zhuzhou CSR 3898.HK N 26.60 4.0 15.6x 14.0x 2.4x 2.1x 16.4% 15.9% 10.6x 9.6x 1.9% 2.1% 13%

Hollysys Automation HOLI.OQ O 21.96 1.2 15.3x 13.5x 2.3x 1.9x 15.1% 14.5% 10.3x 8.8x 0.0% 0.0% 18%

HK China ITS 1900.HK NR 1.55 0.3 10.0x 7.8x 0.7x 0.7x 7.3% 8.7% 6.0x 5.0x 1.7% 1.8% 33%

China Automation 0569.HK NR 1.41 0.2 4.5x 4.3x 0.5x NA 10.7% 8.6% 4.3x 3.9x 4.4% 5.3% 92%


Railway operator

Guangshen Railway 0525.HK NR 3.34 3.1 12.3x 11.3x 0.7x 0.7x 5.4% 5.4% 4.5x 4.3x 3.6% 3.9% 13%

Daqin Railway 601006.SS O 6.57 15.7 6.7x 6.0x 1.1x 1.0x 17.0% 17.2% 4.4x 4.0x 7.1% 8.8% 13%

MTR Corporation 0066.HK N 29.10 21.8 18.4x 14.1x 1.1x 1.1x 6.2% 7.8% 12.1x 9.6x 2.9% 3.0% 16%

Canadian National CNI.N N 56.61 46.8 18.3x 16.1x 3.8x 3.5x 21.2% 22.2% 11.3x 10.4x 1.6% 1.6% 9%

Canadian Pacific CP.N O 153.28 26.9 19.8x 16.2x 4.0x 3.6x 20.4% 22.9% 11.7x 10.2x 0.8% 0.8% 23%

CSX Corporation CSX.N N 29.22 29.4 16.1x 14.0x 2.6x 2.3x 16.7% 17.5% 8.3x 7.5x 2.1% 2.1% 9%

Kansas City Southern KSU.N O 104.30 11.5 22.2x 18.0x 2.8x 2.5x 13.4% 14.8% 12.1x 10.0x 1.1% 0.0% 17%

Norfolk Southern NSC.N O 97.68 30.3 15.4x 13.6x 2.5x 2.2x 16.7% 17.1% 8.5x 7.7x 2.2% 2.2% 12%

Union Pacific UNP.N O 189.08 85.7 17.4x 14.8x 4.0x 3.7x 23.0% 25.4% 9.3x 8.3x 1.9% 1.9% 15%

Central Japan Railway 9022.T NR 12,130 23.0 10.2x 9.3x 1.2x 1.1x 12.7% 12.5% 0.2x 0.2x 0.9% 0.9% 3%

East Japan Railway 9020.T NR 7,639 29.0 14.3x 13.4x 1.3x 1.2x 9.3% 9.2% 0.2x 0.2x 1.8% 1.9% 7%

West Japan Railway 9021.T NR 4,140 7.7 12.7x 12.0x 1.0x 0.9x 7.8% 7.9% 0.2x 0.2x 2.9% 3.0% 4%


Other constructors

Sinopec Engineering 2386.HK U 8.72 5.0 7.7x 6.9x 1.3x 1.2x 18.0% 17.7% 4.3x 3.9x 3.9% 4.3% 8%

CNCE 601117.SS NR 6.13 4.9 7.2x 5.9x 1.2x 1.0x 17.6% 17.4% 1.9x 1.6x 2.3% 2.0% 19%

CMES 1829.HK NR 5.65 3.0 7.5x 6.4x 1.4x 1.2x 20.9% 19.4% 1.4x 1.2x 4.8% 5.4% 23%

Daelim 000210.KS O 86,100 2.8 10.3x 7.8x 0.6x 0.6x 6.4% 8.0% 7.5x 6.3x 0.6% 0.6% NA

Deawoo E&C 047040.KS N 8,020 3.2 21.7x 11.3x 1.1x 1.0x 5.4% 9.6% 17.3x 12.9x 0.0% 0.0% NA

GS E&C 006360.KS U 37,000 1.8 39.0x 6.4x 0.6x 0.5x 1.5% 8.5% 22.1x 10.1x 2.6% 2.6% NA

Hyundai E&C 000720.KS O 56,400 5.9 7.5x 6.4x 1.0x 0.9x 14.8% 15.0% 5.6x 4.8x 0.9% 0.9% 24%

Samsung E&C 028050.KS N 73,800 2.8 15.3x 7.7x 2.7x 2.0x 19.0% 30.1% 14.6x 8.9x 2.0% 2.0% NA

JGC 1963.T N 3,683 9.0 18.4x 17.7x 2.3x 2.1x 12.9% 12.2% 0.5x 0.5x 1.4% 1.4% 12%

Chiyoda 6366.T N 1,381 3.4 20.0x 18.4x 1.7x 1.6x 8.6% 8.7% 0.6x 0.6x 1.3% 1.3% 11%

Larsen & Toubro LART.BO U 1,290.00 19.9 21.4x 19.1x 2.8x 2.5x 13.9% 14.1% 1.4x 1.2x 1.0% 1.1% 16%

Fluor FLR.N O 77.66 12.4 17.9x 14.7x 2.9x 2.5x 17.4% 18.5% 8.3x 7.0x 0.8% 0.8% 14%

Technip SA TECF.PA N 73.06 11.4 16.0x 11.2x 2.1x 1.9x 13.7% 18.0% 7.0x 5.3x 2.5% 3.1% 21%

Forst Wheeler FWLT.OQ N 33.36 3.3 16.7x 13.6x 2.9x 2.4x 19.1% 19.3% 8.4x 7.0x 0.0% 0.0% 37%

KBR KBR.N O 27.35 4.0 14.1x 12.1x 1.3x 1.2x 10.0% 10.6% 5.8x 5.1x 0.0% 0.0% 4%

McDermott MDR.N O 7.06 1.7 -166.2x 17.7x 1.2x 1.1x -0.7% 6.4% 16.4x 6.6x 0.0% 0.0% NA

Weighted avg 13.2x 13.2x 2.1x 1.8x 13.9% 15.3% 5.5x 4.2x 1.4% 1.6% -42%

Overseas heavy equipment

ABB ABBN.VX O 23.08 60.2 15.7x 13.7x 3.0x 2.7x 18.0% 19.2% 9.9x 8.7x 3.2% 3.4% 10%

Alstom ALSO.PA U 21.97 9.3 9.2x 8.0x 1.1x 1.0x 12.2% 12.8% 59.4x 55.2x 3.0% 3.4% 7%

Bombardier BBDb.TO N 4.28 5.6 12.4x 10.7x 2.6x 2.2x 22.7% 22.3% 7.0x 6.3x 2.6% 2.6% 17%

Kawasaki 7012.T NR 398 6.4 13.4x 11.9x 2.8x 2.6x 23.0% 23.7% 8.9x 7.9x 3.2% 3.4% 30%

Siemens SIEGn.DE O 98.38 119.2 13.9x 12.2x 2.7x 2.5x 20.6% 21.5% 11.2x 10.1x 3.1% 3.3% 10%


Source: IBES, Company data, Credit Suisse estimates; we use IBES consensus for not-rated companies

04 April 2014


Railway equipment demand improving with extra growth from urban rapid transit We believe railway equipment demand will continue improving after resumption in new

orders awarded, while railway infrastructure spending has slowed down. Encouragingly,

railway equipment demand should continue to be driven by gradually improving high

speed rail (HSR) operation, better networking and potentially rising maintenance demand.

Worsening flight delays due to frequent haze have also been very helpful. As a good

example, business travellers including ourselves start to use high speed railway more

often in mainland China, to avoid significant and unexpected delay that could upset the

whole schedule.

Figure 8: Flight accuracy rate on down trend Figure 9: Railway environmentally friendly (kg of standard

coal consumption / '000 of ton-km)

60

65

70

75

80

85

90

Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13

0

50

100

150

200

250

300

350

400

450

500

Airline Road Railway Shipping

Source: CAAC, Wind Source: CAAC, MOT, Credit Suisse estimates

We are confident on railway equipment investment as it is ready to catch up with high

flying infrastructure spending earlier. We project 17.5% CAGR for equipment investment in

2014-15, compared to 5% CAGR for infrastructure during the same period. Substantial

addition of high speed railway in 2014/15 would lay solid foundation for strong demand for

MUs, especially when HSR loading factor improves. We project 6,200-6,600 km and 3,900

km HSR to start operation in 2014 and 2015, respectively, based on the announced

schedule (including inter-city railway).

04 April 2014


Figure 10: China Railway Corporation (previously MOR)'s

railway construction and equipment investment (Rmb mn)

Figure 11: Railway construction FAI growth and

equipment FAI growth (YoY)

0

100

200

300

400

500

600

700

800

900

2008 2009 2010 2011 2012 2013 2014 2015

Construction Renewal Equipment

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2010 2011 2012 2013 2014 2015

Construction yoy (RHS) Equipment yoy (RHS)


Figure 12: High speed rail addition (km) Figure 13: High-speed rail cumulative length (km)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2009 2010 2011 2012 2013 2014 2015

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2008 2009 2010 2011 2012 2013 2014 2015 >2015

Source: Ministry of Railway, China Railway Corporation, Credit Suisse

estimates

Source: Ministry of Railway, China Railway Corporation, Credit Suisse

estimates

Better loading factor is the critical game changer that made us optimistic, in our view.

Without such an improvement, increasing addition in high speed railway would only end up

with idle capacity that will in turn discourage new orders to placed down the road, in our

view. This is exactly what happened in 2011-13 when new supply of high speed railway

and MUs far exceeded demand at that juncture that consequently dampened new demand

recovery for longer. Of course the tragic train crash in summer of 2011 made it worse,

after which MU orders had been shelved until Aug 2013. We have observed some

anecdotal evidence that loading factor is improving on certain major lines like Beijing-

Shanghai and Wuhan-Guangzhou. This should definitely build a solid foundation to

generate sustainable demand for EMUs.

04 April 2014


From a bottom-up angle, railway equipment makers have received a strong flow of new

orders since 4Q2013 after it had gradually recovered from the trough in mid-2011. On the

contrary, infrastructure constructors have demonstrated slower momentum in new orders

since 1H13. After the tragic train crash, constructors recovered as early as end of 2011

when the economy that was slowing down then required increased infrastructure spending

to keep the economy afloat. We expect railway infrastructure spending to decelerate from

a high base, with upside surprise from a stimulus angle.

Figure 14: Railway equipment new orders (Rmb bn,

trailing 12M average)

Figure 15: Constructors' new orders (Rmb bn)

0

2

4

6

8

10

12

14

16


-

100

200

300

400

500

600

700

800

900

1,000

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

CCCC CRC CRG


Railway equipment makers have started with the strong new order momentum since

4Q13; CSR has received new orders of Rmb58 bn. More encouraging than before is that

order mix has also improved substantially, with 90% for high margin products including

MUs and heavy locomotives, compared to only 21% at the trough in 2011 for CSR.

Figure 16: CSR new order mix (announced) Figure 17: CSR new order mix (announced)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013 2014YTD

Locomotive EMU Metro Passenger Wagon Wind Others

0%

20%

40%

60%

80%

100%

120%

2009 2010 2011 2012 2013 2014YTD

Locomotive+EMU Metro

Source: Company data Source: Company data

04 April 2014


After a few years of decent demand for new equipment, maintenance would pick up over

time (though from low base) as railway equipment need appropriate maintenance to

ensure reliable performance. Such revenue is recurring and generates better profit. This is

crucial for railway equipment makers who have suffered from huge earnings volatility, as a

result of over-dependence on demand for new equipment, in our view.

Figure 18: Definition of EMU maintenance

Level 3 Level 4 Level 5

CSR Distance (km) 60k 120k 240k

ASP (Rmb mn) Single digit ~10 tens

The other company Distance (km) 120k 240k 480k

ASP (Rmb mn) 14.5 29 NA

Source: Company data

Aging analysis for locomotives suggests ongoing replacement in two directions: from

electric to diesel ones and from old to new. There is still 45% of diesel locomotives of more

than 15 years old, indicating big room for upgrading. EMU is much younger, with 22% of

the total being no less than five years. This is a decent portion that potentially will need

maintenance.

Figure 19: Locomotive age estimate (2009) Figure 20: EMU age distribution (cars)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0~5 5~10 10~15 15~20 20~25 25~30 >30

Units

Diesel Electric

0

500

1000

1500

2000

2500

>5 5 4 3 2 1

Source: MOR, Credit Suisse estimates Source: MOR, MOT, Credit Suisse estimates

We believe urban rapid transit will become another area that offers strong growth in China

after the investment boom in high speed railways. This is consistent with China's

aggressive urbanisation plan. Margin is lower than that of EMUs and heavy duty

locomotives, with payment issues sometimes. BT (build and transfer) is a good approach

to enhance margins but adds pressure to cash flow and balance sheet, and requires

rigorous risk management.

China has undergone rapid urbanisation in the past three decades but its urbanisation rate

still lags behind that of developed countries, such as the United States, Canada, Germany,

the United Kingdom and France. We are confident that rail rapid transit systems in China

have enormous potential for expansion considering China’s large, densely populated

cities. Urban rapid transit can help effectively alleviate increasing traffic congestion in big

cities, providing an environmentally friendly mode of transport.

During 2006-10, China government has invested Rmb500 bn on urban railway systems,

and Rmb1.2 tn is planned to be spent during 2011-15. The total length of urban rail transit

04 April 2014


systems in China has grown from 621km in 2006 to over 2,500km in 2013 and is expected

to reach 3,000km by 2015. According to the China Association of Metros, the total length

of urban rail tracks completed in China is expected to reach 7,000km in 2020. As of the

end of 2013, the NDRC had approved the plans of urban rail rapid transit system in nine

cities with a total length of approximately 845km. The increase in operational length of the

urban rapid transit network should drive the demand for urban rapid transit vehicles and

equipment in China.

Figure 21: China metro length (km) Figure 22: China metro cars ownership (units)

-

1,000

2,000

3,000

4,000

5,000

6,000

2004 2006 2008 2010 2012 2014E 2016E

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2009 2010 2011 2012 2013E

Source: NDRC, local government, Credit Suisse estimates Source: MOR, MOT, Yearbook of China Transportation and

Communications 2013, Credit Suisse estimates

The State Council has recently announced the New Urbanization Development Plan for

2014-20, in which the government targets to increase public transportation infrastructure

coverage in big cities from 45% in 2012 to 60% in 2020. China’s continuous urbanisation

will lead to large scale movement of population, which will increase demand for the public

transport system including the rail transport system.

Figure 23: China's new urbanisation plan (2014-2020)

Targets 2012 2020

Urbanisation level

Urbanisation ratio for permanent residents 52.6% ~60%

Urbanisation ratio for registered residents 35.3% ~45%

Infrastructure targets

Public transportation dependence in the cities with population over 1 million 45% 60%

Water supply coverage 81.7% 90%

City sewage treatment rate 87.3% 95%

Decontamination rate of urban waste 84.8% 95%

Community service coverage 72.5% 100%

Source: State Council

CSR is one of the two major domestic metro car producers in China, because only rapid

transit projects with average domestic production rate of all railway vehicles and

electromechanical equipment of any rapid transit project being no less than 70% will be

approved by the government. Production capacity ramped up quickly in the past few

years, reaching around 4,000 cars per year in aggregate in the country by end-2012, as a

result of a favourable market outlook. Many of these capacities were built near client cities,

a means for local governments to improve employment and stimulate GDP. Many orders

04 April 2014


were placed in 2011 and 2012 but delivery is scheduled several years later, subject to

government funding and construction progress. We expect utilisation to gradually improve

from 50-75% currently, as more metro lines would be put into operation by 2016 and

orders enter into delivery time.

Local governments are responsible for investment and funding for metro and urban rapid

transit. Margins tend to be thinner than that of EMUs and heavy duty locomotives, with

payment pressure from time to time. We agree that BT is a competitive business model to

win market share of metro car manufacturing by partnering with constructors and offer

better margins, in the context of tight local government funding. However, balance sheet

and cash flow would be under pressure, which requires robust risk management.

04 April 2014


Stimulus offers upside to slowing railway infrastructure We believe that China needs to invest more in the West and also cargo lines in the future

and see room for upward revision when the government needs a stimulus package to

pump up a weakening economy. Railway is always a good candidate to help pump up the

economy as it consumes a lot of raw materials and employs many people, as was the

case in late-2008. The National Development and Reform Committee (NDRC) released

project approvals for a batch of five railway project approvals on 13 March 2014, with a

total amount of Rmb142 bn, followed by Premier Li's announcement to establish a railway

development fund of Rmb200-300 bn p.a. aimed at outside investors. Dong Tao, our chief

economist for non-Japan Asia, considered this "the beginning of a minor stimulus" in his

recent note "Railway projects approved: Stimulus on the way?" Without it, railway

infrastructure spending should remain unexciting in 2014 and 2015, with potential

downside risk after 2015 when most of high speed railways have been built. Rmb600 bn

infrastructure spending per annum appears a high base to beat.

Headwinds should remain strong as infrastructure spending tends to slow down. Transport

FAI has been trending down since October 2013 and turned to slower growth than total

FAI. Among them, railway FAI is always a big swing factor and has dragged down

transport FAI, after peaking in October 2012. On the other hand, there exists upside for

railway infrastructure spending if the economy collapses. The government had tried to

pump up the economy in the midst of 2008 financial crisis. Infrastructure spending

naturally spruces up raw material consumption and delivers full employment.

Vincent Chan, our China Strategist, in his February 2014 China HK Chronicles "Settle the

debt", sees "a rise in political pressure on local governments to curtail the growth of future

debt…Provinces which borrowed a lot of money should feel more de-leveraging pressure

compared to others, but amid the current focus on debt control, every province/city is

expected to become very cautious in borrowing more money. Given that local government

debt is a major funding source for infrastructure investment, the reduction in local

government borrowing will likely trigger a slowdown in infrastructure investment, which has

been a major growth driver over the past few years". Infrastructure spending (including

ports, highways, metro and other civil engineering) is largely financed by local

governments.

04 April 2014


Figure 24: Transportation subsectors FAI 3 mma YoY

growth

Figure 25: FAI growth and transportation FAI growth (3

mma)

-100%

-50%

0%

50%

100%

150%

Jan-06 Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12 May-13

FAI railway FAI road FAI non rail

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%


FAI transport FAI

Source: CEIC, Credit Suisse research Source: CEIC, Credit Suisse research

Dong Tao, our chief economist for non-Japan Asia, pointed out in his report dated 29

January 2014, that GDP growth might have peaked in 3Q13 and revised 1Q14 growth

forecast to 6.0% QoQ from 7.4%, and to 7.3% from 7.7% in YoY terms. Therefore, he

revised down 2014 full-year growth forecast from 7.7% to 7.3%. He expects Beijing to take

action to boost growth eventually, but the threshold for stimulus is likely to be higher. He

also thinks President Xi is keen to focus on reforms even at the expense of slower growth,

provided the slowdown does not derail social stability. The weaker-than-expected Flash

PMI reading suggests the current growth slowdown is probably worse than the market

expectation, however, in line with our recent downgrade of GDP growth forecast. The

weak and deteriorating PMI readings support our view that current growth in China is

probably as low as 6.0% (on a seasonally adjusted, quarter over quarter annualised basis).

Figure 26: HSBC flash PMI Figure 27: Credit Suisse IP momentum

30

35

40

45

50

55

60

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

-10

-5

0

5

10

15

20

25

30

Jan-

02

Aug

-02

Mar

-03

Oct

-03

May

-04

Dec

-04

Jul-0

5

Feb

-06

Sep

-06

Apr

-07

Nov

-07

Jun-

08

Jan-

09

Aug

-09

Mar

-10

Oct

-10

May

-11

Dec

-11

Jul-1

2

Feb

-13

Sep

-13

Source: CEIC Source: Credit Suisse estimates

04 April 2014


Railway reform to unlock huge value if executed well We believe that on-going MOR reform, despite certain delays after split of regulatory

functions in Mar 2013, will continue to drive forward and unlock the huge value. The recent

case in Sinopec (opening its marketing segment to external investors, to add value to

shareholders) is hugely positive and we expect the railway sector to likely follow the steps.

Undoubtedly MOR reform is crucial to the whole railway industry, after decades of little

opening and reform. If executed well, we expect the reform to unleash huge upside and

unlock value and efficiency that was long buried in bureaucracy. Equally important, the

reform will consequently benefit the overall economy by providing cost effective and

environment friendly mode of transports.

We expect visibility for orders and pricing transparency to improve substantially (of course

from a low base) as a result of higher clarity in regulatory regime and independence in

investment decision, budgeting and procurement. Late payment issue in terms of timing

and consistency (currently a big headache for all product and service providers involved)

will gradually improve as clients are less concentrated and behave professionally.

We believe China Railway Corporation (previously MOR) and Central Government are

very keen to introduce new investors, opening up to the private sector, a view that was

reinforced by Premier Li's speech on National Congress on 6 March, 2014. What

happened to Sinopec in opening the market segment to external investors would be a

good case to copy. We would not be surprised to see CRC open its long shut door as well.

Of course private investors need to understand better the profit/return formulae and their

role and influence on the entity before they are committed to investment into this strategic

area.

Listing of attractive operating assets owned by CRC, e.g., high speed railway lines like

Beijing-Shanghai and Wuhan-Guangzhou would be well sought after. Asset injection to

existing listed vehicle is also an alternative. Recent cargo price hike not only helps

improve profitability of railway cargo operators hence enhance return on assets, but also

confirms the commitment of central government towards the long-awaited Railway reform.

Railway reform is of greater urgency when balance sheet of MOR (now CRC) is

deteriorating as a result of low ticket price, huge fixed cost and constantly heavy capex.

CRC remains underfunded, with total debt or gearing rising constantly. The recent bond

issuance has demonstrated the rising funding cost. However, we don’t believe it will

default given implicit central government's endorsement. Ticket price hike, post-

restructuring efficiency gain and capital injection are necessary to lead to a sustainable

CRC operation.

04 April 2014


Figure 28: MOR/CRC debt issuance interest rate Figure 29: MOR/CRC debt and gearing (Rmb bn)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

7Y 10Y

0%

20%

40%

60%

80%

100%

120%

140%

-

500

1,000

1,500

2,000

2,500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 3Q13

Debt (Rmb bn) Net gearing (RHS)

Source: MOR, CRC Source: MOR, CRC

Ticket price hike is a good starting point for railway reform and would undoubtedly bode

well for all the parties involved. Passenger pricing outlook remains uncertain in the near

term, however, cargo prices have been raised several times, further evidenced in the

recent 13% increase dated in 14 Feb, 2014. We believe that passenger ticket price will

tend to rise to provide an appropriate cost/benefit or investment return to external

investors. Historically passenger ticket price has been kept low to provide inter-provincial

transport as cheap as possible. Passenger price has only seen a 2% CAGR since 1955

with no change since 1995, while cargo price has done relatively better with a 7% CAGR

since 2003.

