Page 1 of 17 Company Update 5 September 2014 Lewis Pang [email protected](852) 2235 7847 Trading data 52-Week Range (HK$) 3 Mth Avg Daily Vol (m) No of Shares (m) Market Cap (HK$m) Major Shareholders (%) Auditors Result Due 1.24/2.03 1.8 1,026 1,632 Mr. Xuan Ruiguo (45.02%) Deloltte FY14: Mar Company description Listed in 2007, China Automation Group (CAG) is primarily engaged in petrochemical and railway industries. It offers two major product categories for each sector, including 1) safety control systems and 2) control valves for petrochemical industry, as well as 3) signaling systems and 4) auxiliary power supply and traction systems for railway industry. Price chart Positive signals in 1H14 results, initiate BUY Rating BUY Initial Target price HK$2.05 Current price HK$1.59 Upside +29% 19% growth in 1H14 PBT, 2 nd consecutive half-year periods with yoy earnings growth after the downtrend started in 2H11 CAG achieved 19% yoy PBT growth in 1H14, which is the 2 nd consecutive period with yoy earnings growth, we believe it indicated that CAG is bottoming out from the downtrend started in 2H11. Positive signals in 1H14 results included 1) better costs control (SG&A ratio down from 18.6% in 1H13 to 17.9% in 1H14), 2) lowered net debt position, and 3) no new provision for bad debt. Railway signaling system: recovery expected in 2H14E, improving new orders While railway signaling system sales dropped by 25% to RMB99mn due to delay of product delivery, management expressed that new orders was improving in 1H14 (~RMB250mn). As China Railway Corporation (“CRC”) generally completes most of the projects in the 2H, CAG expects to achieve ~RMB350mn sales in FY14E. New orders could also get a further boost if CRC accelerates investment to achieve its 2014 spending target of >RMB800bn. Train electrified equipment show sign of recovery, control valve’s momentum carried on After CRC resumed train tendering in 3Q13, train electrified equipment sales rebounded from RMB64-72mn in the last 3 half-year periods to RMB82mn in 1H14. On the other hand, momentum of control valve segment carried on with 33% sales growth. Management is positive towards its prospect given the fragmented market and stable replacement demand. Safety control system: improving GPM By terminated the loss making Singapore unit and reduced exposure to non-core and lower margin segment such as products related to oil and gas industry, GPM of safety control system improved from 29% in FY13 to 35% in 1H14. Management would continue to put a higher priority on profitability to achieve ~38% GPM in short term. Focus on cash flow to lower debt level CAG is focus on improving cash flow in order to reduce debt level. CAG now requires the customers to pay a higher proportion of down payment, and it scale down the equipment distribution segment as this business requires a significant amount of working capital. CAG is making progress with RMB174mn operating cash inflow in 1H14, leading to RMB36mn decrease in net debt position. The worst should be over, initiate with BUY We believe the worst for CAG should be over, and the potential increase of CRC’s spending in 2H14 would provide a stronger support to CAG in FY15E. Initiate with BUY, target price at HK$2.05, which translate to 10X FY15E PER, a 10% discount to the average of H share railway system and equipment suppliers. RMB million FY12A FY13A FY14E FY15E FY16E Revenue 2,211 2,309 2,188 2,361 2,551 Net Profit 85 74 131 167 188 EPS (RMB) 0.082 0.072 0.128 0.163 0.183 P/E ( x) 15.4 17.7 9.9 7.8 6.9 Sources: Bloomberg, CIRL estimates China Automation Group | 569.HK
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
industries. It offers two major product categories
for each sector, including 1) safety control
systems and 2) control valves for petrochemical
industry, as well as 3) signaling systems and 4)
auxiliary power supply and traction systems for
railway industry.
Price chart
Positive signals in 1H14 results, initiate BUY Rating BUY Initial
Target price
HK$2.05
Current price
HK$1.59 Upside +29%
19% growth in 1H14 PBT, 2nd
consecutive half-year periods with yoy earnings growth after the downtrend started in 2H11 CAG achieved 19% yoy PBT growth in 1H14, which is the 2
nd
consecutive period with yoy earnings growth, we believe it indicated that CAG is bottoming out from the downtrend started in 2H11. Positive signals in 1H14 results included 1) better costs control (SG&A ratio down from 18.6% in 1H13 to 17.9% in 1H14), 2) lowered net debt position, and 3) no new provision for bad debt.
