Railway Constructor - Sector Report - 030809

Sector Report
03 August 2009
China Railway Infrastructure Constructor
Calvin K.H.Ho (852) 2913 6704

calvinho@vcgroup.com.hk
Investment summary
• While it is widely expected that the railway infrastructure Constructor sector will offer promising
earnings outlook over the next few years, we prefer China Railway Construction (CRCC: 1186.HK)
to China Railway Group (CRG: 0390.HK) based on the following reasons:
• Benefit more if the MOR would increase investment in 2009. CRCC has a lower involvement in
property development & mining businesses, and focuses more on its core construction business. Also,
CRCC has maintained a higher GP margin in railway construction. According to the latest MOR
announcement, the amount spent on railway infrastructure up to Jun09 exceeded consensus forecast and
grew 155% yoy to Rmb201bn.
• Higher sales growth and GP margin. CRCC appears to have a higher commitment to R&D, and
maintained a larger scale of railway survey & design Institutes. In the long run, we believe that innovation
and technological advancement are critical for winning more new contracts with higher GP margin,
especially for overseas businesses.
• Higher survey, design and consultancy revenue. We believe that survey, design & consultancy revenue
will account for a good portion of core railway revenue for railway construction companies. For instance,
most of their customers pursuing survey, design & consultancy services at first end up also going after
railway construction services. The industry will trend towards a closer coordination between these two lines
of businesses, in our view. In FY07 to FY08, CRCC’s revenue from survey, design & consultancy
exceeded that of CRG.
• More overseas business. We expect domestic railway construction new contract value to peak out in
FY11, and railway constructors’ long-term growth lies in their capability of applying their core skills in
overseas projects. Historically, CRCC is stronger in getting overseas business in terms of the amount and
percentage to total of new contracts from overseas. We expect CRCC to continue to outperform CRG in
fetching overseas contracts given that it appears to have more experience in conducting overseas projects
and a higher commitment to R&D.
• Less dependent on performance of other incomes. The predictability and sustainability of growth for
“other income” is low as majority of them for CRG & CRCC are “gain on sales of materials” and “penalty
income”. During FY04 to FY08, “other incomes” constituted an average 30% & 10% of profit before tax for
CRG & CRCC, respectively. That other income accounts for a higher percentage in CRG’s EBT could
cloud its earnings visibility.
• Less exposed to earnings distortions from financial investments. CRCC invests less aggressively in
financial investments (e.g. listed/unlisted equities, funds or bonds) and thus its bottom line and equity are
less exposed to the usually big swings in the fair values in these investments. For instance, CRCC
commanded a dividend yield of around 1% while CRG paid no dividend in FY08.
• A laggard in the recent market rally. The recent rally of the local bourse since Mar09 has seen CRG rise
71%, HSI 81%, and CRCC 30%. CRCC is also a catch-up play in our view.
© 2009 VC Brokerage Limited. All rights reserved. Opinions, projections and other information contained in this report are based upon sources
believed to be accurate, but no responsibility is accepted for any loss occasioned by reliance placed upon the contents herein. Further
information on the companies mentioned in this report is available upon request.
VC Research 1
China Railway Infrastructure Constructor 03 August 2009
Table of content
BACKGROUND .......................................................................................................................................... 3
PREFER CRCC TO CRG............................................................................................................................. 3
FOCUS ON MAIN BUSINESS ......................................................................................................................................................... 3
HIGHER RAILWAY GP MARGIN .................................................................................................................................................. 3
ADDITIONAL MOR INVESTMENTS ............................................................................................................................................. 4
HIGHER RESEARCH CAPACITIES ................................................................................................................................................. 5
MORE OVERSEAS BUSINESS ....................................................................................................................................................... 6
LESS DEPENDENT ON “OTHER INCOME” .................................................................................................................................... 8
LESS EXPOSED TO FINANCIAL INVESTMENTS’ INCOMES ............................................................................................................. 9
BETTER POTENTIAL TO IMPROVE ROA .................................................................................................................................... 10
MARKET OVERESTIMATING PROPERTY BUSINESS .................................................................................................................... 12
RECENT SHARE PRICE PERFORMANCE OF CRG & CRCC RELATIVE TO THE HSI.................. 13
VALUATION ............................................................................................................................................. 14
RECOMMENDATION .............................................................................................................................. 18
COMPANY UPDATE – CHINA RAILWAY GROUP (0390.HK) ............................................................................ 19
BUSINESS DEVELOPMENT & NEWS UPDATE ................................................................................................................. 20
Sales growth surprises on the upside ....................................................................................................20
Margin Analysis .............................................................................................................................................21
VALUATION ........................................................................................................................................................................... 23
RECOMMENDATION: HOLD .............................................................................................................................................. 24
SENSITIVITY ANALYSIS ...................................................................................................................................................... 24
COMPANY UPDATE – CHINA RAILWAY CONSTRUCTION CO. (1186.HK) ....................................................... 31