Figure 30: Passenger tariff basic rate (Rmb/ person km;

2% CAGR since 1955)

Figure 31: Class 4 cargo rate (Rmb/t; 7% CAGR since

2003)

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

Jun-55 Jun-62 Jun-69 Jun-76 Jun-83 Jun-90 Jun-97 Jun-04 Jun-11

0

2

4

6

8

10

12

14

16

18

Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

We apprehend the fact that passenger ticket price is always a sensitive issue in China with

its long history of subsidisation. However, it should be a good idea to start attracting

business and leisure travellers by providing competitive travel service versus airliners and

roads. Obviously high speed railway provides an excellent solution. With inter-change to

04 April 2014


Metro, airline and other ground transport to be further improved, we are confident to see

high speed railway attract more people who are willing to pay a premium for comfort and

punctuality. Unexpected flight delays over time have pushed people to travel on high

speed railway.

04 April 2014


CSCI to benefit from new urbanization program on the back of its unique business model New urbanization programs initiated by this government will be the next driving force for

infrastructure investment, in the longer term, in our view. The State Council recently has

set out a series of targets in the New Urbanization Plan (2014-2020), in order to stimulate

domestic demand, facilitate industry upgrade, and support healthy economic development

in different regions. Housing, education, healthcare, pension, infrastructure, and resources

are the specific targets to execute in the next fifteen years. Among the urbanisation targets,

the government gives special attention to shanty town alternation, the focus area of

CSCI's affordable housing business.

Figure 32: China's new urbanisation plan (2014-2020)

Targets 2012 2020

Urbanisation level

Urbanisation ratio for permanent residents 52.6% ~60%

Urbanisation ratio for registered residents 35.3% ~45%

Coverage ratio of affordable housing for permanent residents in urban areas 12.5% >23%

Infrastructure targets

Public transportation dependence in the cities with population over 1 million 45% 60%

Water supply coverage 81.7% 90%

City sewage treatment rate 87.3% 95%

Decontamination rate of urban waste 84.8% 95%

Community service coverage 72.5% 100%


China government targets to have 36 mn units of affordable housing completed during

2011-15. By the end of 2013, 15 mn units have been completed (42% of target) and a

cumulative 25 mn units have started construction (~70% of target). Premier Li Keqiang

announced of 7 mn units of new starts and 4.8 mn units of completion in 2014, leaving 4

mn units to be started in 2015 to hit the target.

04 April 2014


Figure 33: Annual new start of affordable housing

construction to meet 12th

five year plan target (mn units)

-

2.0

4.0

6.0

8.0

10.0

12.0

2011 2012 2013 2014E 2015E


Figure 34: Definition of affordable housing

Type Ownership Target Operation Pricing

Economic housing Private Mid-low income group Developer <50% of market price

Price-limit housing Private Mid-low income group & special group Developer <80% of market price

Low-rental housing Public Lowest income group Government <10% of market price

Public rental housing Public Low income group Government 30-80% of market price

Relocation housing Private Relocated households & residents in shanty towns Government Compensated proportionally

Source: MoHURD

Local government debts have grown to the level that makes further leverage difficult for

local governments. When BT financing is also categorized as local government debt

implicitly, BOT, TOT and PPP (or other equity participation) are good alternatives to fund

needed infrastructure, without adding further pressure to the existing debt burden. Vincent

also pointed out "apart from borrowing fewer new loans, another way for local

governments to bring down debt is through selling existing assets to repay debt. As the

central government is encouraging a more hybrid ownership of assets currently dominated

by the state sector, it is entirely possible for the local governments to become more

aggressive in selling down their assets, including land and other operating assets, to repay

part of their existing debt".

This would provide great opportunities for the companies with strong balance sheet,

access to cheap funding and foreign identity like CSCI to cherry pick fundamentally sound

projects with reasonable return. CSCI is well positioned to benefit from this secular trend,

in our view, not only through getting construction works but also expanding margins

through BT, BOT, TOT and PPP.

04 April 2014


Stock calls We like stocks at the back end that will continue to enjoy a strong order flow with

potentially increasing contribution in recurring earnings (like maintenance), including

Hollysys, CSR and Zhuzhou CSR. We rate CRG and CRCC with OUTPERFORM as they

are the major beneficiaries of the government stimulus plan with focus on railway. CSCI

stands out among constructors due to its unique business model that strikes a good

balance between profitability and cash flow, and is well positioned to benefit from the

newly initiated urbanization plan.

CSCI (OUTPERFORM; TP: HK$17.3)

CSCI offers a well-managed exposure to growing affordable housing market in China, in

addition to a healthy proxy for Hong Kong/Macau's solid infrastructure and property

investment. Given its strong balance sheet, access to cheap funding, solid risk management

and appropriate incentive in place, CSCI would continue to add value to shareholders.

Hollysys (OUTPERFORM; TP: US$29.1)

We believe Hollysys is well positioned to benefit from secular growth in China's automation

market and overseas market expansion, driven by strong R&D, sound track record and

good financial discipline. The railway segment will contribute strong revenue/earnings

growth given fast delivery near term, with overseas market offering additional growth. We

believe the current valuation of 14.6x/12.9x FY14/15E PE with 23% earnings CAGR in

FY13-16 is attractive, with upside surprise from new product launches.

CSR (OUTPERFORM; TP: HK$8.1)

We are confident of CSR's growth outlook on recent strong order improving its product mix.

The resumption of CRC tender, in particular EMUs, will support margin expansion, and

increasing demand from train maintenance will offer more sustainable earnings in the long

term to equipment makers who used to have volatile growth profile, in our view. Recent

success in the export market should add further growth momentum.

CRCC (OUTPERFORM; TP: HK$9.2)

We believe it is the right time to buy CRCC for its cheap exposure to stimulus plan with

focus on railway. Infrastructure spending (esp. railway) naturally spruces up raw material

consumption and delivers full employment.

CRG (OUTPERFORM; TP: HK$4.85)

We initiate CRG with an OUTPERFORM rating given its improvement in cost control and

financial management, attractive valuation and a good proxy to stimulus plan with focus on

railway. Currently, the stock trades at historical low-end of valuation range of 7x 2014 PE.

ZZCSR (NEUTRAL; TP: HK$28.9)

We like ZZCSR's good positioning in the whole food chain and its light asset business

model. However, we believe the new IGBT line leased from the parent company will add

near-term earnings pressure, before it generates sizeable revenue and cost saving by

2017. Our DCF-based target price of HK$28.9 implies 16.8x 2014PE, largely in line with its

historical trading average.

CCCC (NEUTRAL; TP: HK$6.0)

We initiate coverage on CCCC with a NEUTRAL rating and target price of HK$6.0

implying 6.0x PE2014E on 7% EPS CAGR for 2014-16E. We expect new orders/revenue

to rebound in 2014 from a tight 2013, with gross margin to be normalised after the big loss

realised in railway construction. However, CCCC will have to grow slowly given stretched

balance sheet. Despite its cheapness, there are very few catalysts in the near term, in our

view.

04 April 2014


Appendix

Figure 35: Backlog coverage comparison (backlog to sales)

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CSR Hollysys-rail segment CCCC CRG CRCC

2009 2010 2011 2012 2013

Source: Company data, Credit Suisse estimates *Hollysys data are in fiscal years ended Jun

Figure 36: Constructors' interest expense % of

EBIT(trailing 12M)

Figure 37: Constructors net gearing

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

CCCC CRC CRG

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

CCCC CRC CRG


04 April 2014


Figure 38: Operating cash flow (trailing 12M, Rmb bn) Figure 39: Free cash flow (trailing 12M, Rmb bn)

(20)

(15)

(10)

(5)

-

5

10

15

20

25

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

CCCC CRC CRG

(35)

(30)

(25)

(20)

(15)

(10)

(5)

-

5

10

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13

CCCC CRC CRG


Figure 40: Railway equipment's interest expense % of

EBIT

Figure 41: Railway equipment net gearing

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13

CSR Zhuzhou CSR Hollysys

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13

CSR Zhuzhou CSR Hollysys





04 April 2014

Asia Pacific/Hong Kong

Equity Research

Engineering & Construction

China State Construction International Holdings (3311.HK / 3311 HK)

INITIATION

Leverage on a smart business model

■ A smart business model. We initiate coverage on China State Construction

International (CSCI) with an OUTPERFORM rating and a DCF-based target

price of HK$17.3 (27% potential upside). CSCI offers a well-managed

exposure to the growing affordable housing market in China, in addition to

being a healthy proxy to Hong Kong/Macau's solid infrastructure and

property investment. Given its strong balance sheet, access to cheap

funding, solid risk management and appropriate incentives in place, CSCI

should continue to add value to shareholders.

■ Investment in China to provide strong growth. We expect CSCI's

investment business to continue to grow strongly with good margins,

supported by cash-generating HK/Macau operations and cheaper overseas

funding. With robust risk management in place, CSCI's investment business

has done well and contributed greatly to earnings growth, on the back of a

combination of (1) peerless local knowledge; (2) strong parent support; (3)

leverage to win projects as a foreign company; (4) robust risk management

in place and (5) a solid management team with excellent track record.

■ HK/Macau construction as cash cow with decent growth. Hong

Kong/Macau cash construction should remain resilient given significant

investment plans in Hong Kong and Macau. This generates strong cash flows

which in turn support mainland China's high margin investment business.

■ Risk management/funding cost as the key for success. Risk management

on project selection, execution and receivable collection, on top of access to

cheap funding, is the key element to success. We expect a cash flow

breakdown in 2015 with gearing likely to stabilise at ~50%.

Share price performance

80

130

180

6

11

16

Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the

HANG SENG INDEX which closed at 22565.08 on 03/04/14

On 03/04/14 the spot exchange rate was HK$7.76/US$1

Performance Over 1M 3M 12M Absolute (%) 4.9 -0.6 32.7 — Relative (%) 5.3 0.5 31.7 —

Financial and valuation metrics

Year 12/13A 12/14E 12/15E 12/16E Revenue (HK$ mn) 27,191.9 34,596.9 42,656.4 47,312.7 EBITDA (HK$ mn) 3,585.7 4,807.1 5,808.1 6,688.4 EBIT (HK$ mn) 3,149.8 4,267.7 5,220.1 6,070.3 Net profit (HK$ mn) 2,772.1 3,507.7 4,256.7 4,985.7 EPS (CS adj.) (HK$) 0.71 0.90 1.09 1.28 Change from previous EPS (%) n.a. Consensus EPS (HK$) n.a. 0.92 1.14 1.35 EPS growth (%) 24.4 26.5 21.4 17.1 P/E (x) 19.1 15.1 12.4 10.6 Dividend yield (%) 1.5 2.0 2.4 2.8 EV/EBITDA (x) 15.0 12.1 10.3 9.2 P/B (x) 3.3 2.8 2.4 2.1 ROE (%) 18.7 20.1 21.2 21.3 Net debt/equity (%) 4.0 27.0 32.3 32.8

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* Price (03 Apr 14, HK$) 13.62 Target price (HK$) 17.30¹ Upside/downside (%) 27.0 Mkt cap (HK$ mn) 52,965 (US$ 6,828) Enterprise value (HK$ mn) 58,074 Number of shares (mn) 3,888.74 Free float (%) 42.9 52-week price range 14.7 - 10.0 ADTO - 6M (US$ mn) 9.2

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Edmond Huang, CFA

852 2101 6701

[email protected]

Baiding Rong

852 2101 6703

[email protected]

04 April 2014

China State Construction International Holdings (3311.HK / 3311 HK) 23

China State Construction International Holdings Li 3311.HK / 3311 HK Price (03 Apr 14): HK$13.62, Rating: OUTPERFORM, Target Price: HK$17.30, Analyst: Edmond Huang

Target price scenario

Scenario TP %Up/Dwn Assumptions Upside Central Case 17.30 27.02 Downside

Key earnings drivers 12/13A 12/14E 12/15E 12/16E

— — — — — — — — — — — — — — — — — — — —

Income statement (HK$ mn) 12/13A 12/14E 12/15E 12/16E

Sales revenue 27,192 34,597 42,656 47,313 Cost of goods sold 23,457 29,363 36,280 39,880 SG&A 1,017 1,273 1,472 1,688 Other operating exp./(inc.) (867.2) (845.9) (903.5) (943.7) EBITDA 3,586 4,807 5,808 6,688 Depreciation & amortisation 435.8 539.4 588.0 618.1 EBIT 3,150 4,268 5,220 6,070 Net interest expense/(inc.) 409.3 592.7 720.0 784.0 Non-operating inc./(exp.) — — — — Associates/JV 452.2 520.0 598.0 687.7 Recurring PBT 3,193 4,195 5,098 5,974 Exceptionals/extraordinaries — — — — Taxes 499.4 669.7 820.0 963.3 Profit after tax 2,693 3,525 4,278 5,011 Other after tax income — — — — Minority interests (78.9) 17.6 21.4 25.1 Preferred dividends — — — — Reported net profit 2,772 3,508 4,257 4,986 Analyst adjustments — — — — Net profit (Credit Suisse) 2,772 3,508 4,257 4,986

Cash flow (HK$ mn) 12/13A 12/14E 12/15E 12/16E

EBIT 3,150 4,268 5,220 6,070 Net interest 409.3 592.7 720.0 784.0 Tax paid (499.4) (669.7) (820.0) (963.3) Working capital (3,282) (4,785) (4,402) (4,125) Other cash & non-cash items (973.5) 198.0 (389.7) (433.8) Operating cash flow (1,195) (397) 328 1,332 Capex (937) (2,547) (443) (447) Free cash flow to the firm (2,132) (2,944) (115) 885 Disposals of fixed assets — — — — Acquisitions (40.1) — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 384.9 145.4 144.9 144.8 Investing cash flow (592) (2,402) (298) (302) Equity raised — — — — Dividends paid (817) (1,052) (1,277) (1,496) Net borrowings 2,591 4,363 2,000 1,200 Other financing cash flow (366.0) (592.7) (720.0) (784.0) Financing cash flow 1,409 2,718 3 (1,080) Total cash flow (378.4) (80.1) 33.0 (49.8) Adjustments — — — — Net change in cash (378.4) (80.1) 33.0 (49.8)

Balance sheet (HK$ mn) 12/13A 12/14E 12/15E 12/16E

Cash & cash equivalents 8,116 8,036 8,069 8,019 Current receivables 8,654 12,588 17,513 20,190 Inventories 163.4 204.6 252.8 277.9 Other current assets 10,932 2,314 3,033 3,222 Current assets 27,866 23,142 28,868 31,708 Property, plant & equip. 2,342 2,463 2,554 2,615 Investments 3,967 6,705 7,407 8,213 Intangibles 7,342 7,114 6,887 6,659 Other non-current assets 9,319 14,961 17,183 20,061 Total assets 50,837 54,386 62,899 69,257 Accounts payable 8,565 9,113 11,260 12,377 Short-term debt 236 2,000 3,000 3,000 Current provisions — — — — Other current liabilities 12,163 8,154 9,330 9,746 Current liabilities 20,965 19,267 23,590 25,123 Long-term debt 8,544 11,144 12,144 13,344 Non-current provisions — — — — Other non-current liab. 4,894 5,068 5,257 5,367 Total liabilities 34,403 35,479 40,991 43,833 Shareholders' equity 16,181 18,636 21,616 25,106 Minority interests 343.1 253.2 270.9 292.3 Total liabilities & equity 50,927 54,368 62,878 69,232

Per share data 12/13A 12/14E 12/15E 12/16E

Shares (wtd avg.) (mn) 3,888 3,888 3,888 3,888 EPS (Credit Suisse) (HK$)

0.71 0.90 1.09 1.28 DPS (HK$) 0.21 0.27 0.33 0.38 BVPS (HK$) 4.16 4.79 5.56 6.46 Operating CFPS (HK$) (0.31) (0.10) 0.08 0.34

Key ratios and valuation

12/13A 12/14E 12/15E 12/16E

Growth(%) Sales revenue 24.1 27.2 23.3 10.9 EBIT 34.1 35.5 22.3 16.3 Net profit 30.1 26.5 21.4 17.1 EPS 24.4 26.5 21.4 17.1 Margins (%)

EBITDA 13.2 13.9 13.6 14.1 EBIT 11.6 12.3 12.2 12.8 Pre-tax profit 11.7 12.1 12.0 12.6 Net profit 10.2 10.1 10.0 10.5 Valuation metrics (x) P/E 19.1 15.1 12.4 10.6 P/B 3.27 2.84 2.45 2.11 Dividend yield (%) 1.54 1.99 2.41 2.82 P/CF (44) (133) 161 40 EV/sales 1.97 1.68 1.41 1.30 EV/EBITDA 15.0 12.1 10.3 9.2 EV/EBIT 17.0 13.6 11.5 10.1 ROE analysis (%) ROE 18.7 20.1 21.2 21.3 ROIC 15.5 17.4 16.5 16.2 Asset turnover (x) 0.53 0.64 0.68 0.68 Interest burden (x) 1.01 0.98 0.98 0.98 Tax burden (x) 0.84 0.84 0.84 0.84 Financial leverage (x) 3.08 2.88 2.87 2.73 Credit ratios Net debt/equity (%) 4.0 27.0 32.3 32.8 Net debt/EBITDA (x) 0.19 1.06 1.22 1.24 Interest cover (x) 7.70 7.20 7.25 7.74


0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

04 April 2014


Leverage on a smart business model We initiate coverage on China State Construction Int'l (CSCI) with an OUTPERFORM

rating and a DCF-based target price of HK$17.3 (27% potential upside). We believe that

CSCI offers a well-managed exposure to the growing affordable housing market in China,

in addition to being a healthy proxy to Hong Kong/Macau's solid infrastructure and

property investment. We expect CSCI to continue to grow strongly on the back of resilient

Hong Kong/Macau cash construction which in turn supports mainland China's high margin

investment business. Given its strong balance sheet, access to cheap funding, solid risk

management and appropriate incentives in place, CSCI would continue to add value to

shareholders.

Figure 42: 2013 revenue mix Figure 43: 2013 revenue mix

HK construction41%

CN construction4%

Macau construction

3%

Overseas construction

0%

BT - affordable housing

23%

BT & B of BOT - infrastructure

21%

Operation (TOTO/TO & O

of BOT)3%

FEG Group5%

Construction48%

Infrastructure investment

47%

FEG Group5%

Source: Company data Source: Company data, Credit Suisse estimates

Investment business in China to provide growth

Apart from the traditional infrastructure construction business in mainland China, CSCI has

started penetrating into the investment business since 2009. With robust risk management

in place, CSCI's investment business has done well and contributed greatly to earnings

growth, on the back of a combination of (1) peerless local knowledge; (2) strong parent

support; (3) leverage to win projects as a foreign company; (4) robust risk management in

place; and (5) a solid management team with an excellent track record. The investment

business provides CSCI with strong growth in new orders and revenue, with better

margins than those of pure cash construction. Unsurprisingly, it needs a strong balance

sheet to support such growth given cash flows lagging behind accrued profit.

CSCI has established a smart business model that leverages its strong balance sheet and

access to cheap funding offshore to cherry pick good projects that generate decent returns

over time in mainland China. Management targets project IRRs of no less than 20% and

12% for BT and BOT/TO/TOT, respectively.

04 April 2014


Figure 44: SHIBOR vs HIBOR (%, 3M)

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

SHIBOR (3M) HIBOR (3M)

Source: the BLOOMBERG PROFESSIONAL™ service

Figure 45: HK government bond yield (%) Figure 46: China nominal lending rate (%)

0

1

2

3

4

5

6

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

Jan-00 Aug-01 Mar-03 Oct-04 May-06 Dec-07 Jul-09 Feb-11 Sep-12

1Y lending rate (%) 5Y leading rate (%)

Source: the BLOOMBERG PROFESSIONAL™ service Source: PBOC

The interest spread between China mainland and Hong Kong provides great opportunities

for the companies with strong balance sheet, access to cheap funding and foreign identity

like CSCI to cherry pick fundamentally sound projects with reasonable returns. CSCI is

well positioned to benefit from this secular trend, in our view. CSCI secured new affordable

housing BT projects of Rmb15 bn in 2013, registering 23% YoY growth from 2012.

Affordable housing projects accounted for 34% of backlog in 2013 compared with 20% in

2011 and 28.5% in 2012.

04 April 2014


Figure 47: New order breakdown (HK$ bn)

0

5

10

15

20

25

30

35

40

45

50

2010 2011 2012 2013 2014YTD

HK construction CN construction Macau construction BT - affordable housing Infrastructure FEG Group


Hong Kong and Macau construction as cash cow

with decent growth

Hong Kong/Macau cash construction should remain resilient given significant investment

plans there. This will remain a cash cow which in turn supports mainland China's high-

margin investment business. It generally offers 7-10% gross margin for HK and Macau,

but very good cash flow.

Strong infrastructure construction market in Hong Kong

The HK government expects total public expenditure to see a 3.5% CAGR during FY13-18,

of which ~20% is likely for infrastructure. With the advent of peaking construction of ten

mega infrastructure projects, the government expects a 4.7% YoY increase in

infrastructure spending in 2014-15 to HK$78 bn, and may further increase in 2015-16. For

residential construction, the government targets 34 residential sites capable of providing

about 15,500 units, of which 24 are new sites, as per the 2014-15 Land Sale Programme.

Public housing will take up 60% of the new housing starts.

04 April 2014


Figure 48: Major infrastructure projects in Hong Kong

Projects HK$ bn Expected completion

Railway projects

South HK Island MTR 7.0 2015

Shatin to Central Link 37.4 2020

Guangzhou-Shenzhen-HK High Speed Railway 60.0 2015

HK-Shenzhen Airport Railway Link 2020

West Island Line 15.4 2014

Kwung Tong Line Extension 5.4 2015

Road & bridge projects

HK-Macau-Zhuhai Bridge 72.6 2016

Tuen Mun Western Bypass & Tuen Mun-Chek Lap Kok Link 20.0 2016/2017

Central-Wanchai Bypass & Island Eastern Corridor 36.0 2017

Other infrastructure projects

Widening of Tolo Highway / Fanling Highway 4.3 2018

Central-Kowloon Route planning

Tseung Kwan O-Lam Tin Tunnel planning

Tseung Kwan O Cross Bay Link planning

Kai Tak Redevelopment 130.0 2021

West Kowloon Culture Centre 2030

Development of Lok Ma Chau Loop (HK-Shenzhen Border) 2020

New Development Areas 2024

HK airport upgrade 100.0 2023

Source: HKSAR government, Credit Suisse estimates

Macau casino capacity addition to continue

We are confident on the Macau construction market, given the strong casino project

pipeline and potential residential, infrastructure and supporting construction works. We see

a major casinos plan to continue to expand capacity, on the back of continuous traffic

growth. We estimate nine projects operated by leading casinos (Galaxy, Wynn, MGM,

SJM, etc.) totalling over HK$200 bn will be launched by 2017. Our Macau gaming

research team forecasts gaming tables in big six casinos (Galaxy, MPEL, Sands, MGM,

Wynn, SJM) will have a 12% CAGR during 2014-17.