Railway signaling system: recovery expected in 2H14E, improving new orders While railway signaling system sales dropped by 25% to RMB99mn due to delay of product delivery, management expressed that new orders was improving in 1H14 (~RMB250mn). As China Railway Corporation (“CRC”) generally completes most of the projects in the 2H, CAG expects to achieve ~RMB350mn sales in FY14E. New orders could also get a further boost if CRC accelerates investment to achieve its 2014 spending target of >RMB800bn.
Train electrified equipment show sign of recovery, control valve’s momentum carried on After CRC resumed train tendering in 3Q13, train electrified equipment sales rebounded from RMB64-72mn in the last 3 half-year periods to RMB82mn in 1H14. On the other hand, momentum of control valve segment carried on with 33% sales growth. Management is positive towards its prospect given the fragmented market and stable replacement demand.
Safety control system: improving GPM By terminated the loss making Singapore unit and reduced exposure to non-core and lower margin segment such as products related to oil and gas industry, GPM of safety control system improved from 29% in FY13 to 35% in 1H14. Management would continue to put a higher priority on profitability to achieve ~38% GPM in short term.
Focus on cash flow to lower debt level CAG is focus on improving cash flow in order to reduce debt level. CAG now requires the customers to pay a higher proportion of down payment, and it scale down the equipment distribution segment as this business requires a significant amount of working capital. CAG is making progress with RMB174mn operating cash inflow in 1H14, leading to RMB36mn decrease in net debt position.
The worst should be over, initiate with BUY We believe the worst for CAG should be over, and the potential increase of CRC’s spending in 2H14 would provide a stronger support to CAG in FY15E. Initiate with BUY, target price at HK$2.05, which translate to 10X FY15E PER, a 10% discount to the average of H share railway system and equipment suppliers.
RMB million FY12A FY13A FY14E FY15E FY16E
Revenue 2,211 2,309 2,188 2,361 2,551
Net Profit 85 74 131 167 188
EPS (RMB) 0.082 0.072 0.128 0.163 0.183
P/E ( x) 15.4 17.7 9.9 7.8 6.9
Sources: Bloomberg, CIRL estimates
China Automation Group | 569.HK
Page 2 of 17
Positive signals in 1H14 results
19% growth in 1H14 profit before tax, 2nd
consecutive half-year periods with yoy
earnings growth after the downtrend started in 2H11
While revenue declined by 11%, CAG achieved 19% yoy PBT growth in 1H14, which is
the 2nd
consecutive period with yoy earnings growth, we believe it indicated that CAG is
bottoming out from the downtrend started in 2H11. Positive signals in 1H14 results
included 1) better costs control (SG&A ratio down from 18.6% in 1H13 to 17.9% in
1H14), 2) lowered net debt position, and 3) no new provision for bad debt.
Railway signaling system: recovery expected in 2H14E, improving new orders
Sales of railway signaling system dropped by 25% to RMB99mn, management
attributed it to the delay of product delivery. However, management expressed that new
orders was improving in 1H14 (~RMB250mn), which is higher than the actual sales
figure of all 4 half-year periods during FY12-13. As CRC generally completes most of
the projects in the second half of a year, CAG expects to achieve ~RMB350mn sales in
FY14E. New orders could also get a further boost if CRC accelerates investment to
achieve its 2014 spending target of >RMB800bn.
Train electrified equipment show sign of recovery, control valve’s momentum carried on,
After China Railway Corporation (“CRC”) resumed train tendering in 3Q13, train
electrified equipment sales rebounded from RMB64-72mn in the last 3 half-year periods
to RMB82mn in 1H14. On the other hand, momentum of control valve segment carried
on with 33% sales growth. Management is positive towards its prospect given the
fragmented market and stable replacement demand.
Safety control system: Improving GPM by taking less non-core orders
Revenue of safety control system declined by 17%, but GPM improved significantly from
29% in FY13 to 35% in 1H14. CAG terminated the Singapore unit, which incurred
RMB25mn and ~RMB8mn gross loss in FY13 and 1H14. It also reduced exposure to
non-core and lower margin segment such as products related to oil and gas industry.