BUSINESS DEVELOPMENT & NEWS UPDATE ................................................................................................................. 32
Stronger than expected top line growth .................................................................................................32
Margin Analysis .............................................................................................................................................33
VALUATION ........................................................................................................................................................................... 35
RECOMMENDATION - BUY................................................................................................................................................ 36
SENSITIVITY ANALYSIS ...................................................................................................................................................... 36
APPENDIX – RAILWAY SECTOR OVERVIEW ...................................................................... 43
VC Research 2
Background
CRG (390.HK) and CRCC (1186.HK) are the two largest listed railway infrastructure constructors in China. While
CCCC (1800.HK) concentrates in constructing ports & highways, CRG and CRCC focus on constructing railway.
Both CRG & CRCC originated from the Ministry of Railways (MOR) and shared similar resources and capacities.
Background information (FY2008)

(in Rmb m unless otherwise specified) CRG CRCC
Market capitalization as at 31 July 09 144,164 131,285
Total new contract value 428,450 423,105
Total backlog 420,750 471,089
Total revenue 225,029 219,410
Infrastructure construction: 90.3%, Infrastructure construction: 91.6%,
Revenue mix
of which Railway: 48.2% of which Railway: 50.2%
Total assets 251,919 220,101
Market share in domestic railway construction 40% ~ 45% 40% ~ 45%
Marjor shareholder CRECG: 59.4% CRCCG: 63.31%
Major customers MOR / Regional governments MOR / Regional governments
Source: VC estimates, Bloomberg, The companies
Prefer CRCC to CRG

Focus on main business
1) CRCC is more focused on its main business. Relative to CRG who involves more in the property
development & mining businesses, CRCC focuses more on its main business lines. We believe this is good for
CRCC because:
- Infrastructure construction, especially railway construction, is the major source of stable strong
growth for players in this sector for the coming years.
- The synergetic effect and core competency for CRG or CRCC to diversify into property
development & mining are yet to be seen.
- Earnings volatility will likely increase through diversifying into cyclical industries like property
development & mining.
Higher railway GP margin

2) CRCC commands a higher GP margin in railway construction. CRCC reported higher GP margin in railway
construction than CRG in FY07 and FY08. And we believe this trend will continue at least in the medium term.
Railway GP margin % of CRG & CRCC

8.0%
7.50%
7.5%
7.0% 6.80%
6.42%
6.5% 6.28%
6.0%
5.5%
5.0%
FY2007 FY2008
Source: VC e stimates CRG CRCC
VC Research 3
We expect the two companies’ railway GP margin to stay flat in FY09, and this is in line with management guidance
and consensus. As such, the margin gap between the two companies will persist. In the short run, the margin gap
can be justified by:
- Design capabilities: CRCC owns two of the top-four railway survey & design institutes in China
while CRG only owns one.
- Strength in different fields within railway construction. CRCC is more specialized in designing and
building high-speed railway while CRG in railway electrification.
However, one of the risk factors to our recommendation is that CRG’s railway GP margin would catch up with, or
even exceed, that of CRCC in the longer run. Although this scenario is unlikely to take place in the short term,
given the two companies’ similar backgrounds and GP margin trends this particular risk is not negligible. Therefore,
to be conservative, we have factored in a railway margin for both firms to converge at 7.1% in the long run.
Additional MOR investments