Figure 49: Upcoming casino projects in Macau

Upcoming projects Operator Opening date Gaming tables Slots machines Hotel rooms Budget capex

Galaxy Macau II Galaxy mid-2015 500 1,000 3,600 HK$19.6bn

Studio City MPEL mid-2015 450 1,500 1,650 US$2.6bn

Parisian Macao Sands China late-2015 450 2,500 3,000 US$2.7bn

Wynn Cotai Wynn Macau 1H2016 400 1,500 1,700 HK$32.5bn

MGM Cotai MGM China 1H2016 500 2,500 1,600 HK$24.25bn

Galaxy Macau III & IV Galaxy 2016-18 1000 3,000 5,500 HK$50-60bn

SJM Cotai (North) SJM 2017 700 1,000 2,000 HK$30bn

Louis XIII MPEL/Louis XIII 2016 66 150 246 US$1.06bn

Macau Fisherman's Wharf MLD/Louis XIII 2014-16 350 2,000 1,246 HK$7.9bn


04 April 2014


Figure 50: Number of gaming tables of major casinos in Macau

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-

2,000

4,000

6,000

8,000

10,000

12,000

2013 2014E 2015E 2016E 2017E 2018E

Galaxy MPEL Sands China MGM

Wynn Macau SJM YoY growth (RHS)


Risk management and funding cost key to success

We believe that CSCI has set up a great business model to strike an excellent balance

between growth and cash flows. To make it sustainable, robust risk management and

smart financial management in place are crucial. Our cash flow analysis suggests CSCI

has done a great job in managing the risks in the context of its vast expansion in

investment in infrastructure and affordable housing through BT, BOT and TOT. Initial

impression for CSCI would be further deterioration of cash flows when it grows domestic

investment business aggressively. However, we like to argue that CSCI has improved

OpCF in the investment business since 2013, with cash inflow offsetting large outflow.

Equally important, HK/Macau operations have constantly generated decent cash flows,

especially in 2013 when it encouragingly doubled OpCF. We expect CSCI to achieve

OpCF breakeven in 2015.

Figure 51: OpCF breakdown (HK$ mn) Figure 52: OpCF and Free CF (HK$ bn)

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

2010 2011 2012 2013

Total OpCF

OpCF from HK/Macau businesses

OpCF from investment businesses in CN

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

2010 2011 2012 2013 2014E 2015E 2016E

OpCF Free CF


04 April 2014


We are encouraged to witness early repurchase of some BT projects that have contributed

greatly to cash flows. We estimate that CSCI has managed to collect proceeds ahead of

schedule for ~25% BT projects since 2011. Payment for Tangshan project was received

on schedule, demonstrating excellent execution and risk management of the company.

Sound financial management with good access to cheap funding offshore are another key

element for a sustainable business model. With strong cash flows in Hong Kong and

Macau, we expect CSCI to continue to borrow cheaply, unless excess liquidity in Hong

Kong disappears suddenly overnight. As long as funding cost and its availability in

mainland China remain high relative to Hong Kong, CSCI can continue to enjoy decent

margins for its domestic investment business.

Valuation

We use DCF to value the stock, as we believe CSCI will register positive free cash flows

shortly in 2-3 years when its BT projects enter the payment stage. Our DCF-based target

price of HK$17.3 implies 19.2x/15.8x 2014E/2015E P/E, supported by a 22% earnings

CAGR during 2014-16 and a consistent dividend payout of 30%. We assign a 7.5%

terminal EBIT margin. CSCI currently enjoys >10% EBIT margin, higher than traditional

constructors (5-6%) due to the benefit from interest spread between HK and mainland

China, as well as its solid cost management. We assume this spread will gradually fade in

the long term but CSCI's cost advantage will continue to bring better-than-peer EBIT

margins. We use a 2% terminal growth rate and a WACC of 7.1%, based on a 10.5% cost

of equity and a 6% cost of debt.

Figure 53: CSCI 12M forward P/E valuation Figure 54: CSCI 12M forward P/B valuation

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


[email protected] [email protected] +1 [email protected] -1 [email protected]

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5


[email protected] Avg@2 +1 [email protected] -1 [email protected]

Source: the BLOOMBERG PROFESSIONAL™ service, Company

data, Credit Suisse estimates



Financials

We forecast CSCI net profit will grow 27%/21%/17% in 2014/15/16, on the back of

27%/23%/11% sales growth. Management guided for no less than 20% net profit growth in

2014.

04 April 2014


■ We expect the cash construction business sales to grow 34%/30%/5% in 2014/15/16,

driven by steady growth in HK and Macau, as a significant part of revenue could be

booked for the HK-Macau-Zhuhai Bridge and MGM projects.

■ We forecast the infrastructure investment segment sales will grow 21%/16%/18%,

mainly driven by affordable housing BT.

■ We forecast an 18% sales CAGR in 2014-16 for FEG.

■ We expect gross margin to expend from 12.4%/13.7% in 2012/13 to

15.1%/14.9%/15.7% in 2014/15/16, thanks to the strong growth of the affordable

housing BT project.

■ Rising operating expenses and finance expense will offset part of the benefit from

gross margin expansion, in our view. The company needs to continue to borrow to

fund its affordable housing BT growth in mainland.

Figure 55: Sales forecast (HK$ bn) and growth Figure 56: Net profit forecast (HK$ bn) and growth

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

5

10

15

20

25

30

35

40

45

50

2010 2011 2012 2013 2014E 2015E 2016E

Sales Sales growth YoY (RHS)

0%

10%

20%

30%

40%

50%

60%

-

1

2

3

4

5

6

2010 2011 2012 2013 2014E 2015E 2016E

Net profit Net profit growth YoY (RHS)


Figure 57: Gross margin, EBIT margin and net margin Figure 58: Backlog is able to cover 3Y sales (HK$ bn)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2010 2011 2012 2013 2014E 2015E 2016E

Gross margin EBIT margin Net margin

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

-

20

40

60

80

100

120

140

160

2010 2011 2012 2013 2014E 2015E 2016E

Backlog Backlog to sales (RHS)


04 April 2014


We expect new orders to be HK$61 bn in 2014, higher than management's guidance of

HK$55 bn, driven by the MGM project in Macau and steady growth of affordable housing

BT projects in mainland. We estimate backlog will amount HK$104 bn, being able to cover

more than three-year sales.

We expect rising but still reasonable financial leverage in the next 1-2 years. The company

will continue to invest heavily in the affordable housing BT market in mainland but

receivables will be collected over time on the back of strong government relationship and

robust risk management. Gearing will continue rising in 2014 to 47% from 28% in 2013 but

will stabilise at 50% in 2015 and 2016 when the company breaks even in cash flow in

2015.

Figure 59: Net gearing will continue to rise Figure 60: Interest expense % of EBIT

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2010 2011 2012 2013 2014E 2015E 2016E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2010 2011 2012 2013 2014E 2015E 2016E


Risks

■ Macro economy risk

The major risk comes from the uncertainties in the macro economy in China. CSCI

selects BT projects based on local governments' cash flows and repayment ability. If

the macro economy further slows and the local governments are negatively affected,

CSCI would have difficulty in collecting receivables on time.

■ Interest rate risk

CSCI earns above-industry profitability through its access to the low-cost financing. If

interest rates in HK rise to the narrow interest rate spread, CSCI would be negatively

affected and margins would be squeezed.

■ Client management risk

On-time receivable collection and careful client selection are critical in developing the

affordable housing BT business in mainland. Mismanagement would result in

deterioration of balance sheet.

■ Financing capability

CSCI's sustained growth relies on its financing capability in Hong Kong, project

selection ability in mainland, and stable cash inflow from the HK and Macau

businesses. If the HK/Macau business contracts and liquidity in Hong Kong gets tight,

CSCI would not grow at the pace as fast as we expected.




04 April 2014

Asia Pacific/China

Equity Research

Capital Goods

Hollysys Automation Technologies Ltd. (HOLI.OQ / HOLI US)

INITIATION

Grow strongly on two drivers

■ Initiating on Hollysys as sector top pick. We initiate coverage on Hollysys

with an OUTPERFORM rating and a DCF-based target price of US$29.10

(32.5% potential upside). We believe that Hollysys is well positioned to

benefit from secular growth in China's automation market and overseas

market expansion, on the back of strong R&D, a sound track record and

good financial discipline. We believe the railway segment will contribute

strong revenue/earnings growth given fast delivery in the near term, with the

overseas market offering additional growth. We believe that the current

valuation of 15x/13x FY14E/15E P/E with a 23% earnings CAGR for FY13-

16E is attractive, with upside surprise seen from new product launches. Key

risks include CRC tender slowdown and overseas execution risk.

■ Benefiting from fast high-speed rail completion. We expect the railway

business to be the key revenue and earnings drivers in the near term,

thanks to fast delivery as a result of rising high speed rail completion in

2014-15. Hollysys is one of only a few certified suppliers of ATP for EMUs

and with a strong track record of TCC for HSR. As a late cycle play, strong

sales and earnings growth could extend beyond FY15.

■ Market share expansion in automation. We expect the company will

continue expanding its domestic market share due to: (1) secular automation

demand given rising labour costs; (2) government support for local suppliers;

(3) its solid track record and increasing recognition within China; and (4) its

excellent capability of understanding client requirements and reacting quickly.

■ Overseas expansion and new product launches to provide further

growth. We expect Hollysys to leverage on its strong R&D capability and

the local resources of Concord and Bond in mechanical & engineering and

railway growth opportunities in South-East Asia and the Middle East.


60

110

160

010203040


The price relative chart measures performance against the S&P

500 INDEX which closed at 1890.9 on 02/04/14

On 02/04/14 the spot exchange rate was US$1./US$1

Performance over 1M 3M 12M Absolute (%) 9.8 22.2 93.1 — Relative (%) 9.8 24.9 92.1 —


Year 6/13A 6/14E 6/15E 6/16E Revenue (US$ mn) 349.1 528.4 615.1 709.4 EBITDA (US$ mn) 66.9 102.6 119.8 136.9 EBIT (US$ mn) 57.7 89.5 108.4 126.4 Net profit (US$ mn) 57.7 84.5 95.1 108.7 EPS (CS adj.) (US$) 1.02 1.51 1.70 1.94 Change from previous EPS (%) n.a. Consensus EPS (US$) n.a. 1.31 1.57 1.69 EPS growth (%) -3.5 47.5 12.5 14.4 P/E (x) 21.5 14.6 12.9 11.3 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 17.1 11.0 9.2 7.8 P/B (x) 3.0 2.5 2.1 1.8 ROE (%) 15.4 18.7 17.9 17.2 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates

Rating OUTPERFORM* Price (02 Apr 14, US$) 21.96 Target price (US$) 29.10¹ Upside/downside (%) 32.5 Mkt cap (US$ mn) 1,223 (US$ 1,223) Enterprise value (US$ mn) 1,132 Number of shares (mn) 55.70 Free float (%) 65.0 52-week price range 22.0 - 11.1 ADTO - 6M (US$ mn) 1.3




Research Analysts

Baiding Rong

852 2101 6703

[email protected]

Edmond Huang, CFA

852 2101 6701

[email protected]

04 April 2014

Hollysys Automation Technologies Ltd. (HOLI.OQ / HOLI US) 33

Hollysys Automation Technologies Ltd. HOLI.OQ / HOLI US Price (02 Apr 14): US$21.96, Rating: OUTPERFORM, Target Price: US$29.10, Analyst: Baiding Rong


Scenario TP %Up/Dwn Assumptions Upside

Central Case 29.10 32.51 350-400sets CRC EMU tenders per year and steady market share expansion in the industrial automation

Downside


Automation business growth

0.11 0.22 0.20 0.20 Railway business growth (0.18) 1.03 0.12 0.09 — — — — — — — — — — — —

Income statement (US$ mn) 6/13A 6/14E 6/15E 6/16E

Sales revenue 349.1 528.4 615.1 709.4 Cost of goods sold 225.4 356.0 408.9 469.4 SG&A 56.4 72.2 85.5 99.5 Other operating exp./(inc.) 0.3 (2.5) 0.9 3.6 EBITDA 66.9 102.6 119.8 136.9 Depreciation & amortisation 9.2 13.1 11.4 10.6 EBIT 57.7 89.5 108.4 126.4 Net interest expense/(inc.) (0.9) (0.3) (1.1) (2.5) Non-operating inc./(exp.) 1.7 0.2 0.2 0.2 Associates/JV 0.3 (1.3) (0.9) (0.5) Recurring PBT 60.6 88.7 108.8 128.5 Exceptionals/extraordinaries 5.6 10.9 4.7 1.9 Taxes 8.1 14.0 17.0 20.0 Profit after tax 58.1 85.6 96.5 110.4 Other after tax income — — — — Minority interests 0.5 1.2 1.4 1.7 Preferred dividends — — — — Reported net profit 57.6 84.5 95.1 108.7 Analyst adjustments 0.10 — — — Net profit (Credit Suisse) 57.7 84.5 95.1 108.7

Cash flow (US$ mn) 6/13A 6/14E 6/15E 6/16E

EBIT 57.7 89.5 108.4 126.4 Net interest — — — — Tax paid (8.1) (14.0) (17.0) (20.0) Working capital (30.6) (32.3) (34.2) (39.2) Other cash & non-cash items 11.7 0.4 (3.7) (7.4) Operating cash flow 30.7 43.7 53.5 59.8 Capex (9.1) (10.0) (8.0) (8.0) Free cash flow to the firm 21.6 33.7 45.5 51.8 Disposals of fixed assets — — — — Acquisitions (11.8) (5.5) (14.6) — Divestments 0.33 — — — Associate investments — (2.5) — — Other investment/(outflows) 8.5 (10.9) (6.4) (7.2) Investing cash flow (12.1) (29.0) (29.0) (15.2) Equity raised — — — — Dividends paid — — — — Net borrowings (4.7) (1.1) (20.0) (15.0) Other financing cash flow 0.97 — — — Financing cash flow (3.7) (1.1) (20.0) (15.0) Total cash flow 14.9 13.6 4.5 29.5 Adjustments 1.0 — — — Net change in cash 15.9 13.6 4.5 29.5

Balance sheet (US$ mn) 6/13A 6/14E 6/15E 6/16E

Cash & cash equivalents 112.2 125.8 130.3 159.9 Current receivables 340.7 459.3 527.4 601.5 Inventories 34.1 48.5 58.5 67.1 Other current assets 59.4 66.9 71.6 77.0 Current assets 546.4 700.6 787.8 905.5 Property, plant & equip. 79.5 87.6 101.5 99.8 Investments 19.8 21.0 20.1 19.6 Intangibles 77.6 72.0 69.3 68.4 Other non-current assets 21.3 37.9 56.0 78.5 Total assets 745 919 1,035 1,172

Accounts payable 116.9 167.1 188.3 206.0 Short-term debt 17.0 20.0 15.0 — Current provisions — — — — Other current liabilities 134.5 185.0 207.6 233.6 Current liabilities 268.5 372.2 411.0 439.6 Long-term debt 19.1 15.0 — — Non-current provisions — — — — Other non-current liab. 41.6 41.6 41.6 41.6 Total liabilities 329.2 428.8 452.6 481.2 Shareholders' equity 413.7 487.3 577.7 684.5 Minority interests 1.7 2.9 4.3 6.0 Total liabilities & equity 745 919 1,035 1,172


Shares (wtd avg.) (mn) 56.4 56.0 56.0 56.0 EPS (Credit Suisse) (US$)

1.02 1.51 1.70 1.94 DPS (US$) — — — — BVPS (US$) 7.4 8.7 10.3 12.2 Operating CFPS (US$) 0.54 0.78 0.95 1.07


6/13A 6/14E 6/15E 6/16E

Growth(%) Sales revenue 8.5 51.4 16.4 15.3 EBIT (11.8) 55.2 21.0 16.6 Net profit (2.5) 46.4 12.5 14.4 EPS (3.5) 47.5 12.5 14.4 Margins (%) EBITDA 19.2 19.4 19.5 19.3 EBIT 16.5 16.9 17.6 17.8 Pre-tax profit 17.4 16.8 17.7 18.1 Net profit 16.5 16.0 15.5 15.3 Valuation metrics (x) P/E 21.5 14.6 12.9 11.3 P/B 2.97 2.52 2.13 1.80 Dividend yield (%) — — — — P/CF 40.4 28.1 23.0 20.6 EV/sales 3.29 2.14 1.80 1.50 EV/EBITDA 17.1 11.0 9.2 7.8 EV/EBIT 19.9 12.6 10.2 8.4 ROE analysis (%) ROE 15.4 18.7 17.9 17.2 ROIC 16.3 20.4 21.1 21.4 Asset turnover (x) 0.47 0.57 0.59 0.61 Interest burden (x) 1.05 0.99 1.00 1.02 Tax burden (x) 0.88 0.86 0.85 0.85 Financial leverage (x) 1.79 1.87 1.78 1.70 Credit ratios Net debt/equity (%) (18.3) (18.5) (19.8) (23.2) Net debt/EBITDA (x) (1.14) (0.89) (0.96) (1.17) Interest cover (x) (64) (316) (100) (51)


0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

04 April 2014


Grow strongly on two drivers We view Hollysys as an R&D-driven company well positioned in industries that should

experience solid growth in FY14-15E. The railway segment is expected to benefit from

late-cycle strong equipment demand, while the industrial automation segment should grow

on an expanding market share on the back of China's low automation penetration. Its R&D

culture and growing track record could support overseas expansion. We believe that the

current valuation of 15x/13x 2014E/15E P/E with a 23% earnings CAGR from FY13-16E is

attractive, let alone additional new product launches in new markets.

Figure 61: Hollysys's revenue mix (US$ mn) Figure 62: Hollysys's backlog mix (US$ mn)

-

100

200

300

400

500

600

700

800

2009

2010

2011

2012

2013

FY

2014

E

FY

2015

E

FY

2016

E

Industrial automation Railway & subway Others

-

100

200

300

400

500

600

700

800

2008

2009

2010

2011

2012

2013

FY

2014

E

FY

2015

E

FY

2016

E

Railway Industrial automation M&E and others


Strong high-speed EMU equipment orders offer

earning visibility

We expect the strong railway-related business to be the most important earnings growth

driver on the back of EMU tenders, construction orders and new product launches in 2015-

16E.

Figure 63: Railway segment sales (US$ mn) and growth Figure 64: Railway backlog (US$ mn) and sales coverage

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-

50

100

150

200

250

2009

2010

2011

2012

2013

FY

2014

E

FY

2015

E

FY

2016

E

Railway & subway YoY (RHS)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-

50

100

150

200

250

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Backlog Backlog coverage (RHS)


04 April 2014


Train-borne EMU ATP sales to boom thanks to recovering demand and tenders

■ Hollysys has delivered better new order momentum in recent HSR equipment tenders.

In August and December 2013, two batches of EMU totalling 473 standard sets of

tenders were announced. Hollysys provides automatic train protection (ATP) for ~70%

of the first batch of 164 sets and ~82% of the second batch of 314 sets (mostly 200-

250km/h train sets), totalling US$164 mn. We estimate these orders to be booked in

FY14-15E.

Hollysys is one of only two approved providers for the 300-350km/h sets and one of

only three approved providers in the 200-250km/h segment. China Railway Signal &

Communication (CRSC), a state-owned company, is its major competitor.

Our channel check suggests 350-400 standard sets of EMU to be tendered per year in

China in the next several years, on the back of: (1) the network effect of railway lines;

and (2) rising demand for spare sets as the existing fleet enters their maintenance

age. This provides sustainable order flow in the next few years.

Hollysys is one of four institutes that participated in the CTCS-3 train control system

technology standards in China in 2009. The other parties are Beijing Jiaotong

University, China Academy of Railway Science and CRSC.

Figure 65: Recent ATP orders

Tender size

(sets)

Tender time Equipment

provider

Hollysys sets

200-250km/h 91 Aug 2013 CSR Sifang 100%

300-350km/h 68 Aug 2013 CNR 25%

200-250km/h 78 Dec 2013 CSR Sifang 100%

300-350km/h 83 Dec 2013 CSR Sifang 100%

300-350km/h 70 Dec 2013 CNR Tangshan 0%

300-350km/h 27 Dec 2013 CNR Changchun 0%

300-350km/h for cold regions 46 Dec 2013 CNR Changchun 0%

200-250km/h for cold regions 10 Dec 2013 CNR Changchun 0%

Total 473 366

Source: China Railway Investment Corporation, company data

A late cycle play on a strong HSR construction pipeline in 2014

■ We expect line-side control systems also to contribute to sales in FY14-15, mainly

train control centres (TCC) and line-side electronic units (LEU). We believe that

Hollysys could continue to deliver growth as a late-cycle play on HSR construction.

According to our bottom-up estimates, about 6,230km/3,900km of high-speed railway

will be in operation by the end of 2014-15, compared to 1,421km/2,723km in 2011-12.

We estimate more than 50% of Hollysys US$210 mn railway segment backlog is line-

side related, which will be booked as sales in FY14-16.

Hollysys also has a long track record of TCC. It entered the market in 1999,and its

products have been applied to nearly all HSR artilleries in China, including

Zhengzhou-Xi'an-Baoji, Fuzhou-Xiamen-Shenzhen, Beijing-Shijiazhuang, Wuhan-

Yichang, Guangzhou-Shenzhen, Taiyuan-Zhongwei-Yinchuan, etc.

Figure 66: Major on-going line-side train control projects

Line Client Products Delivery time Contract value (US$ mn)

Mudanjiang-Suifenhe Harbin-Mudanjiang Railway TCC/LEU 2015E US$5.47

Datong-Xi'an China Railway Construction TCC/LEU/others Jul 2014 US$14.72

Lanzhou-Xinjiang (Xinjiang section) China Railway Construction TCC/LEU/others 2016E US$19.2


04 April 2014


New products launched in 2015-16 to drive medium-/long-term growth

In the medium to long term, we believe that Hollysys's railway segment could continue to

grow on the back of expanding product lines, including:

Figure 67: Major new products

Product name Function Status

CBTC Communication-based train control Onsite testing

CTCS-2 ATO Vehicle-mounted control system Mid 2014 on site testing

ZPW2000 Multimode track circuit system Trial use, expect commercialization in 2015

Source: company data

■ CBTC (communication-based train control) is an integrated service package for

subway, including train-borne ATP and ATO (automatic train operation) and LEU,

balise (electronic transponder between railways as part of ATP) and distance control

systems. The system has already obtained SIL4 certificate (the most dependable

functional safety standard in Europe). The company targets to commercialise it in

CY15 through the southeast Asia market and China.

We estimate Rmb400-500 bn FAI on subway per year during 2014-20, as local

governments have planned to increase subway length to 6,000-10,000km by the end

of 2020 from ~2,400 km by end-2013 (a 14-23% CAGR). We estimate cumulative

market size of Rmb35-70 bn (US$5-11 bn) by 2020, assuming an ASP of Rmb8-10

m/km.