Management would continue to put a higher priority on profitability to achieve ~38%
GPM in short term.
Focus on cash flow to lower debt level
CAG is focus on improving cash flow in order to reduce debt level. CAG now requires
the customers to pay a higher proportion of down payment, and it scale down the
supplementary equipment distribution segment as this business requires a significant
amount of working capital. CAG is making progress with RMB174mn operating cash
inflow in 1H14, leading to RMB36mn decrease in net debt position in comparison to 31
Dec 2013.
Page 3 of 17
Exhibit 1: 1H14 results review
Source: CAG, CIRL
RMB mn 1H13 1H14 YoY change Remarks
Sales 1,207 1,071 -11.2%
- safety control systems 539 450 -16.5%CAG ceased taking low margin orders including oversea orders and
orders from non core segment such as oil and gas industry
- control valves 230 304 32.6%Management is positive towards its prospect given the fragmented
market and stable replacement demand (replaced every 3-5 years)
- railway signaling systems 132 99 -25.0% Products delivery is delayed to 2H14
- train electrified equipment 66 82 24.5% Rebounded after CRC resumed train tendering in 3Q13
- engineering & maintenance 73 78 6.7% Stable growth along with accumulated system delivered
- distribution of equipment 167 58 -65.5%
Declined due to 1) CAG scale down this segment to save up working
capital, and 2) change in accounting policy (only net revenue was
booked rather instead of gross revenue for trading contracts)
Gross Profit 421 388 -7.8%
SG&A (225) (192) -14.6% Management is putting more focus on costs control
R&D expenses (42) (45) 6.8% Mainly related to development of high end control valves
Net provision of bad debt (24) 0 -100.0% no new provision for bad and doubtful debts was made in 1H14
Other income/expenses 22 16 -26.1%
Operation profit 152 167 10.0%
Share of associate/JV profit (1) (0) -76.7%
Net finance costs (66) (66) -0.1%
Profit before tax 85 101 18.7%
Income tax (16) (30) 91.6%
Higher effective tax rate as 1) finance costs of the holding company is
not recognised and 2) expiry of tax holidays for some subsidiaries.
Management is looking for better tax planning in 2H14
Profit 69 71 2.1%
Non-controlling interest (4) (2) -33.3%
Net profit 66 68 4.1%
GPM
- safety control systems 34.4% 34.5% 0.1% Improved from 21% in 2H14
- control valves 32.2% 31.6% -0.6%
- railway signaling systems 48.4% 43.8% -4.6% Delay of orders delivery lead to operating deleverage
- train electrified equipment 29.4% 27.2% -2.2% Decline in GPM mainly due to intensed industry competition
- engineering & maintenance 74.1% 74.4% 0.3%
- distribution of equipment 16.8% 21.7% 4.9%
Operating cash inflow 28 174 524.2%
Investment cash outflow (44) (51) 16.3%
Net cash/(debt) position (1,095) (912)
Cash 503 593 17.9%
Short term debt 435 342 -21.3%
Long term debt 1,163 1,162 0.0%
Page 4 of 17
The worst should be over, initiate with BUY
We expect a 5% decline in FY14E revenue mainly because CAG decided to scale down
the equipment distribution segment. And we forecast a moderate 8% revenue CAGR
during FY14-16E, largely driven by 1) the pickup in sales of railway signaling system
and 2) increasing market share in the fragmented control valves market.
We also expect GPM to be in an uptrend after CAG gradually completes the low margin
or even loss making orders in safety control system segment. Besides, CAG is putting
more focus on costs control, we believe there is still room for further improvement in
efficiency after a series of M&A in 2010-12.
While provision for bad debt would remain the major uncertainty factor for CAG earnings
performance (most of the overdue receivables came from the railway constructors such
as CRG (390 hk)), situation could improve as the PRC government is considering
various options to solve the liquidity problem of CRC (one potential solution is to open
railway construction to private capital). We project an annual new provision of
RMB20mn during FY14-16E.
We believe the worst for CAG should be over, and the potential increase of CRC’s
spending in 2H14 would provide a stronger boost to CAG in FY15E. Initiate with BUY,
target price at HK$2.05, which translate to 10X FY15E PER, a 10% discount to the
average of H share railway system and equipment suppliers.