3) MOR investments may exceed forecast. We expect CRCC to benefit more than CRG if railway infrastructure
investment by the MOR would be higher than market expectations in coming years.
The MOR may increase more in railway infrastructure
Railway infrastructure annual spending by MOR

1,000
860
900
800
700
600
Rmb bn
500
400 337
300
155 179
200
88
100
-
2005 2006 2007 2008 2009E
Source: VC estimates, MOR
*2009 is projected using announced figures up to Jun-09
The scale of the MOR’s railway infrastructure investment is no secret to the market and consensus forecast is that
it will invest Rmb600bn in FY09. However, according to the latest MOR announcement, the actual investment
amount up to Jun09 grew 155% yoy to Rmb201bn. If the MOR’s investment pattern over the previous year repeats
in 2009, the projected total investment could hit Rmb860bn in FY09 according to our estimate. The figure would
exceed consensus forecast by 43%.
CRCC to benefit more if the MOR increases railway investments
We assume both CRCC and CRG will be able to maintain their market shares at 40-45%. That is to say they would
split the additional investment by the MOR, if any. The following sensitivity tables depict the changes in TPs for
CRG & CRCC if their railway related revenue is 20% or 40% higher than our base case. We estimate that the TP of
CRCC would rise 9% more than that of CRG if the growth rates of railway related revenues are 40% higher than
the base case.
VC Research 4
Sensitivity analysis - Railway related growth rate assumption Sensitivity analysis - Railway related growth rate assumption
Relative to current WACC Relative to current WACC
Share price (CRG) -2% -1% 0% 1% 2% Share price (CRCC) -2% -1% 0% 1% 2%
-40% 11% -11% -27% -39% -48% -40% 10% -5% -15% -23% -29%
% change of -20% 28% 3% -14% -28% -38% % change of -20% 28% 11% -1% -10% -18%
Sales 0% 52% 23% 3% -13% -25% Sales 0% 54% 33% 18% 6% -3%
growth rate* 20% 84% 49% 25% 6% -8% growth rate* 20% 88% 62% 43% 29% 17%
40% 126% 83% 53% 31% 13% 40% 136% 101% 77% 58% 44%
* % change of sales growth rate of railway related revenues (e.g. * % change of sales growth rate of railway related revenues (e.g. Railway &
Railway & Survey) for each year in projection period Survey) for each year in projection period
** This table changes sales growth rate of railway & survey revenues at ** This table changes sales growth rate of railway & survey revenues at the
the same rate (e.g. Railway sales growth rate expands 20% from 40% to same rate (e.g. Railway sales growth rate expands 20% from 40% to 48%,
48%, etc.) etc.)
Higher research capacities

4) We believe that CRCC can attain a higher railway GP margin and overseas revenue than CRG if it
continues to lead CRG in terms of research capacities. The higher survey & design capabilities and
commitment to R&D of CRCC are supported by the following facts and figures.
CRCC owned four Grade A1 railway construction design and research institutes out of only seven in China. Among
the seven Grade A1 institutes, CRCC owned two of the four large-scale railway survey and design institutes, while
MOR and CRG each own the other two.
Major Railway Survey and Design Institutes in China