■ CTCS2-ATO (automatic train operation system) can be viewed as an upgraded

version of ATP, targeting to be used for inter-city railways. We estimate a 28% CAGR

in inter-city railway length during 2013-20 to ~6,800 km.

■ ZPW (a multimode-track circuit system) sends signals to trains and can be applied

to both normal-grade railway and HSR. The market is monopolised by China Railway

Signals & Communication, a state-owned competitor supplying a full range of

signalling and controlling systems in China.

Market share expansion in the automation business

We believe that Hollysys's traditional core automation business will continue to be a cash

cow with growing market share, on the back of (1) government support for local

automation suppliers and related R&D, (2) the firm's growing track record and brand

reputation, (3) Hollysys's capability of customisation and responsiveness with competitive

pricing, and (4) optimism of the automation market in China in the context of rising labour

costs.

04 April 2014


Figure 68: Hollysys's industrial automation segment sales

growth (US$ mn)

Figure 69: Industrial automation backlog (US$ mn) and

sales coverage

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

-

50

100

150

200

250

300

350

400

2009

2010

2011

2012

2013

FY

2014

E

FY

2015

E

FY

2016

EIndustrial automation YoY (RHS)

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

-

20

40

60

80

100

120

140

160

180

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Backlog Backlog coverage (RHS)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse

Government support for domestic players

Intelligent manufacturing equipment is on the list of government's favourable strategic new

industries, announced by the State Council in July 2012. A higher market share for the

domestic suppliers has been set as a strategic target for 2015. In particular, the

government encourages domestic equipment to be used for big projects as demonstration,

and will focus on key technology development and commercialisation of sensor, high-

precision motion control, robot, automation control system, servomechanism, etc.

We see the market share of leading domestic DCS suppliers rising. According to data from

Gongkong, Supcon and Hollysys were ranked No.1 and No.3 in the DCS market in China

in 2012, in terms of sales.

Figure 70: Top 5 DCS suppliers in China by revenue (Chinese companies highlighted)

2009 2010 2011 2012 2013

1 ABB Invensys Invensys Supcon Supcon

2 Emerson Siemens Honeywell Emerson Emerson

3 Honeywell Honeywell Supcon Hollysys Hollysys

4 Siemens ABB Emerson Invensys Honeywell

5 Supcon Emerson ABB Honeywell Invensys

Source: Gongkong

Building track record by winning large project contracts

Being one of the earliest domestic suppliers of DCS, Hollysys has been fast winning

contracts in the large projects in power and chemical. We believe these are critical steps

for the company to further build up its reputation in terms of functionality and reliability.

04 April 2014


Figure 71: Selective major industrial automation contracts

Project name Capacity Contract year Industry Product

Guangdong Huayue Taishan ultra-supercritical thermal power plant #6 & #7 2x1000MW 2008 Power DCS

Shenhua Shendong Power Dianta thermal power plant 2x660MW 2011 Power DCS

Gudandong Yuejiang ultra-supercritical thermal power plant 2x660MW 2011 Power DCS

Guangxi Investment Group Guizhou Panxian thermal power plant 2x660MW 2011 Power DCS

Fujian Hongshan ultra-supercritical thermal power plant 2x1000MW 2013 Power DCS

Fujian Petrochemical Mezhouwan chlor-alkali plant 100ktpa caustic soda

50ktpa polyether

40ktpa propylene oxide

50ktpa hydrochloric acid

2013 Chemical MES

Shandong Wanda Butadiene plant 150ktpa 2013 Chemical DCS

Inner Mongolia Hongyu Technology ammonia and urea plant 300ktpa ammonia 520ktpa urea

2013 Chemical DCS

China Tianchen Yaolong caprolactam plant 200ktpa 2013 Chemical DCS+DEH

PetroChina Ningxia Petrochemical ammonia and urea plant 450ktpa ammonia

800ktpa urea

2013 Chemical OTS


We believe that Hollysys's footprint in the nuclear power plant instrument and control

systems is also a strong indicator of its leading technology position. Its joint venture (China

Techenergy, CTEC) with China Guangdong Nuclear has a dominant market share in non-

safety level control systems in China. As of end-2013, CTEC had 14 reactors in the

backlog (Yangjiang #1 and Hongyanhe #1 were connected to the grid in early 2014).

Figure 72: Selective nuclear power plant control system contracts in China

Nuclear power plant Technology Location Products Expected commissioning date

Yangjiang Nuclear Power Plant CPR1000 Guangdong #1,2,3,4,5,6 2013-19

Fangchenggang Nuclear Power Plant CPR1000 Guangxi #1,2 2015-16

Ningde Nuclear Power Plant CPR1000 Fujian #2,3,4 2014-15

Hongyanhe Nuclear Power Plant CPR1000 Liaoning #2,3,4 2014-15

Source: Company data, Credit Suisse estimate

Capability of customisation and responsiveness with competitive pricing

We believe Hollysys's success could be attributed to its capability of offering customised

products and highly responsive services with reliable performance and attractive price.

First, for large-scale clients, functionality, reliability, service and responsiveness are the

key factors that users consider when they choose DCS products. Factories vary in terms

of safety requirement, project scale, production type, production cycle, etc., therefore

suppliers with strong customisation capability are more likely to win and retain clients.

Second, Hollysys is also competitive to serve small- to medium-sized clients, which give

importance to cost control and energy saving initiatives more than large companies.

Figure 73: Competitiveness comparison

Functionality Reliability Service Upgrade Customisation Pricing Reputation

Hollysys YY YYY YYY YY YYY YYY YY

Other domestic players Y YY YY YY YY YYY Y

Multinationals YYY YYY YY Y Y Y YYY

Source: company data, Gongkong, Credit Suisse estimate

04 April 2014


Figure 74: DCS: domestic players gaining market share

0%

10%

20%

30%

40%

50%

60%

70%

80%

2007 2008 2009 2010 2011 2012 2013

Hollysys + Supcuon Global players

Source: Gongkong

Optimistic on the long-term automation market growth

We echo with our global industrial research team that automation is one of the few ways

for China industrial companies to cope with decelerating growth, falling FAI, and rising

labour cost. Many international companies that rely on "Made in China" have made clear

of their concerns about wage inflation. In this context, we are optimistic on the long-term

growth outlook of the industrial automation market in China. Please refer to The Next

Growth Phase by Julian Mitchell et al. published on 14 Aug 2012, for details about the

automation market.

Figure 75: Decelerating birth rate suggests a smaller

proportion of work age people and a potential rise in

wages

Figure 76: Wage growth may be faster than sales growth

of manufacturing industries

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

0-14 year-old % of total population

natural birth rate (RHS)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

wage growth of manufacturing industries

sales growth of manufacturing industries

Source: CEIC Source: CEIC

04 April 2014


Figure 77: Robot stock (base year = 1974 for Japan, 1999

for China)

Figure 78: Robot density (base year = 1974 for Japan,

1999 for China)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

T T+3 T+6 T+9 T+12 T+15 T+18 T+21 T+24 T+27 T+30 T+33 T+36 T+39

Japan

0

50

100

150

200

250

300

350

T T+3 T+6 T+9 T+12 T+15 T+18 T+21 T+24 T+27 T+30 T+33 T+36 T+39

Japan

Source: IFR, Credit Suisse estimates (Robot stock in units, unless

otherwise stated)

Source: IFR, Credit Suisse estimates (Robots per 10,000

manufacturing employees, unless otherwise stated)

Overseas expansion and new product development

We see further growth opportunities in its overseas businesses (particularly in Southeast

Asia), after the acquisition of Concord and Bond, in mechanical & engineering and railway

businesses, respectively.

Recent management changes show that international expansion has been part of

Hollysys's core strategy. Mr. SHAO Baiqiang, current CEO and co-founder of Hollysys,

was a Vice President in charge of its overseas business. Dr. WANG Changli, founder of

the group and ex-chairman and ex-CEO, is now President of Hollysys International,

devoting his energy to overseas development.

Management targets for 30% sales contribution from overseas in five years compared with

18% in FY13.

■ Bond: Hollysys acquired Bond in April 2013 for a US$73 mn consideration, with 50%

in cash and 50% in stock. Bond provides mechanical and electrical solutions to a wide

range of industries including factories, data centres, banks hospitals, power stations,

residential buildings, etc. in Southeast Asia.

Major business opportunities may come from Malaysia. For example, the Iskandar

development plan (a region near Singapore) targets RM263 bn (US$80 bn) investment

during 2016-25, of which ~20% to be spent on mechanical and electrical solutions.

04 April 2014


Figure 79: Selective projects of Concord

Major projects Industry Country

Circle Line Stage I, II, IV, V & Kim Chuan Depot Transportation Singapore

North East Line, MRT system Transportation Singapore

Punggol Light Rail Transportation System Transportation Singapore

Bukit Panjang Light Rail Transport System Transportation Singapore

Kallang-Paya Lebar Expressway Transportation Singapore

Kuala Lumpur International Airport Track Transit System Transportation Malaysia

Dubai Metro LRT, Red & Green Lines Transportation UAE

Makkah – Al Mashaaer Al Mugaddassah Metro Project Transportation Saudi Arabia

Tanjung Bin 3 x 700MW Coal Fire Power Plant Power Malaysia

Senoko Power Station Gas Turbine Unit 1, 2, 3 & 4 Power Singapore

Panglima 710MW Combined Cycle Gas Turbine Power Plant at Melaka Power Malaysia

Labrador and Ayer Rajah 400kV Sub-station Power Singapore

Pulau Sebarok Oil Storage Terminal Transportation/petrochemical Singapore

Bohai Phase II Development Project Marine & offshore China


■ Concord: Hollysys acquired Concord in July 2011 for US$43.2 mn with US$33.5 mn

cash and 1 mn shares. Concord was founded in 1983, engaging in electrification-

related services in railway, power, semiconductor, pharmaceutical, petrochemical,

etc., partnering with global players including Mitsubishi, Alstom, Thales, Bombardier,

Areva, and ABB. Concord's business is highly related to Hollysys's core business. We

believe Hollysys will leverage Concord's client relationship in Southeast Asia to

increase its penetration.

Figure 80: Iskandar development project investment plan

US$ bn Total investment Avg annual investment M&E investment per year

Phase 1 (2007-2009) 17.1 5.7 1.14

Phase 2 (2010-2015) 22.3 3.7 0.74

Phase 3 (2016-2025) 80.3 8.0 1.61

Source: Iskandar Regional Development Authority, Credit Suisse estimates

Figure 81: Investment in Iskandar development project

(2012)

Manufacturing32%

Petrochemical5%

Logistics4%

Residential property

25%

Government7%

Utilities9%

Retail property7%

Industrial property

4%

Others7%

Source: Iskandar Regional Development Authority

04 April 2014


New product initiations

Supported by the high-margin railway business and the steady industrial automation

business, Hollysys is able to further expand into other new areas with new products, such

as safety system and servo, in various industries such as pharmaceutical, municipal

management, waste treatment and new energy.

Figure 82: Sustained R&D efforts (US$ mn)

0%

2%

4%

6%

8%

10%

12%

14%

-

2

4

6

8

10

12

14

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

R&D R&D % of sales (RHS)


04 April 2014


Financials We forecast 46%/13%/14% non-GAAP net profit growth (a 23% CAGR) in FY14/15/16E

on 51%/16%/15% sales growth. Our earnings forecasts are 11%/2%/8% higher than

consensus, due to more bullish sales growth forecast.

Figure 83: CS vs consensus

Sales Net profit

US$ mn FY14 FY15 FY16 FY14 FY15 FY16

CS 528 615 709 84 95 109

IBES consensus 505 585 658 76 93 101

CS % over consensus 4.5% 5.2% 7.7% 10.6% 1.9% 7.8%

Source: IBES, Credit Suisse estimates

■ We expect accelerating sales growth in FY14E mainly driven by the railway segment,

and then to normalise in FY15/16E.

■ We expect each business segment to maintain stable gross margins due to high entry

barriers or high customisation.

■ EBIT margin should trend down slightly after FY15E, due to higher operating

expenses from (1) overseas market expansion and (2) new product launches (e.g.,

PLC and other motion control systems, CBTC, ZPW2000, etc.).

■ Solid balance sheet and cash flow management suggest lower debt and rising interest

income, assuming no large-scale M&As. We expect the company to maintain its net

cash position.

■ We assume no dividend payment over FY14-16, but it is likely for the company to

adjust dividend policy given good cash flows.

■ We expect a stable 15% ROE in the next few years.

Figure 84: Revenue breakdown and growth Figure 85: Net profit (GAAP, US$ mn) and growth

0%

10%

20%

30%

40%

50%

60%

-

100

200

300

400

500

600

700

800

2009

2010

2011

2012

2013

FY

2014

E

FY

2015

E

FY

2016

E

Industrial automation Railway & subway

Others Total sales growth (RHS)

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

20

40

60

80

100

120

2011

2012

2013

FY

2014

E

FY

2015

E

FY

2016

E

Net profit YoY growth (RHS)


04 April 2014


Figure 86: Revenue mix Figure 87: Gross margin by segment (adjusted)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%20

09

2010

2011

2012

2013

FY

2014

E

FY

2015

E

FY

2016

E

Industrial automation % total sales Raiway % of total sales Others

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2010 2011 2012 2013 FY2014E FY2015E FY2016E

Overall gross margin adj

Rail & subway

Industrial automation total

Mechanical and eletrical solution (adj)

Overseas/others


Figure 88: Trailing 4Q cash flow (US$ mn) Figure 89: Net gearing (cash)

(60)

(40)

(20)

-

20

40

60

80

100

4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14

OpCF FCF

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14


04 April 2014


Valuation Our target price of US$29.10 is based on a DCF methodology.

■ We use an 8.4% WACC based on an 11% cost of equity (1.2x beta, a 5% risk free

rate, and a 5% equity risk premium) and a 6% pre-tax cost of debt.

■ We assume a terminal growth rate of 2%.

■ We assume EBIT margin of 20% in the terminal years. We think this is reasonable and

sustainable compared to matured global players such as Emerson, Honeywell,

Yokogawa and Invensys.

Our target price implies 19.3x/17.1x P/E and 3.3x/2.8x P/B in FY14/15 (year-end June),

and 18.2x/16x P/E and 3.1x/2.6x P/B in CY14/15 P/E. We believe the valuation is

attractive on the back of a 23% earnings CAGR during FY13-16, let alone potential

sales/profit contribution from new product launches.

We compare Hollysys with both railway-related stocks and automation stocks.

■ We believe that Hollysys should trade at a premium to railway equipment-makers

because (1) Hollysys's line-side railway signal business is on a later cycle than railway

equipment; and (2) its automation business helps to smoothen earnings and cash flow

volatility.

■ We believe that Hollysys should trade at a premium to railway constructors because of

a much better growth profile, cash flows and a healthier balance sheet.

Figure 90: Hollysys 12M forward P/E valuation Figure 91: Hollysys 12M forward P/B valuation

-

5.0

10.0

15.0

20.0

25.0



-

0.5

1.0

1.5

2.0

2.5

3.0

3.5




04 April 2014


Risks Industry and country risks

■ Slower-than-expected railway tenders from China Railway Corporation would result in

lower sales growth.

■ Late payment from major clients such as China Railway Corporation would result in

deteriorating cash flows.

■ A weakening macro economy in China may result in new project delays and negatively

affect sales growth of the industrial automation segment.

■ Later-than-expected nuclear tenders would result in lower sales growth.

■ A change in the nuclear power technology development roadmap would incur extra

costs.

Company risks

■ Margins could be negatively affected when entering new industries/markets, due to

additional price competition and marketing campaigns.

■ The failure to win tenders would negatively affect growth, particularly in the overseas

market and the subway segment.

■ The company may not be able to enter new markets successfully, due to an unproven

track record.

■ Overseas expansion may not be as smooth as expected due an unfamiliar market

environment, culture and political systems.

■ Unexpected accidents could significantly affect the company's reputation, new order

and backlog delivery, because Hollysys's products have been widely applied to the

areas that have high safety requirement, such as train safety, power plant and

chemical plant.

04 April 2014


Management profile Dr. Changli Wang

Dr Wang is the founder of Hollysys, and was the chairman and CEO until November 2013.

He is now the President of Hollysys International Pte. Prior to founding Hollysys, Dr Wang

worked for the No.6 Institute of Electronic Industry Department. He also has been the Vice

Chairman of the Chinese Automation Association since 2003. He received his Bachelors'

degree in Automation from Tianjin University in 1984 and PhD in Automation from

Lancaster University in 1988.

Mr Jianfeng He

Mr He is the Chairman since November 2013. Prior to that, he served as our chief

operating officer from Feb 2012, as well as CEO of Beijing Hollysys, a subsidiary of

Hollysys. Mr He has more than 15 years' experience with Hollysys. He received his PhD

from South China University of Technology.

Mr Shao Baiqiang

Mr Shao is the CEO since Nov 2013. He was the former senior vice president, Business

Development of the Company from Feb 2012. Prior to 2012, he was in charge of M&A and

new business exploration and was vice president of Beijing Hollysys. He has 20 years'

experience in the industry, and is one of the founding group of engineers. Mr Shao

received Master of Computer Science from the 6th Research Institute of China Electronics

Corporation and MBA from Peking University.

Ms Herriet QU

Ms Qu, 43, is the Chief Financial Officer since Feb 2012. Before joining Hollysys as the

financial controller in 2007, she was chief financial officer of Beijing Chum Investment

Corporation for five years. Ms Qu received her MBA degree from Oklahoma City

University and holds a Bachelors' degree from Tianjin University in Finance & Economics.

04 April 2014


Appendix Automation market in China

According to Gongkong, the China automation market was estimated to be Rmb141 bn in

2013. Control, drive and feedback are the major product categories, accounting for 20%,

24% and 23% of the total market, respectively.

Hollysys focuses on DCS—a type of control system that is widely used in factories, such

as power plant, chemical factories, cement factories and metallurgical factories to monitor

and control production activities continuously. DCS accounts for 24% of the control

automation market, with about Rmb8 bn market size (including service).

Figure 92: Automation market breakdown by type (2013) Figure 93: DCS is a major control product in China (2013)

Control20%

Drive24%

Montion Control12%

Feedback23%

Actuator14%

Others7%

PLC37%

DCS24%

IPC25%

HMI11%

Software3%

Source: Gongkong Source: Gongkong

Figure 94: China automation market growth (Rmb bn) Figure 95: China DCS market growth (Rmb bn)

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-

20

40

60

80

100

120

140

160

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Product Service Total YoY (RHS)

-10%

-5%

0%

5%

10%

15%

20%

0

1

2

3

4

5

6

7

8

9

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Market size YoY growth (RHS)


DCS is widely applied to large-scale factories in China. Our global industrial team

forecasts ~10% growth per year for the China market. Global suppliers such as Yokogawa,

Honeywell, Emerson, ABB, Invensys, and Siemens have deep footsteps. Hollysys and

Supcon are domestic brands that should gradually take market share from global players.

04 April 2014


Figure 96: DCS market share by major player (2013)

Hollysys10%

ABB13%

Emerson12%

Honeywell11%

Invensys9%

Siemens11%

Supcon10%

Yokogawa9%

Others15%

Source: Gongkong

■ Chemical is the largest and fastest growing end-user market of DCS, according to

Gongkong, amounting Rmb2.75 bn in 2013 with a 13% CAGR over the past decade.

New coal chemical and new materials are the key drivers of the market.

■ Despite decelerating capex for PetroChina and Sinopec, the petrochemical market is

of potential for domestic DCS players to expand market share because of high

penetration of global players such as Honeywell, Yokogawa and Emerson.

■ Power is the second largest end-user maker but demand has been quite stable.

Emerson, ABB, Invensys and Hollysys are the key players.

■ Municipal (including waste-to-energy power and heating) is the emerging market on

the back of urbanisation, with a 10% CAGR since 2004.

Figure 97: DCS market size (2013, Rmb mn) and market

size CAGR (2004-2013) by industry

Figure 98: DCS market size (2014E, Rmb mn) and market

size CAGR (2014-18E) by industry

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0 500 1000 1500 2000 2500 3000

Power

ChemicalMunicipal

Petrochemical

Metallurgy

Building material

Papermaking

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0 500 1000 1500 2000 2500 3000

Power

ChemicalMunicipal

Petrochemical

Metallurgy

Building material

Papermaking





04 April 2014

Asia Pacific/China

Equity Research

Capital Goods

CSR Corporation Limited

(1766.HK / 1766 HK) INITIATION

Recovering order to revitalize growth

■ Initiate with OUTPERFORM rating and HK$8.10 target price (21%

potential upside). We are confident of CSR's growth outlook on the back of

recent strong orders improving its product mix. The resumption of CRC

tender, in particular EMUs, should support margin expansion, and increasing

demand from train maintenance should offer more sustainable earnings in

the long term to equipment makers which used to have volatile growth

profiles, in our view. The recent success in the export market should add

further growth momentum.

■ Rising backlog and a better mix help improve the growth outlook. The

resumption of CRC railway equipment tenders since August 2013 has

revitalised CSR. The rising order backlog coverage and a favourable change

in the order mix should improve the growth and profitability profile, in our

view. The current backlog of Rmb111 bn as at end-2013 can cover more

than a year of sales, based on our estimates.

■ The export market offers huge potential; risk management is key to

success. The recent locomotive order to South Africa confirms Chinese

railway equipment competitiveness in the global market, in our view. Export

orders tend to be more profitable than domestic orders, but they incur extra

cost as required by localisation. Robust execution and risk management are

critical, given an unfamiliar political and economic environment.

■ Valuation. Our DCF-backed target price of HK$8.10 implies 17.3x 2014E

P/E and 2.2x 2014E P/B, in the context of recovering orders and the

profitability outlook. Key risks include overseas execution risk and client

concentration risk, and working capital risk.


