Hong Kong company reporting season

China’s CRSC surprises market with 40 per cent profit rise in first half

PUBLISHED : Thursday, 18 August, 2016, 11:40am
UPDATED : Thursday, 18 August, 2016, 10:28pm

China Railway & Signal Communications, the world’s biggest manufacturer of train traffic signalling and controls equipment by revenue, surprised the market with a 40.1 per cent rise in profits in the first half of this year.

The company reported a profit of 1.67 billion yuan in the six months ended June 30, a 40.1 per cent increase compared to the same period a year earlier, according to the company’s interim earnings results. That’s significantly higher than market expectations of about 10 per cent growth for the period, according to a Bloomberg survey of analysts.

The company’s first half revenue rose 22 per cent year on year to 14.35 billion yuan. As of 11.38am in Hong Kong, the company’s share price was up by 2.5 per cent to HK$5.32.

“The growth of net income far exceeds our expectations, showing that the company’s ability to generate profits has been strengthening,” said Jiao Yiding, an analyst at China Merchants Securities (Hong Kong). “We expect better figures in the second half of the year, due to seasonal factors which could benefit revenue generation.

“Generally speaking, we are holding quite a positive view on the outlook of the company,” Jiao added. Although growth of the company’s high-speed rail business is slowing, its subway rail business is expected to grow at a rapid pace to become the new major income driver, with revenue from subway work expected to grow 50 per cent and 60 per cent year on year in 2016 and 2017 respectively, according to a research note from Jiao.

However, with regard to the company’s share price, some analysts have some worries despite the better-than-expected earnings result.

“One of our major concerns is that the shares are still trading below the IPO price of HK$6.3 last August,” said Tina Li, executive director at Bank of China International in Hong Kong.

“With most investors of the stock still under water, the IPO price could become a bottleneck for further gains in the shares,” added Li.

Separately, Nomura Securities holds a negative view on the outlook of the company. Before the earnings announcement, the bank downgraded CRSC’s rating from neutral to underweight and cut its target price to HK$4.65 from HK$4.77 on the grounds that the stock is overvalued with poor cash flow.

It expects the company to invest aggressively in public-private-partnership projects, which will benefit local governments more than shareholders. Nomura forecasts free cash flows to remain negative for the company in the financial years from 2016 to 2018.