80

100

120

140

4

6

8

10




MSCI CHINA F IDX which closed at 6129.72 on 03/04/14


Performance Over 1M 3M 12M Absolute (%) 17.8 5.7 31.0 — Relative (%) 17.7 8.2 29.8 —


Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 96,525.1 112,558.1 128,318.8 145,934.7 EBITDA (Rmb mn) 8,056.6 10,135.4 11,546.1 13,292.8 EBIT (Rmb mn) 6,116.0 7,945.0 9,136.2 10,567.3 Net profit (Rmb mn) 4,037.2 5,128.3 6,056.0 6,979.0 EPS (CS adj.) (Rmb) 0.29 0.37 0.44 0.51 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.39 0.44 0.45 EPS growth (%) -2.2 27.0 18.1 15.2 P/E (x) 18.2 14.4 12.2 10.6 Dividend yield (%) 1.7 2.1 2.5 2.8 EV/EBITDA (x) 7.6 6.1 5.6 5.1 P/B (x) 2.0 1.8 1.6 1.5 ROE (%) 11.6 13.3 14.2 14.7 Net debt/equity (%) Net cash Net cash Net cash 3.1


Rating OUTPERFORM* Price (03 Apr 14, HK$) 6.67 Target price (HK$) 8.10¹ Upside/downside (%) 21.4 Mkt cap (HK$ mn) 81,506 (US$ 10,507) Enterprise value (Rmb mn) 62,048 Number of shares (mn) 13,803.00 Free float (%) 43.5 52-week price range 7.29 - 4.21 ADTO - 6M (US$ mn) 14.4




Research Analysts

Edmond Huang, CFA

852 2101 6701

[email protected]

Baiding Rong

852 2101 6703

[email protected]

04 April 2014


(1766.HK / 1766 HK) 51

CSR Corporation Limited 1766.HK / 1766 HK Price (02 Apr 14): HK$6.72, Rating: OUTPERFORM, Target Price: HK$8.10, Analyst: Edmond Huang


Scenario TP %Up/Dwn Assumptions

Upside Central Case 8.10 20.54 Downside


— — — — — — — — — — — — — — — — — — — —

Income statement (Rmb mn) 12/13A 12/14E 12/15E 12/16E

Sales revenue 96,525 112,558 128,319 145,935 Cost of goods sold 79,896 92,730 105,646 120,067 SG&A 11,647 12,844 14,503 16,266 Other operating exp./(inc.) (3,075) (3,152) (3,376) (3,691) EBITDA 8,057 10,135 11,546 13,293 Depreciation & amortisation 1,941 2,190 2,410 2,726 EBIT 6,116 7,945 9,136 10,567 Net interest expense/(inc.) 546.4 685.5 805.3 947.8 Non-operating inc./(exp.) — — — — Associates/JV 363.8 100.0 360.0 396.0 Recurring PBT 5,933 7,359 8,691 10,015 Exceptionals/extraordinaries (102.7) — — — Taxes 859 1,067 1,260 1,452 Profit after tax 4,971 6,292 7,431 8,563 Other after tax income — — — — Minority interests 934 1,164 1,375 1,584 Preferred dividends — — — — Reported net profit 4,037 5,128 6,056 6,979 Analyst adjustments — — — — Net profit (Credit Suisse) 4,037 5,128 6,056 6,979

Cash flow (Rmb mn) 12/13A 12/14E 12/15E 12/16E

EBIT 6,116 7,945 9,136 10,567 Net interest 717 831 956 1,098 Tax paid (968) (1,067) (1,260) (1,452) Working capital (2,034) (3,437) (4,592) (5,582) Other cash & non-cash items 1,582 1,359 1,454 1,628 Operating cash flow 5,412 5,631 5,694 6,258 Capex (5,898) (4,260) (6,000) (6,000) Free cash flow to the firm (486) 1,371 (306) 258 Disposals of fixed assets 74.4 — — — Acquisitions (105.3) — — — Divestments 657.5 — — — Associate investments (295.7) — — — Other investment/(outflows) (1,678) — — — Investing cash flow (7,245) (4,260) (6,000) (6,000) Equity raised — — — — Dividends paid (1,242) (1,242) (1,539) (1,817) Net borrowings 828 1,703 2,500 2,500 Other financing cash flow 1,888 (686) (805) (948) Financing cash flow 1,473 (224) 156 (265) Total cash flow (360) 1,147 (150) (7) Adjustments (83.2) — — — Net change in cash (444) 1,147 (150) (7)

Balance sheet (Rmb mn) 12/13A 12/14E 12/15E 12/16E

Cash & cash equivalents 14,905 16,052 15,902 15,896 Current receivables 40,317 48,174 56,315 65,682 Inventories 17,721 20,568 23,432 26,631 Other current assets 10,010 11,368 12,735 14,262 Current assets 82,953 96,162 108,385 122,470 Property, plant & equip. 25,201 26,868 29,827 32,588 Investments 3,662 3,762 4,122 4,518 Intangibles 5,324 5,726 6,357 6,870 Other non-current assets 3,990 4,670 5,487 6,467 Total assets 121,129 137,189 154,179 172,915 Accounts payable 45,373 52,662 59,396 66,829 Short-term debt 7,606 8,310 8,810 10,810 Current provisions 728.6 728.6 728.6 728.6 Other current liabilities 13,292 15,309 17,173 19,230 Current liabilities 67,000 77,009 86,108 97,598 Long-term debt 3,569 4,569 6,569 7,069 Non-current provisions 1,147 1,147 1,147 1,147 Other non-current liab. 3,259 3,259 3,259 3,259 Total liabilities 74,975 85,984 97,082 109,072 Shareholders' equity 36,560 40,446 44,963 50,125 Minority interests 9,595 10,759 12,133 13,718 Total liabilities & equity 121,129 137,189 154,179 172,915


Shares (wtd avg.) (mn) 13,803 13,803 13,803 13,803 EPS (Credit Suisse) (Rmb)

0.29 0.37 0.44 0.51 DPS (Rmb) 0.09 0.11 0.13 0.15 BVPS (Rmb) 2.65 2.93 3.26 3.63 Operating CFPS (Rmb) 0.39 0.41 0.41 0.45


12/13A 12/14E 12/15E 12/16E

Growth(%) Sales revenue 8.4 16.6 14.0 13.7 EBIT 5.2 29.9 15.0 15.7 Net profit 0.7 27.0 18.1 15.2 EPS (2.2) 27.0 18.1 15.2 Margins (%)

EBITDA 8.3 9.0 9.0 9.1 EBIT 6.34 7.06 7.12 7.24 Pre-tax profit 6.15 6.54 6.77 6.86 Net profit 4.18 4.56 4.72 4.78 Valuation metrics (x) P/E 18.4 14.5 12.3 10.6 P/B 2.03 1.83 1.65 1.48 Dividend yield (%) 1.67 2.07 2.45 2.82 P/CF 13.7 13.2 13.0 11.9 EV/sales 0.64 0.56 0.51 0.46 EV/EBITDA 7.69 6.16 5.64 5.09 EV/EBIT 10.1 7.9 7.1 6.4 ROE analysis (%) ROE 11.6 13.3 14.2 14.7 ROIC 13.6 15.0 14.9 14.8 Asset turnover (x) 0.80 0.82 0.83 0.84 Interest burden (x) 0.97 0.93 0.95 0.95 Tax burden (x) 0.85 0.85 0.85 0.86 Financial leverage (x) 2.62 2.68 2.70 2.71 Credit ratios Net debt/equity (%) (8.08) (6.20) (0.92) 3.11 Net debt/EBITDA (x) (0.46) (0.31) (0.05) 0.15 Interest cover (x) 11.2 11.6 11.3 11.1


0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0

1

2

3

4

5

6

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

04 April 2014


(1766.HK / 1766 HK) 52

Recovering orders to revitalise growth We believe that the ongoing vast development of high speed railway network in China will

generate strong demand for EMUs, which provide a fuel-efficient mode of transport.

Increasing flight delays and environmental concerns lay a solid foundation for future

demand. The resumption of CRC railway equipment tenders since August 2013 has

provided us with more confidence in CSR's growth profile. The rising order backlog

coverage and a favourable product mix offer a better growth and profitability outlook, in our

view. The current backlog of Rmb110 bn as of end-2013 is able to cover more than a year

of sales, based on our estimates. Another Rmb48 bn of new orders have been announced

in YTD 2014 which will further add growth momentum.

In August 2013, CRC tendered for 726 units of passenger coaches, 28,900 units of freight

wagons, 795 units of locomotives, 91 sets of 250km/h EMUs, 42 sets of 30km/h EMUs

and 26 sets of 350km/h EMUs suitable for high latitude and low temperature. In October

2013, another batch of tenders of 1,000 units of freight wagons, 500 units of passenger

carriages, 88 sets of 250km/h EMUs and 226 sets of 350km/h EMUs were announced. We

estimate these orders amounted to Rmb100 bn. CSR won 53% of the EMU tenders, 50%

of the passenger coach tenders and 25% of the wagon tenders, by our estimate.

Figure 99: Strong new order momentum (in aggregate

trailing 12M, Rmb bn)

Figure 100: Improving backlog coverage (Rmb bn)

0

1

2

3

4

5

6

7

8


-

0.5

1.0

1.5

2.0

2.5

-

20

40

60

80

100

120

2009 2010 2011 2012 2013

Backlog Sales Backlog to sales (RHS)


Figure 101: The latest CRC tenders

Units August 2013 October 2013

Wagon 28,900 1,000

Passenger 726 500

Locomotive 795 0

EMU (250km/h) 91 88

EMU (300km/h) 68 226

Source: Company data, MOR

Encouragingly, we have witnessed an improving product mix for recent new orders and

backlog for CSR. High-margin products (locomotive and EMU) have accounted for 82% of

the new orders announced YTD 2014, a remarkable rise from 61% in 2013 and merely

21% in 2011 and 41% in 2012. As of end-2013, high-margin products accounted for 62%

of total backlog, compared with 51% as of end-2012.

04 April 2014


(1766.HK / 1766 HK) 53

Figure 102: High-margin products (locomotive + EMU) to

contribute more sales in the future

Figure 103: CSR major new order breakdown

0%

10%

20%

30%

40%

50%

60%

70%

80%

2009 2010 2011 2012 2013 2014YTD

High margin products (locomotive+EMU) % of new order announced

High margin products (locomotive+EMU) % of total backlog

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013 2014YTD

Locomotive EMU Metro Passenger Wagon Wind Others


Moreover, we expect rising sales contribution from maintenance to help improve gross

margins of railway equipment. After a few years of decent demand for new equipment,

maintenance should grow substantially over time (though from a low base) as railway

equipment is ageing and needs maintenance to ensure reliable performance. Such a

revenue is recurring and generates better profits. This is crucial to the railway equipment-

makers that have suffered from huge earnings volatility as a result of over-dependence on

demand for new equipment.

Figure 104: Definition of EMU maintenance

Level 3 Level 4 Level 5

CSR Distance (km) 60k 120k 240k

ASP (Rmb mn) Single digit ~10 tens


Figure 105: Gross margin, EBIT margin and net margin Figure 106: Export sales as % of total sales

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2005 2007 2009 2011 2013 2015E


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2005 2006 2007 2008 2009 2010 2011 2012 2013

Exports sales Export sales %


04 April 2014


(1766.HK / 1766 HK) 54

Export market offers large potential; execution and

risk management key to success

We believe the Chinese railway equipment is increasingly competitive in the global market,

thanks to the improving track record, competitive price, reasonable quality and

government supportive polices. Australia, Southeast Asia, Argentina and Africa are the

major export markets, with locomotive, wagon and metro as major products for CSR.

CSR won a big order from South Africa Transnet in March 2014, with 359 units of electric

locomotives totalling Rmb12.8 bn to be delivered in three years. The first batch of 40 units

will be manufactured in China and shipped to South Africa. Another 15 units will be

assembled in South Africa, with the rest to be manufactured locally. According to our

channel checks, export orders tend to have higher gross margins than domestic orders.

However, the localisation programme in the target market will also incur extra costs, explicitly

and implicitly, including hiring and training of local employees. Given very different political

and economic environments, execution and risk management are critical for success.

04 April 2014


(1766.HK / 1766 HK) 55

Financials

We forecast 27%/18%/15% earnings growth in 2014/15/16, with 16.6%/14.0%/13.7%

growth of sales and expanding gross margin due to a change in the business mix (rising

sales contribution of EMU and maintenance).

Figure 107: Sales (Rmb bn) and growth Figure 108: Net profit (Rmb bn) and growth

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

20

40

60

80

100

120

140

160

2005 2007 2009 2011 2013 2015E

Sales YoY growth (RHS)

-20%

0%

20%

40%

60%

80%

100%

120%

140%

-

1

2

3

4

5

6

7

8

2005 2007 2009 2011 2013 2015E

Net profit YoY growth (RHS)


We expect CSR to remain in a net cash position in 2014-15, as profitability recovers and

capex is limited. Working capital may rise due to the expanding business and CRC's tight

financial condition.

Figure 109: Free cash flow (Rmb bn) and net gearing

-50%

-40%

-30%

-20%

-10%

0%

10%

(3)

(2)

(2)

(1)

(1)

-

1

1

2

2

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

FCF Net gearing (RHS)


04 April 2014


(1766.HK / 1766 HK) 56

Valuation

Our DCF-backed target price of HK$8.10 is based on 2% terminal growth and a 7.1%

WACC. We assume an 11% cost of equity and a 6% cost of debt. Our target price implies

17.3x/14.6x 2014E/15E P/E and 2.2x/2.0x 2014/15E P/B. We believe the stock should

trade above the historical trading average, as we are going to see a normalised growth

profile for CSR, driven by growing high-speed training network in China, rising

maintenance demand and potential overseas expansion. CSR should trade at a premium

to railway constructors due to a much stronger growth profile and a healthier balance

sheet.

Figure 110: CSR 12M forward P/E Figure 111: CSR 12M forward P/B

(5.0)

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0



(1.0)

-

1.0

2.0

3.0

4.0

5.0

6.0







04 April 2014


(1766.HK / 1766 HK) 57

Key investment risks

■ Government policies and capex plan

The development of China’s railway equipment industry is dependent upon the

development of major rail transportation and rapid transit projects, subject to government

decisions. In addition, the government also sets technology and safety requirement of

railway equipment, and foreign investment restriction on the industry. Thus, government

policy, decision of railway construction and capital expenditure plan have a material and

adverse effect on CSR's business and financial performance.

■ Client concentration risk

CSR's revenue is substantially dependent on CRC's tenders. In 2011, 2012 and 2013,

MOR/CRC accounted for 54.6%, 42.1% and 40.6% of its sales, respectively. CRC has

relatively strong bargain power in procurement, in terms of price, quantity, technical

specifications and delivery schedule. If CRC changes/cancels contracts, CSR would not

be able to find any comparable replacement orders. If CSR fails to win CRC's bids, CSR's

financial condition would be negatively affected.

■ Product quality concerns

Product quality, safety and reliability are of critical importance for CSR's products. CSR

may be subject to product liabilities caused by defects in products, and results in product

recalls and potential fines and compensations, as well as sales recognition delays.

■ Key components and raw material supply risks

Fluctuations in raw material prices, particularly aluminium, steel, and copper, could affect

its gross margins. Inaccurate estimate of cost and price fluctuations in raw material, and

delays caused by various factors may cause cost overruns.

■ Working capital risks

As CSR generates a significant amount of revenue from CRC, any late payment from CRC

could result in unfavourable changes in working capital and cash flows for CSR; this was

evident in late 2011.

■ Order cancelation risk

As of end-2013, CSR's backlog amounted to Rmb110 bn. However, this figure is based on

the assumption that its relevant contracts will be performed in full accordance with their

terms. The termination or modification of any one or more major contracts may have a

substantial and immediate effect on backlog and future earnings.

■ International market risks

CSR exports products to more than 80 countries and regions outside of the PRC whose

economic and political conditions are subject to change and beyond its control. In 2011,

2012 and 2013, revenue generated from overseas sales amounted to 7.7%, 9.5% and

6.6% of total sales, respectively.




04 April 2014

Asia Pacific/China

Equity Research


China Railway Construction Corporation Limited (1186.HK / 1186 HK)

INITIATION

Undemanding valuation, exposure to potential

stimulus; initiate with OUTPERFORM

■ Initiate coverage on CRCC with OUTPERFORM on inexpensive

valuation and exposure to potential stimulus: We believe it is the right

time to buy CRCC for its undemanding valuation and exposure to potential

stimulus plans of the government with focus on railway. Infrastructure

spending (esp. railway) is a good instrument to pump up the economy as it

consumes raw materials and provides employment opportunities, if the

Chinese economy slows further.

■ However, the growth outlook is unexciting after 2015 when China's high

speed railway network will be largely completed. We expect slow railway

infrastructure spending after 2015, as a Rmb600 bn infrastructure spending

per annum appears a high base to beat. New railway construction may only

focus on more remote passenger lines, cargo lines, double-track upgrades,

electrifications, and new lines in the West.

■ Diversification into property and BT/BOT projects increases risk profile

and requires stronger balance sheet: CRCC is expanding its property

business and municipal works through BT/BOT projects which will definitely

help improve profitability due to favourable business mix, however, tighter

cash flow would lead to a stretched balance sheet.

■ Valuation and risks: Our price target of HK$9.20 is based on 8.2x 2014E P/E

and 1x 2014E P/B, and implies a potential upside of 24%. We believe the

current valuation is attractive in the context of potential government stimulus and

the on-going railway reform. Key risks include project cost overrun, overseas

execution risk and working capital risk.


80

100

120

140

160

4

6

8

10

12








Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 569,962.3 635,299.5 705,339.2 741,961.6 EBITDA (Rmb mn) 26,903.4 30,613.7 33,399.7 35,569.9 EBIT (Rmb mn) 16,997.4 19,475.9 21,707.1 23,302.3 Net profit (Rmb mn) 10,272.4 11,041.2 12,194.3 12,921.2 EPS (CS adj.) (Rmb) 0.83 0.89 0.99 1.05 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.91 1.01 1.07 EPS growth (%) 24.8 7.5 10.4 6.0 P/E (x) 7.1 6.6 6.0 5.7 Dividend yield (%) 2.2 2.4 2.6 2.8 EV/EBITDA (x) 4.4 4.5 4.6 4.7 P/B (x) 0.91 0.81 0.73 0.66 ROE (%) 13.4 12.9 12.8 12.2 Net debt/equity (%) 73.5 85.4 92.1 95.4


Rating OUTPERFORM* Price (03 Apr 14, HK$) 7.43 Target price (HK$) 9.20¹ Upside/downside (%) 23.8 Mkt cap (HK$ mn) 71,464 (US$9,213 mn) Enterprise value (Rmb mn) 136,784 Number of shares (mn) 12,337.54 Free float (%) 38.7 52-week price range 8.94 - 5.63 ADTO - 6M (US$ mn) 12.3




Research Analysts

Edmond Huang, CFA

852 2101 6701

[email protected]

Baiding Rong

852 2101 6703

[email protected]

04 April 2014

China Railway Construction Corporation Limited (1186.HK / 1186 HK) 59

China Railway Construction Corporation Limited 1186.HK / 1186 HK Price (03 Apr 14): HK$7.43, Rating: OUTPERFORM, Target Price: HK$9.20, Analyst: Edmond Huang




— — — — — — — — — — — — — — — — — — — —


Sales revenue 569,962 635,300 705,339 741,962 Cost of goods sold 527,248 587,762 652,453 686,336 SG&A 25,229 28,151 31,311 32,504 Other operating exp./(inc.) (9,418) (11,227) (11,825) (12,448) EBITDA 26,903 30,614 33,400 35,570 Depreciation & amortisation 9,906 11,138 11,693 12,268 EBIT 16,997 19,476 21,707 23,302 Net interest expense/(inc.) 6,518 8,105 8,957 9,726 Non-operating inc./(exp.) 2,809 2,728 2,701 2,690 Associates/JV (248.8) (193.3) (93.3) 6.7 Recurring PBT 13,040 13,906 15,358 16,274 Exceptionals/extraordinaries (72.3) — — — Taxes 2,600 2,781 3,072 3,255 Profit after tax 10,367 11,125 12,286 13,019 Other after tax income — — — — Minority interests 94.7 83.4 92.1 97.6 Preferred dividends — — — — Reported net profit 10,272 11,041 12,194 12,921 Analyst adjustments — — — — Net profit (Credit Suisse) 10,272 11,041 12,194 12,921


EBIT 16,997 19,476 21,707 23,302 Net interest 3,212 5,377 6,256 7,035 Tax paid (2,600) (2,781) (3,072) (3,255) Working capital (34,435) (23,775) (24,989) (25,590) Other cash & non-cash items 7,512 5,761 5,437 5,232 Operating cash flow (9,314) 4,057 5,339 6,725 Capex (16,844) (13,766) (11,735) (10,564) Free cash flow to the firm (26,158) (9,709) (6,396) (3,839) Disposals of fixed assets 1,606 — — — Acquisitions — — — — Divestments 3.3 — — — Associate investments — — — — Other investment/(outflows) (4,762) 1,585 1,462 1,724 Investing cash flow (19,997) (12,181) (10,273) (8,840) Equity raised — — — — Dividends paid (1,790) (1,734) (1,915) (2,030) Net borrowings 119,870 18,168 14,000 15,000 Other financing cash flow (88,480) (8,105) (8,957) (9,726) Financing cash flow 29,600 8,329 3,128 3,245 Total cash flow 290 205 (1,806) 1,130 Adjustments (286.6) — — — Net change in cash 3 205 (1,806) 1,130


Cash & cash equivalents 82,198 82,402 80,596 81,726 Current receivables 200,387 220,157 243,526 259,812 Inventories 40,981 46,699 52,733 60,172 Other current assets 147,496 173,214 195,527 216,126 Current assets 471,061 522,473 572,381 617,836 Property, plant & equip. 43,164 38,471 32,989 28,521 Investments 5,898 6,009 6,251 6,626 Intangibles 10,631 17,952 23,477 26,240 Other non-current assets 22,265 25,351 28,999 33,184 Total assets 553,019 610,256 664,097 712,408 Accounts payable 213,315 237,616 263,617 278,965 Short-term debt 68,813 77,000 86,000 93,000 Current provisions 723.8 723.8 723.8 723.8 Other current liabilities 108,054 113,435 116,904 123,878 Current liabilities 390,906 428,775 467,245 496,567 Long-term debt 75,019 85,000 90,000 98,000 Non-current provisions 2,445 2,442 2,442 2,442 Other non-current liab. 823.8 823.8 823.8 823.8 Total liabilities 469,194 517,041 560,511 597,833 Shareholders' equity 80,987 90,294 100,573 111,464 Minority interests 2,838 2,921 3,013 3,111 Total liabilities & equity 553,019 610,256 664,097 712,408



0.83 0.89 0.99 1.05 DPS (Rmb) 0.13 0.14 0.16 0.16 BVPS (Rmb) 6.6 7.3 8.2 9.0 Operating CFPS (Rmb) (0.75) 0.33 0.43 0.55


12/13A 12/14E 12/15E 12/16E


EBITDA 4.72 4.82 4.74 4.79 EBIT 2.98 3.07 3.08 3.14 Pre-tax profit 2.29 2.19 2.18 2.19 Net profit 1.80 1.74 1.73 1.74 Valuation metrics (x) P/E 7.14 6.64 6.02 5.68 P/B 0.91 0.81 0.73 0.66 Dividend yield (%) 2.22 2.36 2.61 2.77 P/CF (7.9) 18.1 13.7 10.9 EV/sales 0.21 0.22 0.22 0.22 EV/EBITDA 4.42 4.47 4.57 4.68 EV/EBIT 6.99 7.02 7.03 7.14 ROE analysis (%) ROE 13.4 12.9 12.8 12.2 ROIC 11.2 9.8 9.3 8.8 Asset turnover (x) 1.03 1.04 1.06 1.04 Interest burden (x) 0.77 0.71 0.71 0.70 Tax burden (x) 0.80 0.80 0.80 0.80 Financial leverage (x) 6.60 6.55 6.41 6.22 Credit ratios Net debt/equity (%) 73.5 85.4 92.1 95.4 Net debt/EBITDA (x) 2.29 2.60 2.86 3.07 Interest cover (x) 2.61 2.40 2.42 2.40


0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

04 April 2014


Undemanding valuation, exposure to potential stimulus; initiate with OUTPERFORM We initiate coverage on CRCC with a target price of HK$9.20 and an OUTPERFORM

rating as we believe that it is inexpensively valued with exposure to potential stimulus

plans of the Chinese government with focus on railway. CRCC is trading very close to

levels it traded at before the increased railway project approvals last year. Infrastructure

spending (esp. railway) is a good instrument to pump up the economy as it consumes raw

materials and provides employment, if the Chinese economy slows further. The

government had used this method before, to pump up the economy, in the midst of the

financial crisis in late 2008. Headwind remains strong as infrastructure spending tends to

slow. Transport FAI has been trending down since Oct 2013 and records slower growth

than total FAI. Among transportation FAI, railway FAI is a big swing factor and is

responsible for dragging down transport FAI after peaking in Oct 2012.

Figure 112: Transportation subsectors FAI 3mma YoY

growth

Figure 113: FAI growth and transportation FAI growth

(3mma)

-100%

-50%

0%

50%

100%

150%



-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%


FAI transport FAI

Source: CEIC, Credit Suisse Source: CEIC, Credit Suisse

Railway construction to normalise after 2015

China does need more railway facilities to serve its super-size economy and huge

population in the long term and we believe railway is a cost effective and environment-

friendly mode of transport. However, we expect unexciting growth in railway infrastructure

spending after 2015, as Rmb600 bn infrastructure spending per annum appears a high

base to beat, with most projects nearing completion around that time. New railway

construction may only focus on more remote passenger line, cargo lines, double-track

upgrades, electrifications, and new lines in the West where traffic is not heavy and speed

standard is low.

04 April 2014


Figure 114: China Railway Corporation (previously

MOR)'s railway construction and equipment investment

(Rmb mn)

Figure 115: Railway construction FAI growth and

equipment FAI growth (YoY)

0

100

200

300

400

500

600

700

800

900

2008 2009 2010 2011 2012 2013 2014 2015

Construction Renewal Equipment

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2010 2011 2012 2013 2014 2015

Construction yoy (RHS) Equipment yoy (RHS)


We expect CRCC to see an 8% net profit CAGR in 2014-16 on the back of strong backlog

in hand. However, we remain cautious on future growth after 2015, as railway spending

will have a high base to beat.

Figure 116: CRCC sales and growth (Rmb bn) Figure 117: CRCC backlog and new orders (Rmb bn)

-10%

0%

10%

20%

30%

40%

50%

60%

70%

-

100

200

300

400

500

600

700

800

2004 2006 2008 2010 2012 2014E 2016E


0

500

1,000

1,500

2,000

2,500

3,000

2004 2006 2008 2010 2012 2014E 2016E

New order Backlog


Diversification into property and BT/BOT adding

risks and requiring a stronger balance sheet

CRCC is proactively expanding its property business in the context of normalising

infrastructure FAI. CRCC plans to invest Rmb30 bn on property development in 2014,

nearly doubling the spend from 2013. The company also plans to further expand its

balance sheet to support municipal works in the form of BT and BOT. This will definitely

04 April 2014


help improve profitability due to favourable business mix. However, it will add more

pressure to cash flow, which in turn would lead to a stretched balance sheet. Its gearing

has continued to rise since 2010.

Local government funding will remain difficult in a weak macroenvironment. This implies

potential delay of payment for BT projects unless a rigorous risk management system is in

place. Management suggests normal repayment from local governments, however, we

see rising risk as the company continues to plan more BT projects at the expense of cash

flow and balance sheet. CRCC plans to invest ~Rmb20 bn on BT (10-20% YoY increase)

and Rmb9-10 bn on BOT in 2014.

Figure 118: CRCC OpCF and FCF (Rmb bn) Figure 119: CRCC capex (Rmb bn) and net gearing

(30)

(25)

(20)

(15)

(10)

(5)

0

5

10

15

20

2004 2006 2008 2010 2012 2014E 2016E

OpCF FCF

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

0

2

4

6

8

10

12

14

16

18

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Capex Net gearing (RHS)


Financials

We forecast 7.5%/10%/6% earnings growth in 2014/15/16, on the back of

11.5%/11%/5.2% growth in sales. Finance expense will rise significantly due to rising

gearing.

04 April 2014


Figure 120: CRCC net profit (Rmb bn) and growth Figure 121: CRCC gross margin, EBIT margin and net

margin

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

2

4

6

8

10

12

14

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Net profit Net profit growth

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E



We expect CRCC's net gearing to increase from 74% in 2013 to 85%/92% in 2014/15,

mainly due to heavy capex on property and BT/BOT. Working capital could remain tight as

business expands and CRCC's financial condition remains challenging.

Valuation

Our price target of HK$9.20, which implies a potential upside of 24%, is based on 8.2x

2014E P/E and 1x 2014E P/B, a slight discount to its historical trading average.

■ We believe the current valuation is attractive in the context of potential government

stimulus and the on-going railway reform.

■ CRCC should trade at a discount to railway equipment makers due to weak balance

sheet and unexciting order flow and order quality.

Figure 122: CRCC 12M forward P/E valuation Figure 123: CRCC 12M forward P/E valuation

-

5.0

10.0

15.0

20.0

25.0

30.0



-

0.5

1.0

1.5

2.0

2.5

3.0




04 April 2014


Risks


The development of China’s railway and other transportation infrastructure investment is

dependent upon the development of major transportation projects, subject to government

decisions. Thus, government policy and decisions about railway construction plans have a

material and adverse effect on CRCC's business and financial performance.


CRCC's revenue is substantially dependent on CRC's construction plan and funding. If

CRC changed/cancelled contracts, CRCC would not be able to find any comparable

replacement orders. If CRCC failed to win CRC's bids, CRCC's financial condition would

be negatively affected.


As CRCC generates a significant amount of revenue from CRC and the local government,

any late payment could result in unfavourable change in working capital and cash flow for

CRCC, such as which was evident in late 2011.

■ Order cancellation risk

As of end-2013, CRCC's backlog amounted Rmb1.7 tn. However, this figure is based on

the assumption that its relevant contracts will be performed in full in accordance with their

terms. The termination or modification of any one or more major contracts will have a

substantial and immediate effect on the backlog and future earnings.


CRCC currently has businesses in 69 countries and regions outside of the PRC that are

subject to changes in economic and political conditions that are beyond its control. During

2011/12/13, revenue generated from overseas sales amounted 3.8%/3.6%3.6% of total

sales.

Figure 124: CRCC and CRG interest coverage Figure 125: CRCC and CRG net gearing

-

5.0

10.0

15.0

20.0

25.0

30.0

2009 2010 2011 2012 2013 2014E 2015E 2016E

CRCC CRG

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

CRCC CRG





04 April 2014

Asia Pacific/China

Equity Research


China Railway Group Limited

(0390.HK / 390 HK) INITIATION

Better cost control and financial management;

initiate with OUTPERFORM on stimulus

■ Initiate with OUTPERFORM. We initiate coverage on CRG with an

OUTPERFORM rating and a target price of HK$4.85 (24% potential upside)

given its improvement in cost control and financial management, attractive

valuation and it being a good proxy to the potential stimulus plan with focus

on railway. Currently, the stock trades at the historical low-end of valuation

range of 7x 2014E P/E.

■ Better cost control and financial management. CRG has done a great job

in cost control, with admin cost reduced by 6% YoY in 2013. It also managed

to improve operating cash flow and FCF by managing working capital well

and efficiently controlling BT/BOT investment.

■ Unexciting infrastructure spending after 2015. We expect slow railway

infrastructure spending after 2015, as Rmb600 bn infrastructure spending

per annum appears a high base to beat. New railway construction may only

focus on more remote passenger lines, cargo lines, double-track upgrades,

electrifications, and new lines in the west.

■ Valuation and risks. Our target price of HK$4.85 is based on 9.1x 2014E

P/E and 0.9x 2014E P/B. We believe that the current valuation is attractive in

the context of potential government stimulus and on-going railway reform.

Key risks include project cost overrun, overseas execution risk and working

capital risk.


80

100

120

140

160

2

3

4

5

6








Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 540,394.0 599,723.2 666,912.9 697,007.7 EBITDA (Rmb mn) 25,199.0 24,996.8 27,339.8 28,841.9 EBIT (Rmb mn) 18,478.0 18,024.6 20,114.1 21,355.7 Net profit (Rmb mn) 8,401.1 8,980.0 10,142.9 10,796.9 EPS (CS adj.) (Rmb) 0.39 0.42 0.48 0.51 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.46 0.51 0.40 EPS growth (%) 18.5 6.9 12.9 6.4 P/E (x) 8.0 7.4 6.6 6.2 Dividend yield (%) 2.1 2.0 2.3 2.4 EV/EBITDA (x) 6.7 7.1 6.7 6.6 P/B (x) 0.77 0.71 0.65 0.60 ROE (%) 10.2 9.9 10.3 10.1 Net debt/equity (%) 114.6 114.2 111.2 108.2


Rating OUTPERFORM* Price (03 Apr 14, HK$) 3.92 Target price (HK$) 4.85¹ Upside/downside (%) 23.7 Mkt cap (HK$ mn) 71,175 (US$9,175 mn) Enterprise value (Rmb mn) 176,863 Number of shares (mn) 21,299.90 Free float (%) 43.9 52-week price range 4.63 - 3.02 ADTO - 6M (US$ mn) 9.4




Research Analysts

Edmond Huang, CFA

852 2101 6701

[email protected]

Baiding Rong

852 2101 6703

[email protected]

04 April 2014

China Railway Group Limited (0390.HK / 390 HK) 66

China Railway Group Limited 0390.HK / 390 HK Price (02 Apr 14): HK$3.73, Rating: OUTPERFORM, Target Price: HK$4.85, Analyst: Edmond Huang




CRC's railway construction FAI (Rmb bn)

530.0 556.5 584.3 500.0 — — — — — — — — — — — — — — — —


Sales revenue 540,394 599,723 666,913 697,008 Cost of goods sold 500,054 552,047 613,238 639,463 SG&A 16,722 23,129 26,034 28,169 Other operating exp./(inc.) (1,581) (450) 302 534 EBITDA 25,199 24,997 27,340 28,842 Depreciation & amortisation 6,721 6,972 7,226 7,486 EBIT 18,478 18,025 20,114 21,356 Net interest expense/(inc.) 6,363 6,996 7,239 7,470 Non-operating inc./(exp.) 2,603 2,674 2,603 2,584 Associates/JV 101.0 112.8 126.1 141.2 Recurring PBT 14,819 13,815 15,605 16,611 Exceptionals/extraordinaries (972.9) — — — Taxes 4,744 4,145 4,681 4,983 Profit after tax 9,102 9,671 10,923 11,627 Other after tax income — — — — Minority interests 701.0 690.8 780.2 830.5 Preferred dividends — — — — Reported net profit 8,401 8,980 10,143 10,797 Analyst adjustments — — — — Net profit (Credit Suisse) 8,401 8,980 10,143 10,797


EBIT 18,478 18,025 20,114 21,356 Net interest 3,760 4,322 4,636 4,886 Tax paid (4,744) (4,145) (4,681) (4,983) Working capital (12,455) (13,633) (13,401) (15,333) Other cash & non-cash items 2,956 3,199 3,203 3,285 Operating cash flow 7,995 7,768 9,871 9,210 Capex (10,540) (10,540) (10,175) (9,827) Free cash flow to the firm (2,545) (2,772) (304) (618) Disposals of fixed assets 74.0 — — — Acquisitions — — — — Divestments 375.0 — — — Associate investments — — — — Other investment/(outflows) (2,071) 2,006 1,847 2,218 Investing cash flow (12,162) (8,534) (8,328) (7,610) Equity raised — — — — Dividends paid (1,406) (1,347) (1,521) (1,619) Net borrowings 24,771 5,302 7,836 4,651 Other financing cash flow (11,201) (6,996) (7,239) (7,470) Financing cash flow 12,164 (3,041) (924) (4,439) Total cash flow 7,997 (3,807) 618 (2,839) Adjustments (102.7) — — — Net change in cash 7,894 (3,807) 618 (2,839)







12/13A 12/14E 12/15E 12/16E

Growth(%) Sales revenue 16.1 11.0 11.2 4.5 EBIT 26.1 (2.5) 11.6 6.2 Net profit 18.5 6.9 12.9 6.4 EPS 18.5 6.9 12.9 6.4 Margins (%)

EBITDA 4.66 4.17 4.10 4.14 EBIT 3.42 3.01 3.02 3.06 Pre-tax profit 2.74 2.30 2.34 2.38 Net profit 1.55 1.50 1.52 1.55 Valuation metrics (x) P/E 7.57 7.08 6.27 5.89 P/B 0.74 0.68 0.62 0.57 Dividend yield (%) 2.21 2.12 2.39 2.55 P/CF 7.95 8.18 6.44 6.90 EV/sales 0.31 0.29 0.27 0.27 EV/EBITDA 6.62 7.04 6.70 6.61 EV/EBIT 9.0 9.8 9.1 8.9 ROE analysis (%) ROE 10.2 9.9 10.3 10.1 ROIC 6.23 5.84 6.04 5.97 Asset turnover (x) 0.86 0.89 0.91 0.91 Interest burden (x) 0.80 0.77 0.78 0.78 Tax burden (x) 0.66 0.70 0.70 0.70 Financial leverage (x) 6.50 6.46 6.43 6.19 Credit ratios Net debt/equity (%) 115 114 111 108 Net debt/EBITDA (x) 4.40 4.80 4.65 4.67 Interest cover (x) 2.90 2.58 2.78 2.86


0

5

10

15

20

25

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

04 April 2014


Initiate at OUTPERFORM on better cost

control and financial management We initiate CRG with an OUTPERFORM rating given its improvement in cost control and

financial management, attractive valuation and it being a good proxy to the potential

stimulus plan with focus on railway, despite a stretched balance sheet. Currently, the stock

trades at the historical low-end of valuation range of 7x 2014 P/E.

Better cost control and financial management

CRG has done a great job in cost control, in our view, with admin cost reduced by 6% YoY

in 2013, compared to 12% CAGR in 2004-12. This is very important for companies like

CRG that has seen its growth slowing down. Cost saving would be crucial to improve

profitability in a slow economy.

Figure 126: Admin cost growth and percentage of total sales

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2004 2006 2008 2010 2012 2014E 2016E

Admin cost YoY growth Admin cost % of sales (RHS)


It also managed to improve operating cash flow and FCF by managing working capital well

and efficiently control BT/BOT investment. OpCF moved into positive territory with Rmb8

bn, compared to Rmb13.5 bn/Rmb4.2 bn outflow in 2011/12. With shrinking investment in

BOT, FCF has improved dramatically from Rmb15 bn outflow in 2012 to Rmb2.5 bn

outflow in 2013. We understand this is partially driven by increasing pressure from

stretched balance sheet, but after all, this is good news to equity shareholders.

04 April 2014


Figure 127: CRG OpCF and FCF (Rmb bn) Figure 128: CRG capex breakdown (Rmb bn) and net

gearing

(30)

(25)

(20)

(15)

(10)

(5)

-

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

OpCF FCF

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Capex ex BOT BOT Net gearing (RHS)


Railway construction to normalise after 2015

China does need more railway lines to serve its super-size economy and huge population

in the long term as we believe railway provides cost effective and environmentally friendly

mode of transport. However, we expect unexciting growth in railway infrastructure

spending after 2015, as Rmb600 bn infrastructure spending per annum appears a high

base to beat. New railway construction may only focus on more remote passenger lines,

cargo lines, double-track upgrades, electrifications, and new lines in the west where traffic

is not heavy and speed standard is low.

Figure 129: Transportation subsectors FAI 3mma YoY

growth

Figure 130: FAI growth and transportation FAI growth

(3mma)

-100%

-50%

0%

50%

100%

150%



-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%


FAI transport FAI

Source: CEIC, Credit Suisse Source: CEIC, Credit Suisse

04 April 2014


We expect CRG to witness a 9% net profit CAGR in 2014-16 on the back of strong

backlog in hand. However, we remain cautious on future growth after 2015, as railway

spending will have a high base to beat.

Figure 131: CRG sales and growth (Rmb bn) Figure 132: CRG backlog and new orders (Rmb bn)

-10%

0%

10%

20%

30%

40%

50%

60%

-

100

200

300

400

500

600

700

800

2004 2006 2008 2010 2012 2014E 2016E


-

500

1,000

1,500

2,000

2,500

3,000

3,500

2004 2006 2008 2010 2012 2014E 2016E

New order Backlog


Financials

We forecast 6.9%/12.9%/6.4% earnings growth in 2014/15/16, driven by 11%/11.2%/4.5%

growth of sales and expanding gross margin due to change of business mix.

Figure 133: CRG net profit (Rmb bn) and growth Figure 134: CRG gross margin, EBIT margin and net

margin

-5%

0%

5%

10%

15%

20%

25%

30%

-

2

4

6

8

10

12

2009 2010 2011 2012 2013 2014E 2015E 2016E

Net profit Net profit growth YoY (RHS)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2004 2006 2008 2010 2012 2014E 2016E



We expect CRG's net gearing to remain at 114%/111% in 2014/15 from 115% in 2013.

We see better working capital management; it improved greatly in 2013, alleviating the

04 April 2014


stretched balance sheet. We expect the company to work rigorously on working capital

control and capex in the future as there is limited room for further leveraging.

Figure 135: CRCC and CRG interest coverage Figure 136: CRCC and CRG net gearing

-

5.0

10.0

15.0

20.0

25.0

30.0

2009 2010 2011 2012 2013 2014E 2015E 2016E

CRCC CRG

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

CRCC CRG


Valuation

Our target price of HK$4.85 is based on 9.1x 2014E P/E and 0.9x 2014E P/B, a slight

discount to its historical trading average.

■ We believe that current valuation is attractive in the context of potential government

stimulus and on-going railway reform.

■ CRG should trade at a discount to railway equipment makers due to weak balance

sheet and unexciting order flow and order quality.

Figure 137: CRG 12M forward P/E valuation Figure 138: CRG 12M forward P/B valuation

-

5.0

10.0

15.0

20.0

25.0



-

0.5

1.0

1.5

2.0

2.5




04 April 2014


Risks


The development of China’s railway and other transportation infrastructure investment is

dependent upon the development of major transportation projects, subject to government

decisions. Thus, government policy and decision of railway construction plan have a

material and adverse effect on CRG's business and financial performance.


CRG's revenue is substantially dependent on CRC's construction plan and funding. If CRC

changed/cancelled contracts, CRG would not be able to find any comparable replacement

orders. If CRG fails to win CRC's bids, CRG's financial condition would be negatively

affected.


As CRG generates a significant amount of revenue from CRC and local government, any

late payment could result in unfavourable change of working capital and cash flow for

CRG, which was evident in late 2011.


As of end 2013, CRG's backlog amounted Rmb1.7 tn. However, this figure is based on the

assumption that its relevant contracts will be performed in full accordance with their terms.

The termination or modification of any one or more major contracts may have a substantial

and immediate effect on backlog and future earnings.


CRG currently has businesses in many countries and regions outside of the PRC that are

subject to changes in the economic and political conditions that are beyond its control.

During 2011/12/13, revenue generated from overseas sales amounted 3.9%/4.6%/4% of

total sales, respectively.




04 April 2014

Asia Pacific/China

Equity Research

Capital Goods

Zhuzhou CSR Times Electric Co. Ltd. (3898.HK / 3898 HK)

INITIATION

Good positioning; IGBT offers pain before gain

■ We initiate coverage on Zhuzhou CSR Times Electric (ZZCSR) with a

NEUTRAL rating and a DCF-based target price of HK$28.90. We like ZZCSR's

good positioning in the whole food chain and light asset model. However, we

believe the new IGBT line leased from the parent company will add near-term

pressure, before it generates substantial revenue and cost saving in 2017. Our

target price implies an 8.4% potential upside and is based on 16.8x 2014E P/E.

We forecast 11% earnings CAGR in 2014-16, with 12% sales CAGR and a

slight decline in margin due to a change in business mix and rising operating

costs. Key risks include client concentration risk and working capital risks.

■ Rising orders improve growth outlook. The resumption of CRC railway

equipment tenders since August 2013 should revitalise CSR and benefit its

major component supplier ZZCSR directly. We expect EMU electric systems

to be the major growth driver for ZZCSR over 2014-16. Its dominance in

metro traction systems will also contribute positively to the top line. CSR's

recent strong export orders will add further growth in the medium term.

■ Margin down slightly due to product mix change. We expect that

normalising sales growth of locomotive electric system, and rising sales

contribution of EMU electric system and metro traction system businesses

will lead to lower blended gross margin. The potential export order to South

Africa still has uncertainty in margin given extra high operating costs.

■ IGBT new line, pain before pain. We expect the new IGBT line to add

downward earnings pressure over 2014-16 before reaching scale production

in 2017, regardless of it being acquired or leased from the parent. ZZCSR

will incur all the costs (depreciation, operating cost and related interest cost).


100

110

120

130

140

0

10

20

30

40






Performance over 1M 3M 12M Absolute (%) 12.4 -2.4 25.4 — Relative (%) 12.1 2.5 24.8 —


Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 8,780.7 9,884.5 11,138.1 12,439.5 EBITDA (Rmb mn) 1,844.7 2,058.6 2,284.0 2,541.8 EBIT (Rmb mn) 1,677.2 1,852.1 2,064.5 2,309.3 Net profit (Rmb mn) 1,467.0 1,606.1 1,792.7 2,005.9 EPS (CS adj.) (Rmb) 1.33 1.37 1.53 1.71 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 1.44 1.69 1.88 EPS growth (%) 18.0 2.5 11.6 11.9 P/E (x) 16.0 15.6 14.0 12.5 Dividend yield (%) 1.6 1.9 2.1 2.4 EV/EBITDA (x) 11.9 10.5 9.2 7.9 P/B (x) 2.8 2.4 2.1 1.9 ROE (%) 19.3 16.4 15.9 15.8 Net debt/equity (%) Net cash Net cash Net cash Net cash


Rating NEUTRAL Price (02 Apr 14, HK$) 26.65 Target price (HK$) 28.90¹ Upside/downside (%) 8.4 Mkt cap (HK$ mn) 31,326 (US$4,039 mn) Enterprise value (Rmb mn) 21,586 Number of shares (mn) 1,175.48 Free float (%) 46.6 52-week price range 30.0 - 16.5 ADTO - 6M (US$ mn) 10.5




[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Edmond Huang, CFA

852 2101 6701

[email protected]

Baiding Rong

852 2101 6703

[email protected]

04 April 2014

Zhuzhou CSR Times Electric Co. Ltd. (3898.HK / 3898 HK) 73

Zhuzhou CSR Times Electric Co. Ltd. 3898.HK / 3898 HK Price (03 Apr 14): HK$26.60, Rating: NEUTRAL, Target Price: HK$28.90, Analyst: Edmond Huang




— — — — — — — — — — — — — — — — — — — —


Sales revenue 8,781 9,884 11,138 12,439 Cost of goods sold 5,695 6,474 7,329 8,210 SG&A 1,504 1,700 1,908 2,108 Other operating exp./(inc.) (262.2) (348.9) (382.6) (420.3) EBITDA 1,845 2,059 2,284 2,542 Depreciation & amortisation 167.5 206.6 219.5 232.4 EBIT 1,677 1,852 2,064 2,309 Net interest expense/(inc.) (13.9) 2.1 — — Non-operating inc./(exp.) — — — — Associates/JV 12.6 15.1 17.4 20.0 Recurring PBT 1,704 1,865 2,082 2,329 Exceptionals/extraordinaries — — — — Taxes 237.4 259.9 290.1 324.5 Profit after tax 1,466 1,605 1,792 2,005 Other after tax income — — — — Minority interests (0.8) (0.9) (1.0) (1.1) Preferred dividends — — — — Reported net profit 1,467 1,606 1,793 2,006 Analyst adjustments — — — — Net profit (Credit Suisse) 1,467 1,606 1,793 2,006


EBIT 1,677 1,852 2,064 2,309 Net interest (34.5) (23.3) (29.3) (34.9) Tax paid (237.4) (259.9) (290.1) (324.5) Working capital (845.3) (711.6) (638.0) (693.9) Other cash & non-cash items 166.0 204.5 219.5 232.4 Operating cash flow 726 1,062 1,327 1,488 Capex (150.0) (200.0) (200.0) (200.0) Free cash flow to the firm 576 862 1,127 1,288 Disposals of fixed assets — — — — Acquisitions (100.0) — — — Divestments (1,100) — — — Associate investments — — — — Other investment/(outflows) 22.7 25.3 29.3 34.9 Investing cash flow (1,327) (175) (171) (165) Equity raised 1,776 — — — Dividends paid (379.5) (411.4) (481.8) (537.8) Net borrowings 55.0 (83.4) — — Other financing cash flow (29.1) (2.1) — — Financing cash flow 1,422 (497) (482) (538) Total cash flow 821.1 390.3 674.1 785.6 Adjustments — — — — Net change in cash 821.1 390.3 674.1 785.6


Cash & cash equivalents 3,136 3,509 4,183 4,968 Current receivables 4,907 5,886 6,853 7,902 Inventories 1,428 1,624 1,838 2,059 Other current assets 1,342 1,373 1,411 1,456 Current assets 10,814 12,391 14,285 16,385 Property, plant & equip. 1,830 2,284 2,265 2,232 Investments 233.0 248.0 265.4 285.4 Intangibles 246.8 246.8 246.8 246.8 Other non-current assets 274.7 300.6 300.6 300.6 Total assets 13,398 15,471 17,362 19,450 Accounts payable 2,679 3,045 3,447 3,862 Short-term debt 31.2 31.2 31.2 31.2 Current provisions — — — — Other current liabilities 1,111 1,263 1,443 1,649 Current liabilities 3,821 4,340 4,921 5,542 Long-term debt 52.2 — — — Non-current provisions 209.5 209.5 209.5 209.5 Other non-current liab. 166.2 166.2 166.2 166.2 Total liabilities 4,248 4,716 5,297 5,917 Shareholders' equity 9,016 10,622 11,933 13,401 Minority interests 134.2 133.4 132.4 131.3 Total liabilities & equity 13,398 15,471 17,362 19,450





12/13A 12/14E 12/15E 12/16E


EBITDA 21.0 20.8 20.5 20.4 EBIT 19.1 18.7 18.5 18.6 Pre-tax profit 19.4 18.9 18.7 18.7 Net profit 16.7 16.2 16.1 16.1 Valuation metrics (x) P/E 16.0 15.6 14.0 12.5 P/B 2.78 2.36 2.10 1.87 Dividend yield (%) 1.64 1.93 2.15 2.41 P/CF 32.3 23.6 18.9 16.8 EV/sales 2.50 2.18 1.87 1.61 EV/EBITDA 11.9 10.5 9.1 7.9 EV/EBIT 13.1 11.6 10.1 8.7 ROE analysis (%) ROE 19.3 16.4 15.9 15.8 ROIC 28.5 23.8 23.4 24.1 Asset turnover (x) 0.66 0.64 0.64 0.64 Interest burden (x) 1.02 1.01 1.01 1.01 Tax burden (x) 0.86 0.86 0.86 0.86 Financial leverage (x) 1.46 1.44 1.44 1.44 Credit ratios Net debt/equity (%) (33.4) (32.3) (34.4) (36.5) Net debt/EBITDA (x) (1.65) (1.69) (1.82) (1.94) Interest cover (x) (121) 891 — —


0

5

10

15

20

25

30

35

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0

1

2

3

4

5

6

7

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

04 April 2014


Improved growth profile on the back of rising new orders The resumption of CRC railway equipment tenders since August 2013 has revitalised

CSR's growth profile and will benefit its major component supplier ZZCSR. We believe the

on-going vast development of high-speed railway network in China would generate strong

demand for EMUs which is a fuel efficient mode of transport. Increasing flight delays and

environmental concerns would change travellers' behaviour and in turn lay solid

foundation for great demand profile. CSRs' backlog rose from Rmb78 bn in 2012 to

Rmb111 bn in 2013, of which Rmb62 bn (56%) is EMU. ZZCSR will benefit directly as

CSR's key EMU component and system supplier.

In August 2013, CRC tendered for 795 units of locomotives, 91 sets of 250km/h EMUs, 42

sets of 30km/h EMUs and 26 sets of 350km/h EMUs suitable for high latitude and low

temperature. In October 2013, another batch of tender of 88 sets of 250km/h EMUs and

226 sets of 350km/h EMUs were announced. CSR won 54% of the EMU tenders and 47%

of the locomotive tenders, based on our estimates.

We believe CSR's growing export orders will also help ZZCSR. CSR awarded ZZCSR all

of its 95 units of locomotive export orders won in 2012 (to South Africa Transnet),

reflecting ZZCSR's critical role as the key supplier. We believe ZZCSR will also be actively

involved in CSR's recent big locomotive export orders (359 units to South African

Transnet), with more details to be disclosed.

Figure 139: Strong new railway equipment order

momentum (in aggregate trailing 12M, Rmb bn)

0

1

2

3

4

5

6

7

8



04 April 2014


Margins likely slightly down due to product mix change We believe ZZCSR's gross margin will more likely contract slightly than expand in 2014,

mainly due to product mix change. Locomotive electric system, which enjoys the highest

gross margin, will have decelerating YoY sales growth from a high base due to normalised

CRC locomotive tender in 2014. EMU electric system and metro traction system

businesses will catch up and contribute more to revenue than that in 2013. EMU

maintenance will definitely help support revenue and net profit but may materialise in the

medium term.

The profitability of the potential CSR's 359 units of locomotive export orders to South

Africa is better than domestic market but some factors may drag down overall profitability.

We believe export orders tend to have higher gross margin than domestic orders.

However, localisation programme in the target market will also incur extra costs, explicitly

and implicitly, including hiring and training of local employees. Different product

specifications (lower horse-power but more complicated power sources compared to

domestic locomotives) may also affect gross margin. Given very different political and

economic environments, execution and risk management are also critical for success.

Figure 140: Gross margin, EBIT margin and net margin Figure 141: Quarterly margin trend

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13



04 April 2014


IGBT development: Pain before gain We expect the new IGBT production line to add downward pressure to ZZCSR's earnings

in 2014/15, regardless of it being acquired or leased from CSR. The IGBT production line

costs Rmb1.5 bn and was built by CSR. According to a memorandum disclosed by

ZZCSR, CSR allows ZZCSR to use the production line for trial production, during which

ZZCSR needs to pay all the operating expenses. After finishing the examination of the

production line, ZZCSR can lease or acquire it from CSR.

It really depends on how quickly and significantly it will ramp up. We understand that sales

will gradually pick up over 2014-16 before reaching scale production in 2017 (at 120,000

pieces p.a.). ZZCSR will book depreciation, operating cost and related interest cost (likely

Rmb200 mn per year) on their own profit and loss statement, according to

the management.

04 April 2014


Financials We forecast 9.5%/11.6%/11.9% earnings growth in 2014/15/16, with 12.6%/12.7%/11.7%

growth in sales and a slight decline in margin due to change of business mix and rising

operating costs, respectively.

Figure 142: Sales (Rmb mn) and growth Figure 143: Net profit (Rmb mn) and growth

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Sales Sales YoY (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

-

500

1,000

1,500

2,000

2,500

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Net profit Net profit YoY (RHS)


We expect ZZCSR to remain in a net cash position in 2014/15, as profitability recovers

and capex is limited. Working capital may rise due to expanding business and CRC's tight

financial condition.

Figure 144: Free cash flow (Rmb mn) and net gearing

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

(400)

(200)

-

200

400

600

800

1,000

1,200

1,400

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

FCF Net gearing


Valuation

Our DCF-based price target of HK$28.90 is based on 2% terminal growth and 8.7%

WACC. We assume 11% cost of equity and 6% cost of debt. Our target price implies 16.8x

2014E P/E and 2.5x 2014E P/B. We believe the stock should trade above historical trading

average, as we are going to see a normalised railway equipment and component orders

04 April 2014


from CRC, driven by growing high-speed train network in China, rising maintenance

demand and potential overseas expansion. ZZCSR should trade at a premium over

railway construction companies due to much stronger growth profile and healthier balance

sheet.

Figure 145: ZZCSR 12M forward P/E Figure 146: ZZCSR 12M forward P/B

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

[email protected] [email protected] +1 [email protected] -1 stdv@10

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

PB@2 [email protected] +1 [email protected] -1 [email protected]





04 April 2014


Key investment risks Government policies and capex plan

The development of China’s railway equipment industry is dependent on the development

of major rail transportation and rapid transit projects, subject to government decisions. In

addition, the government also sets technology and safety requirement of railway

equipment, and foreign investment restriction on the industry. Thus, government policies,

decision of railway construction and capital expenditure plan have a material and adverse

effect on ZZCSR's business and financial performance.

Client concentration risk

ZZCSR's revenue is substantially dependent on CRC's tenders. CRC has relatively strong

influence in procurement, in terms of price, quantity, technical specifications, and delivery

schedule. If CRC change/cancel contracts, ZZCSR would not be able to find any

comparable replacement orders. If CSR fails to win CRC's bids, ZZCSR's financial

condition would be negatively affected.

ZZCSR's revenue is also dependent on CSR's support. CSR Group usually accounted for

50-65% of ZZCSR's sales. If CSR does not purchase the key components from ZZCSR,

the latter's business and financial performance will be negatively affected.

Working capital risks

As ZZCSR generates a significant amount of revenue from CSR, any late payment from

CSR could result in unfavourable change in working capital and cash flow for ZZCSR,

which was evident in late 2011.

Order cancelation risk

The termination or modification of any one or more major contracts from CSR or other

customers may have a substantial and immediate effect on backlog and future earnings.

International market risks

ZZCSR may participate in the export orders with CSR to countries and regions outside of

the PRC that are subject to changes in economic and political conditions that are beyond

its control. Unfamiliar economic, political and labour environment may negatively affect

ZZCSR's profitability from overseas.




04 April 2014

Asia Pacific/China

Equity Research


China Communications Construction Co Ltd (1800.HK / 1800 HK)

INITIATION

To grow at a slow pace given stretched

balance sheet

■ Expected to grow slowly given tight balance sheet. We initiate coverage on CCCC with a NEUTRAL rating and target price of HK$6.00 implying 6.0x/0.7x 2014E P/B and P/E, respectively, on a 7% earnings CAGR for 2014-16E. We expect new orders/revenue to rebound in 2014 from a tight 2013, with the gross margin to normalise after the big loss realised in railway construction. However, we expect that CCCC will have to grow slowly given its stretched balance sheet. Despite undemanding valuation, there are few share price catalysts in the near term, in our view.

■ New order/revenue to rebound in 2014. We expect revenue to grow a moderate 9.4%/9.9%/5.8% in 2014E/15E/16E, with more contributions from municipal works, overseas projects and BT/BOT projects. The dredging business may only grow mildly, with the port machinery business on the right recovery track. We also expect new orders to grow 12.8%/10.8%/10.5% in 2014E/15E/16E, following 6% YoY growth in 2013.

■ Margins to normalise after big loss in railway construction. The overall gross margin is expected to recover in 2014 from a relatively low base in 2013, given a Rmb1.8 bn loss realised in the railway construction business (contributing to a 0.6% lower gross margin). However, we expect the net margin will struggle to improve given rapidly rising financial costs as a result of a stretched balance sheet.

■ Rising gearing remains biggest overhang. We believe that CCCC has to further leverage its balance sheet in order to deliver growth and expect net gearing to further increase to 115% by the end of 2014. We expect the high gearing will remain a key overhang as a result of the still-tight funding status of local government and heavy investment in BT/BOT projects. Key risks are government funding risk, policy uncertainty, and overseas execution risk.


60

80

100

120

4

6

8

10






Performance Over 1M 3M 12M Absolute (%) 3.9 -6.9 -22.3 — Relative (%) 3.7 -4.5 -23.6 —


Year 12/13A 12/14E 12/15E 12/16E Revenue (Rmb mn) 331,798.0 363,093.8 399,023.9 422,329.2 EBITDA (Rmb mn) 27,617.0 33,059.4 36,863.0 39,183.1 EBIT (Rmb mn) 19,575.0 23,771.0 26,673.2 28,382.7 Net profit (Rmb mn) 11,974.2 12,924.5 14,074.7 14,637.5 EPS (CS adj.) (Rmb) 0.74 0.80 0.87 0.90 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.88 0.96 1.04 EPS growth (%) -0.9 7.9 8.9 4.0 P/E (x) 6.1 5.6 5.2 5.0 Dividend yield (%) 4.2 4.6 5.0 5.2 EV/EBITDA (x) 6.2 5.9 6.0 6.1 P/B (x) 0.77 0.69 0.63 0.57 ROE (%) 13.2 12.9 12.7 12.0 Net debt/equity (%) 100.9 114.6 122.3 126.5


Rating NEUTRAL* Price (03 Apr 14, HK$) 5.63 Target price (HK$) 6.00¹ Upside/downside (%) 6.6 Mkt cap (HK$ mn) 80,271 (US$ 10,348) Enterprise value (Rmb mn) 196,311 Number of shares (mn) 16,174.74 Free float (%) 35.7 52-week price range 7.89 - 4.97 ADTO - 6M (US$ mn) 13.2




Research Analysts

Edmond Huang, CFA

852 2101 6701

[email protected]

Baiding Rong

852 2101 6703

[email protected]

04 April 2014

China Communications Construction Co Ltd (1800.HK / 1800 HK) 81

China Communications Construction Co Ltd 1800.HK / 1800 HK Price (03 Apr 14): HK$5.63, Rating: NEUTRAL, Target Price: HK$6.00, Analyst: Edmond Huang


Scenario TP %Up/Dwn Assumptions Upside

Central Case 6.00 6.57 Room to grow limited given stretched balance sheet

Downside


— — — — — — — — — — — — — — — — — — — —


Sales revenue 331,798 363,094 399,024 422,329 Cost of goods sold 297,860 323,007 354,039 374,293 SG&A 16,290 18,162 20,157 21,499 Other operating exp./(inc.) (9,969) (11,134) (12,036) (12,646) EBITDA 27,617 33,059 36,863 39,183 Depreciation & amortisation 8,042 9,288 10,190 10,800 EBIT 19,575 23,771 26,673 28,383 Net interest expense/(inc.) 3,945 6,126 7,181 8,104 Non-operating inc./(exp.) — — — — Associates/JV 222.0 244.2 268.6 295.5 Recurring PBT 15,852 17,889 19,761 20,575 Exceptionals/extraordinaries (593.8) (518.0) (472.8) (425.4) Taxes 3,580 4,114 4,545 4,732 Profit after tax 11,678 13,256 14,743 15,417 Other after tax income — — — — Minority interests (296.0) 332.0 668.4 779.6 Preferred dividends — — — — Reported net profit 11,974 12,924 14,075 14,637 Analyst adjustments — — — — Net profit (Credit Suisse) 11,974 12,924 14,075 14,637


EBIT 19,575 23,771 26,673 28,383 Net interest 3,945 6,126 7,181 8,104 Tax paid (3,677) (4,114) (4,545) (4,732) Working capital (15,478) (22,034) (22,968) (23,366) Other cash & non-cash items (3,013) (5,460) (6,691) (7,924) Operating cash flow 1,352 (1,710) (350) 464 Capex (26,868) (23,931) (21,796) (19,875) Free cash flow to the firm (25,516) (25,642) (22,146) (19,411) Disposals of fixed assets 1,073 — — — Acquisitions — — — — Divestments 6,497 1,299 1,712 1,642 Associate investments (2,923) — — — Other investment/(outflows) (5,865) 1,874 1,034 865 Investing cash flow (28,086) (20,758) (19,051) (17,368) Equity raised — — — — Dividends paid (2,988) (3,361) (3,637) (3,766) Net borrowings 126,060 27,056 23,105 19,736 Other financing cash flow (82,890) — — — Financing cash flow 40,182 23,695 19,468 15,971 Total cash flow 13,448 1,227 67 (934) Adjustments (213.0) — — — Net change in cash 13,235 1,227 67 (934)





0.74 0.80 0.87 0.90 DPS (Rmb) 0.19 0.21 0.22 0.23 BVPS (Rmb) 5.86 6.49 7.16 7.86 Operating CFPS (Rmb) 0.08 (0.11) (0.02) 0.03


12/13A 12/14E 12/15E 12/16E

Growth(%) Sales revenue 12.4 9.4 9.9 5.8 EBIT 2.0 21.4 12.2 6.4 Net profit 0.49 7.94 8.90 4.00 EPS (0.91) 7.94 8.90 4.00 Margins (%) EBITDA 8.3 9.1 9.2 9.3 EBIT 5.90 6.55 6.68 6.72 Pre-tax profit 4.78 4.93 4.95 4.87 Net profit 3.61 3.56 3.53 3.47 Valuation metrics (x) P/E 6.09 5.64 5.18 4.98 P/B 0.77 0.69 0.63 0.57 Dividend yield (%) 4.16 4.61 4.99 5.17 P/CF 54 (43) (208) 157 EV/sales 0.51 0.54 0.55 0.57 EV/EBITDA 6.15 5.94 5.95 6.13 EV/EBIT 8.68 8.26 8.22 8.46 ROE analysis (%) ROE 13.2 12.9 12.7 12.0 ROIC 7.81 7.92 7.70 7.28 Asset turnover (x) 0.64 0.64 0.65 0.65 Interest burden (x) 0.81 0.75 0.74 0.72 Tax burden (x) 0.77 0.76 0.76 0.77 Financial leverage (x) 4.94 4.95 4.87 4.71 Credit ratios Net debt/equity (%) 101 115 122 127 Net debt/EBITDA (x) 3.83 4.00 4.21 4.49 Interest cover (x) 4.96 3.88 3.71 3.50


0

2

4

6

8

10

12

14

16

18

20

2009 2010 2011 2012 2013 2014

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012 2013 2014

12MF P/B multiple

Source: IBES

04 April 2014


To grow at slow pace given stretched balance sheet We initiate coverage on CCCC with a NEUTRAL rating and target price of HK$6.00

implying 6.0x/0.7x 2014E P/E / P/B, respectively, based on a 7% earnings CAGR for

2014-16E. We expect new orders/revenue to rebound in 2014 from a tight 2013, with the

gross margin to normalise after the big loss realised in railway construction. However, we

expect CCCC will have to grow slowly given its stretched balance sheet. Its current

valuation has factored in slowing infrastructure spending and weakening cash flow in

China. Despite being inexpensive, there are few catalysts for the share price in the near

term, in our view.

New order and revenue to rebound in 2014

We expect new orders to grow 12.8%/10.8%/10.5% in 2014E/15E/16E. New orders grew

6%YoY to Rmb546 bn in 2013. The construction segment registered strong growth in

road/bridge (+55% YoY), overseas orders (+38% YoY) and other municipal orders

(+47%YoY), which offset a decline in port (-32% YoY) and BT/BOT (-53%YoY). Backlog

growth contracted to 5% YoY to Rmb738 bn, still covering two years of sales.

We expect sales to grow a moderate 9.4%/9.9%/5.8% in 2014E/15E/16E. Municipal

works, overseas projects and BT/BOT projects should contribute more significantly, due to

strong orders in the past several years and a slowdown in China infrastructure fixed-asset

investment (FAI). In addition, the dredging business may only grow mildly, with the port

machinery business on the right recovery track. CCCC delivered 12% sales growth in

2013, mainly driven by the construction segment. The design segment also performed well

at the top line, registering an 18% YoY increase in sales. Heavy machinery sales growth

managed to rebound into positive territory of 25% YoY from a 4% decline in 2012.

Port construction is expected to continue to slow down, with road/bridge investment

normalising. BT/BOT, overseas and municipal projects are the areas in which the

company is keen to seek growth. CCCC plans to focus on large-scale port upgrading and

reconstruction as well as port relocation projects. In addition, the company intends to seek

growth from emerging markets, such as Africa. Road and bridge should stabilise given the

already high base and keen competition. Municipal works are expected to be one of the

major growth drivers in 2014, thanks to China's continuing urbanisation. Design should

also pick up, given the rebounding construction business.

We believe that the dredging business will remain unexciting as a result of sluggish port-

related construction activities, including land reclamation. Environmental dredging has

picked up good momentum, but it is a relatively small market segment for CCCC with low

entry barriers. As a result, CCCC has to seek growth in overseas markets, such as Africa

and the Middle East.

We anticipate port machinery to gradually recover with better offshore marine engineering

order flows. CCCC will actively promote the development of the six-generation deep-water

drilling ship, by leveraging on F&G’s R&D capability.

04 April 2014


Figure 147: New order and growth (Rmb bn) Figure 148: Backlog and growth (Rmb bn)

0%

10%

20%

30%

40%

50%

60%

-

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010 2011 2012 2013 2014E2015E2016E

Total new order YoY (RHS)

0%

10%

20%

30%

40%

50%

60%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2006 2008 2010 2012 2014E 2016E

Total backlog YoY (RHS)

Source: Company data; Credit Suisse estimates Source: Company data; Credit Suisse estimates

Figure 149: New order growth of major construction

segments

Figure 150: New order size and YoY growth of major

construction segments (2013)

-100%

-50%

0%

50%

100%

150%

200%

250%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Port Road & bridge BT&BOT Overseas

-60%

-40%

-20%

0%

20%

40%

60%

80%

- 50 100 150 200

Railway

Other construction

Road & bridge

Overseas

Port

BT&BOT

Source: Company data; Credit Suisse estimates Source: Company data

04 April 2014


Figure 151: Sales (Rmb bn) and YoY growth Figure 152: Net profit (Rmb bn) and YoY growth

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-

50

100

150

200

250

300

350

400

450

2006 2008 2010 2012 2014E 2016E

Sales YoY (RHS)

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

-

2

4

6

8

10

12

14

16

2006 2008 2010 2012 2014E 2016E

Net profit YoY (RHS)


Margins to normalise after big loss in railway

construction in 2013

The overall gross margin is expected to recover in 2014 from a relatively low base in 2013

given the Rmb1.8 bn loss realised in the railway construction business (contributing a

0.6% lower gross margin). The reported gross margin in 2013 contracted, except for the

machinery business, with construction falling from 9.7% to 8.7% and design from 25.7% to

23.9% due to more EPC works. ZPMC (600320.SS, not rated), the major subsidiary of

CCCC’s heavy machinery arm, improved its machinery segment gross margin from 5% to

6.6% (with container crane registering a 12% gross margin) in 2013 when revenue grew

27% YoY. We expect this segment to continue improving margins and achieve an

operational profit in 2014. However, the net margin will struggle to improve, given rapidly

rising financial costs as a result of the stretched balance sheet.

Figure 153: Gross margin by segment Figure 154: Gross, EBIT and net margins

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Construction Design Dredging

Machinery Overall

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E



04 April 2014


Rising gearing remains the biggest overhang

We believe that CCCC has to further room to leverage its balance sheet in order to deliver

growth and we expect net gearing to further increase to 115% by the end of 2014. We see

high gearing remaining a key overhang as a result of the still-tight funding status of local

government and heavy investment in BT/BOT projects. We estimate the company will

continue to invest in its investment business, with Rmb24 bn (including Rmb18 bn on BOT

projects) in 2014.

The balance sheet is already quite stretched due to large investment projects and tight

working capital in 2013. Long-term receivables rose by 42% YoY due to the expansion in

BT/BOT projects. Total capex rose by 21% YoY, mainly due to a 43% YoY increase of

spending on BOT. Operating cash flow halved to a Rmb7 bn inflow, while free cash flow

reached Rmb25.5 bn in outflows (compared with a Rmb18 bn outflow in 2012).

Consequently, net gearing rose to 101% by the end of 2013 from 81% in 2012.

Figure 155: OpCF and FCF (Rmb bn) Figure 156: Net gearing

(30)

(25)

(20)

(15)

(10)

(5)

-

5

10

15

20

2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

OpCF FCF

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E


Valuation

Our target price of HK$6.00 is based on 6x 2014E P/E, one standard deviation below the

historical trading range. We expect the stock will remain at low multiples due to slower

growth, little room for margin expansion and a stretched balance sheet. CCCC is a well-

diversified infrastructure constructor with no meaningful contribution from railway

construction so it would not benefit much from a possible stimulus plan focusing on the

railways.

04 April 2014


Figure 157: CCCC's P/E Figure 158: CCCC's P/B

-

5.0

10.0

15.0

20.0

25.0


[email protected] [email protected] +1 [email protected] -1 stdv@6

-

0.5

1.0

1.5

2.0

2.5

3.0



Source: Bloomberg, Company data, Credit Suisse estimates Source: Bloomberg, Company data, Credit Suisse estimates

Risks


The development of China’s transportation infrastructure investment depends upon the

development of major transportation projects which are subject to government decisions.

Thus, government policy and decisions on the railway construction plan have a material

and adverse effect on CCCC's business and financial performance.


As CCCC generates a significant amount of revenue from local governments, any late

payment could result in unfavourable changes to working capital and cash flow for CCCC.

If the economy slows down, local government funding may get increasingly difficult.


As at the end of 2013, CCCC's order backlog amounted to Rmb738 bn. However, this

figure is based on the assumption that its relevant contracts will be performed in full, in

accordance with their terms. The termination or modification of any one or more major

contracts may have a substantial and immediate effect on backlog and future earnings.


CCCC generates revenues in Africa, the Middle East, the Americas, South-East Asia,

Europe and Central Asia, and particularly emerging economies that are subject to changes

in economic and political conditions that are beyond its control. For 2011/12/13, revenue

generated from overseas sales amounted 11%/13%/17% of total sales, respectively. New

orders from overseas accounted for 19% of total new orders in 2013.

04 April 2014


Companies Mentioned (Price as of 02-Apr-2014)

ABB (ABBN.VX, SFr23.08) Alstom (ALSO.PA, €21.97) Bombardier Inc (SVS) (BBDb.TO, C$4.28) CMEC (1829.HK, HK$5.64) CNCEC (601117.SS, Rmb6.3) CSR Corporation Limited (1766.HK, HK$6.72, OUTPERFORM, TP HK$8.1) CSX Corporation (CSX.N, $29.22) Canadian National (CNI.N, $56.61) Canadian Pacific Railways (CP.N, $153.28) Central Japan Railway Company (9022.T, ¥11,995) China Automation Group (0569.HK, HK$1.32) China Communications Construction Co Ltd (1800.HK, HK$5.33, NEUTRAL, TP HK$6.0) China ITS Holding (1900.HK, HK$1.44) China Railway Construction Corporation Limited (1186.HK, HK$6.93, OUTPERFORM, TP HK$9.2) China Railway Group Limited (0390.HK, HK$3.73, OUTPERFORM, TP HK$4.85) China State Construction International Holdings Li (3311.HK, HK$13.24, OUTPERFORM, TP HK$17.3) Chiyoda Corporation (6366.T, ¥1,376) Daelim Industrial (000210.KS, W87,100) Daewoo E&C (047040.KS, W7,770) Daqin Railway Co. Ltd. (601006.SS, Rmb6.75) East Japan Railway Company (9020.T, ¥7,512) Fluor (FLR.N, $77.66) Foster Wheeler (FWLT.OQ, $33.36) GS E&C (006360.KS, W36,600) Guangshen Railway (0525.HK, HK$3.44) Hollysys Automation Technologies Ltd. (HOLI.OQ, $21.96, OUTPERFORM, TP $29.1) Hyundai E&C (000720.KS, W56,800) JGC Corporation (1963.T, ¥3,619) KBR Inc. (KBR.N, $27.35) Kansas City Southern (KSU.N, $104.3) Kawasaki Heavy Industries, Ltd. (7012.T, ¥393) Larsen & Toubro (LART.BO, Rs1299.95) MTR Corporation (0066.HK, HK$29.0) McDermott International (MDR.N, $7.06) Samsung Engineering Co Ltd (028050.KS, W72,400) Siemens (SIEGn.DE, €98.38) Sinopec Engineering (Group) Co Ltd (2386.HK, HK$8.68) Technip (TECF.PA, €73.06) Union Pacific (UNP.N, $189.08) West Japan Railway Company (9021.T, ¥4,142) Zhuzhou CSR Times Electric Co. Ltd. (3898.HK, HK$26.65, NEUTRAL[V], TP HK$28.9)

Disclosure Appendix

Important Global Disclosures

The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for CSR Corporation Limited (1766.HK)

1766.HK Closing Price Target Price

Date (HK$) (HK$) Rating

24-Sep-12 5.06 4.00 U *

30-Jan-13 6.45 5.50

24-Oct-13 6.31 NR

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

N O T RA T ED

04 April 2014


3-Year Price and Rating History for China Communications Construction Co Ltd (1800.HK)



21-Jun-11 6.56 7.48 N

17-Apr-12 7.37 NR


N EU T RA L

N O T RA T ED

3-Year Price and Rating History for China Railway Construction Corporation Limited (1186.HK)



29-Apr-11 6.86 7.68 N

21-Jun-11 6.48 7.12

02-Nov-11 5.36 6.40 O

12-Apr-12 5.43 NR


N EU T RA L

O U T PERFO RM

N O T RA T ED

3-Year Price and Rating History for China Railway Group Limited (0390.HK)



02-May-11 4.16 4.43 N

21-Jun-11 3.55 3.90

02-Nov-11 2.92 3.55 O

13-Apr-12 2.96 NR


N EU T RA L

O U T PERFO RM

N O T RA T ED

04 April 2014


3-Year Price and Rating History for Zhuzhou CSR Times Electric Co. Ltd. (3898.HK)



24-Sep-12 21.35 15.10 U *

30-Jan-13 25.55 20.30

24-Oct-13 26.70 NR


U N D ERPERFO RM

N O T RA T ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least att ractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price an d (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchma rk.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (53% banking clients)

Neutral/Hold* 40% (50% banking clients)

Underperform/Sell* 14% (45% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

04 April 2014


Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for China Railway Group Limited (0390.HK)

Method: Our target price of HK$4.85 for China Railway Group Limited is based on 9.1x 2014E P/E (price-to-earnings) and 0.9x 2014E P/B (price-to-book), a slight discount to its historical trading average. We believe that current valuation is attractive in the context of potential government stimulus and on-going railway reform. CRG should trade at a discount to railway equipment makers due to weak balance sheet and unexciting order flow and order quality.

Risk: Risks that could impede achievement of our HK$4.85 target price for China Railway Group Limited include: (1) Government policies and capex plan: The development of China’s railway and other transportation infrastructure investment is dependent upon the development of major transportation projects, subject to government decisions. Thus, government policy and decision of railway construction plan have a material and adverse effect on CRG's business and financial performance. (2) Client concentration risk: CRG's revenue is substantially dependent on CRC's construction plan and funding. If CRC changed/cancelled contracts, CRG would not be able to find any comparable replacement orders. If CRG fails to win CRC's bids, CRG's financial condition would be negatively affected. (3) Working capital risks: As CRG generates a significant amount of revenue from CRC and local government, any late payment could result in unfavourable change of working capital and cash flow for CRG, which was evident in late 2011. (4) Order cancellation risk: As of end 2013, CRG's backlog amounted Rmb1.7 tn. However, this figure is based on the assumption that its relevant contracts will be performed in full accordance with their terms. The termination or modification of any one or more major contracts may have a substantial and immediate effect on backlog and future earnings. (5) International market risks: CRG currently has businesses in many countries and regions outside of the PRC that are subject to changes in the economic and political conditions that are beyond its control. During 2011/12/13, revenue generated from overseas sales amounted 3.9%/4.6%/4% of total sales, respectively.

Price Target: (12 months) for China Railway Construction Corporation Limited (1186.HK)

Method: Our price target of HK$9.20 for China Railway Construction Corporation Limited is based on 8.2x 2014E P/E (price-to-earnings) and 1x 2014E /PB (price-to-book), a slight discount to its historical trading average. We believe the current valuation is attractive in the context of potential government stimulus and the on-going railway reform. CRCC should trade at a discount to railway equipment makers due to weak balance sheet and unexciting order flow and order quality.

Risk: Risks that could impede achievement of our HK$9.20 target price for China Railway Construction Corporation Limited include: (1) Government policies and capex plan: The development of China’s railway and other transportation infrastructure investment is dependent upon the development of major transportation projects, subject to government decisions. Thus, government policy and decisions about railway construction plans have a material and adverse effect on CRCC's business and financial performance. (2) Client concentration risk: CRCC's revenue is substantially dependent on CRC's construction plan and funding. If CRC changed/cancelled contracts, CRCC would not be able to find any comparable replacement orders. If CRCC failed to win CRC's bids, CRCC's financial condition would be negatively affected. (3) Working capital risks: As CRCC generates a significant amount of revenue from CRC and the local government, any late payment could result in unfavourable change in working capital and cash flow for CRCC, such as which was evident in late 2011. (4) Order cancellation risk: As of end-2013, CRCC's backlog amounted Rmb1.7 tn. However, this figure is based on the assumption that its relevant contracts will be performed in full in accordance with their terms. The termination or modification of any one or more major contracts will have a substantial and immediate effect on the backlog and future earnings. (5) International market risks: CRCC currently has businesses in 69 countries and regions outside of the PRC that are subject to changes in economic and political conditions that are beyond its control. During 2011/12/13, revenue generated from overseas sales amounted 3.8%/3.6%3.6% of total sales.

Price Target: (12 months) for CSR Corporation Limited (1766.HK)

Method: Our DCF (discounted cash flow)-backed target price of HK$8.10 for CSR Corporation Limited is based on 2% terminal growth and a 7.1% WACC. We assume an 11% cost of equity and a 6% cost of debt. Our target price implies 17.3x/14.6x 2014E/15E P/E (price-to-earnings) and 2.2x/2.0x 2014/15E P/B (price-to-book). We believe the stock should trade above the historical trading average, as we are going to see a normalised growth profile for CSR, driven by growing high-speed training network in China, rising maintenance demand and potential overseas expansion. CSR should trade at a premium to railway constructors due to a much stronger growth profile and a healthier balance sheet.

Risk: Risks that could impede achievement of our HK$8.10 target price for CSR Corporation Limited include: (1) Government policies and capex plan: The development of China’s railway equipment industry is dependent upon the development of major rail transportation and rapid transit projects, subject to government decisions. In addition, the government also sets technology and safety requirement of railway equipment, and foreign investment restriction on the industry. Thus, government policy, decision of railway construction and capital

04 April 2014


expenditure plan have a material and adverse effect on CSR's business and financial performance. (2) Client concentration risk: CSR's revenue is substantially dependent on CRC's tenders. In 2011, 2012 and 2013, MOR/CRC accounted for 54.6%, 42.1% and 40.6% of its sales, respectively. CRC has relatively strong bargain power in procurement, in terms of price, quantity, technical specifications and delivery schedule. If CRC changes/cancels contracts, CSR would not be able to find any comparable replacement orders. If CSR fails to win CRC's bids, CSR's financial condition would be negatively affected. (3) Product quality concerns: Product quality, safety and reliability are of critical importance for CSR's products. CSR may be subject to product liabilities caused by defects in products, and results in product recalls and potential fines and compensations, as well as sales recognition delays. (4) Key components and raw material supply risks: Fluctuations in raw material prices, particularly aluminium, steel, and copper, could affect its gross margins. Inaccurate estimate of cost and price fluctuations in raw material, and delays caused by various factors may cause cost overruns. (5) Working capital risks: As CSR generates a significant amount of revenue from CRC, any late payment from CRC could result in unfavourable changes in working capital and cash flows for CSR; this was evident in late 2011. (6) Order cancelation risk: As of end-2013, CSR's backlog amounted to Rmb110 bn. However, this figure is based on the assumption that its relevant contracts will be performed in full accordance with their terms. The termination or modification of any one or more major contracts may have a substantial and immediate effect on backlog and future earnings. (7) International market risks: CSR exports products to more than 80 countries and regions outside of the PRC whose economic and political conditions are subject to change and beyond its control. In 2011, 2012 and 2013, revenue generated from overseas sales amounted to 7.7%, 9.5% and 6.6% of total sales, respectively.

Price Target: (12 months) for China Communications Construction Co Ltd (1800.HK)

Method: Our target price of HK$6.00 for China Communications Construction Co Ltd is based on 6x 2014E P/E (price-to-earnings), one standard deviation below its historical trading range. We expect the stock will remain at low multiples due to slower growth, little room for margin expansion and a stretched balance sheet. CCCC is a well-diversified infrastructure constructor with no meaningful contribution from railway construction so it would not benefit much from a possible stimulus plan focusing on the railways.

Risk: Risks that could cause the share price to diverge from our HK$6.00 target price for China Communications Construction Co Ltd include: (1) Government policies and capex plan: The development of China’s transportation infrastructure investment depends upon the development of major transportation projects which are subject to government decisions. Thus, government policy and decisions on the railway construction plan have a material and adverse effect on CCCC's business and financial performance. (2) Working capital risks: As CCCC generates a significant amount of revenue from local governments, any late payment could result in unfavourable changes to working capital and cash flow for CCCC. If the economy slows down, local government funding may get increasingly difficult. (3) Order cancellation risk: As at the end of 2013, CCCC's order backlog amounted to Rmb738 bn. However, this figure is based on the assumption that its relevant contracts will be performed in full, in accordance with their terms. The termination or modification of any one or more major contracts may have a substantial and immediate effect on backlog and future earnings. (4) International market risks: CCCC generates revenues in Africa, the Middle East, the Americas, South-East Asia, Europe and Central Asia, and particularly emerging economies that are subject to changes in economic and political conditions that are beyond its control. For 2011/12/13, revenue generated from overseas sales amounted 11%/13%/17% of total sales, respectively. New orders from overseas accounted for 19% of total new orders in 2013.

Price Target: (12 months) for China State Construction International Holdings Li (3311.HK)

Method: We use DCF (discounted cash flow) to value the stock, as we believe CSCI will register positive free cash flows shortly in 2-3 years when its BT projects enter the payment stage. Our DCF-based target price of HK$17.30 implies 19.2x/15.8x 2014E/2015E P/E (price-to-earnings), supported by a 22% earnings CAGR during 2014-16 and a consistent dividend payout of 30%. We assign a 7.5% terminal EBIT margin. CSCI currently enjoys >10% EBIT margin, higher than traditional constructors (5-6%) due to the benefit from interest spread between HK and mainland China, as well as its solid cost management. We assume this spread will gradually fade in the long term but CSCI's cost advantage will continue to bring better-than-peer EBIT margins. We use a 2% terminal growth rate and a WACC of 7.1%, based on a 10.5% cost of equity and a 6% cost of debt.

Risk: Risks that could impede achievement of our HK$17.30 target price for China State Construction International (CSCI) include the following: (1) Macro economy risk: The major risk comes from the uncertain macro economy in China. CSCI selects BT projects based on local governments' cash flow and repayment ability. If macro economy further slowed down and the local governments were negatively affected in terms of revenue, CSCI would have difficulty in collecting receivables. (2) Interest rate risk: CSCI earns above industry profitability by leveraging its access to the low financing sources – mainly HK. If the interest rate in HK rose and the interest rate in mainland fell, CSCI would be negatively affected and margin would be squeezed. (3) Client management risk: On-time receivable collection and careful client selection are critical in developing the affordable housing BT business in the mainland. Mismanagement would lead deteriorating balance sheet or even broken cash flow. (4) Financing capability: CSCI's sustained growth relies on its financing capability in Hong Kong, project seeking ability in mainland, and stable cash inflow from the HK and Macau businesses. If the HK/Macau business shrunk or capital supply from Hong Kong turned tight, CSCI would not grow at the pace as fast as we expected.

Price Target: (12 months) for Zhuzhou CSR Times Electric Co. Ltd. (3898.HK)

Method: Our DCF (discounted cash flow)-backed price target of HK$28.90 for Zhuzhou CSR Times Electric Co. Ltd. is based on 2% terminal growth and 8.7% WACC. We assume 11% cost of equity and 6% cost of debt. Our price target implies 16.8x 2014E PE (price-to-earnings) and 2.5 2014E PB (price-to-book). We believe the stock should trade above historical trading average, as we are going to see a

04 April 2014


normalized railway equipment and components orders from CRC, driven by growing high-speed training network in China, rising maintenance demand and potential overseas expansion. ZZCSR should trade at a premium over railway constructors due to much stronger growth profile and healthier balance sheet.

Risk: Risks that could cause the share price to diverge from our HK$28.90 target price for Zhuzhou CSR Times Electric Co. Ltd. include: (1) Government policies and capex plan: The development of China’s railway equipment industry is dependent upon the development of major rail transportation and rapid transit projects, subject to government decisions. In addition, the government also sets technology and safety requirement of railway equipment, and foreign investment restriction on the industry. Thus, government policy, decision of railway construction and capital expenditure plan have a material and adverse effect on ZZCSR's business and financial performance. (2) Client concentration risk: ZZCSR's revenue is substantially dependent on CRC's tenders. CRC has relatively strong influence in procurement, in terms of price, quantity, technical specifications, and delivery schedule. If CRC changed/cancelled contracts, ZZCSR would not be able to find any comparable replacement orders. If CSR failed to win CRC's bids, ZZCSR's financial condition would be negatively affected. ZZCSR's revenue is also dependent on CSR's support. CSR Group usually accounted for 50-65% of ZZCSR's sales. If CSR did not purchase the key components from ZZCSR, its business and financial performance will be negatively affected. (3) Working capital risks: As ZZCSR generates a significant amount of revenue from CSR, any late payment from CSR could result in unfavourable change of working capital and cash flow for ZZCSR, which was evident in late 2011.

Price Target: (12 months) for Hollysys Automation Technologies Ltd. (HOLI.OQ)

Method: Our target price of US$29.10 for Hollysys Automation Technologies Ltd. is based on a DCF (discounted cash flow) methodology. We use an 8.4% WACC based on an 11% cost of equity (1.2x beta, a 5% risk free rate, and a 5% equity risk premium) and a 6% pre-tax cost of debt. We assume a terminal growth rate of 2%. We assume EBIT margin of 20% in the terminal years. We think this is reasonable and sustainable compared to matured global players such as Emerson, Honeywell, Yokogawa and Invensys. Our target price implies 19.3x/17.1x P/E (price-to-earnings) and 3.3x/2.8x P/B (price-to-book) in FY14/15 (year-end June), and 18.2x/16x P/E and 3.1x/2.6x P/B in CY14/15 P/E. We believe the valuation is attractive on the back of a 23% earnings CAGR during FY13-16, let alone potential sales/profit contribution from new product launches. We compare Hollysys with both railway-related stocks and automation stocks. We believe that Hollysys should trade at a premium to railway equipment-makers because (1) Hollysys's line-side railway signal business is on a later cycle than railway equipment; and (2) its automation business helps to smoothen earnings and cash flow volatility. We believe that Hollysys should trade at a premium to railway constructors because of a much better growth profile, cash flows and a healthier balance sheet.

Risk: Risks that could impede achievment of our US$29.10 target price for Hollysys Automation Technologies Ltd. include: (1) Slower-than-expected railway tenders from China Railway Corporation would result in lower sales growth. (2) Late payment from major clients such as China Railway Corporation would result in deteriorating cash flows. (3) A weakening macro economy in China may result in new project delays and negatively affect sales growth of the industrial automation segment. (4) Margins could be negatively affected when entering new industries/markets, due to additional price competition and marketing campaigns. (5) The failure to win tenders would negatively affect growth, particularly in the overseas market and the subway segment. (6) The company may not be able to enter new markets successfully, due to an unproven track record. (7) Overseas expansion may not be as smooth as expected due an unfamiliar market environment, culture and political systems.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (1186.HK, 1766.HK, 1800.HK, 3311.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (1186.HK, 3311.HK) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (3311.HK) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (1186.HK, 3311.HK) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (1186.HK, 1766.HK, 1800.HK, 3311.HK) within the next 3 months.

As of the date of this report, Credit Suisse makes a market in the following subject companies (HOLI.OQ).

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (0390.HK, 1186.HK, 1800.HK).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (0390.HK, 1186.HK, 1766.HK, 1800.HK, 3311.HK, 3898.HK, HOLI.OQ) within the past 12 months

04 April 2014


Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (3311.HK) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited ................................................................................................................ Edmond Huang, CFA ; Baiding Rong

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

04 April 2014


References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, having registered address at 990 Abdulrahim Place, 27 Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Copyright © 2014 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

EG0061.doc

https://www.credit-suisse.com/who_we_are/en/

China Construction and Railway Equipment/Component...

Documents

Transcript of China Construction and Railway Equipment/Component...