Parent Staff No.
China Railway 1st Survey and Design Institute CRCC 3,800
China Railway 2nd Survey and Design Institute CRG 3,500
China Railway 3rd Survey and Design Institute MOR 3,200
China Railway 4th Survey and Design Institute CRCC 3,000
China Railway 5th Survey and Design Institute CRCC 1,000
China Railway Shanghai Design Institute Group Co., Ltd. CRCC 1,600
Beijing National Railway Research & Design Institute of Signal & Communication MOR 1,000
Design & Research Institute of Ministry of Railway MOR 700
China Railway Electricification Survey Design & Research Institute CRG 350
Source: VC estimates, Design companies' web sites
The R&D expenditure figures show that CRCC has a strong commitment to invest in technology, while CRG invests
more in financial instruments. In FY08, although CRCC’s R&D expense as percentage of sales was 0.66% higher
than that of CRG, CRCC’s total operating expenses as percentage of sales was just 0.3% higher than that of CRG,
indicating that CRCC is more efficient in general administration.
VC Research 5
R&D expenditure and its % of total revenue for CRG & CRCC
2,000
1,800 1,756 1.2%
1,600 1.0%
% of total revenue
1,400 0.8%
1,200 1,049 0.8%
Rmb m
0.6%
1,000 0.6%
800
600 0.4%
306 0.2% 316 0.1%
400
0.2%
200
- 0.0%
FY2007 FY2008
Source: VC estimate, The companies CRG CRCC CRG CRCC
With a larger scale of research institutes and R&D expenditures, CRCC’s revenue from survey, design and
consultancy has started to exceed that of CRG since FY07.
Survey, design & consulting revenue and its % of total revenue for CRG & CRCC
5,000
4,551
3.2% 4,354 3.2%
4,500 3.1% 4,124
4,000 3,709 3.0%
3,480 3,394
3,500 3,349
2.7% 2.8%
% of total revenue
2,909 2.7%
3,000 2,780
Rmb m
2,346 2.6%
2,500
2.6%
2,000 2.4%
1,500 2.2%
2.1% 2.2%
1,000 2.2%
1.9% 2.0%
500
1.9%
- 1.8%
FY2004 FY2005 FY2006 FY2007 FY2008
Survey, design and consultancy business is closely connected with the construction business, especially in the
railway construction sector. It is because most of the customers who pursue survey, design and consultancy
services at first will also become major customers of construction operations. The industry trends towards a closer
coordination between the two lines of businesses. As such, we believe the revenue trend in survey, design and
consultancy can be a leading indicator of core railway revenues for CRG & CRCC. Higher research capabilities and
stronger commitment to R&D will benefit CRCC in terms of more sales and higher margins in the long run.
More overseas business

5) The long-term growth of CRCC looks more promising as it is stronger in getting overseas new contracts.
According to the Ministry of Commerce (MOC) and CRCC’s annual reports, CRCC ranked 1st & 2nd among
overseas Chinese contractors in terms of new contract value in FY07 & FY08. This may be due to the fact that,
China Civil Engineering Construction Corporation (CCECC), which is principally engaged in overseas construction
business, was transferred to CRCC from SASAC as part of restructuring before listing. In its annual reports, CRCC
re-emphasised its commitment to carry out the “Go Overseas” strategy as promoted by the central government.
VC Research 6
Overseas revenue, new contract value and backlog value of CRCC

90 83
80
70
56
60
Rmb bn
50 43 42 42
40 29
30
17
20 13
9 6
10 1 4 3 2 4
0
FY2004 FY2005 FY2006 FY2007 FY2008
Source: VC estimates, The companies
*: In FY07, we excluded the USD8.3bn Nigeria project as it was suspended. Revenue New contract Backlog
Given the high backlog value and strong growth in overseas new contracts, CRCC’s high growth in overseas
revenue will likely continue over the coming years. Although the percentage of revenue contributed by overseas
projects was still lower than 10% in FY08, CRCC still keeps on reporting the figures of overseas revenue & new
contract value separately since FY04, which could signal management’s commitment to expand further overseas
businesses.
CRCC overseas portion as % of respective total amount

25%
21%
20% 17%
20% 18%
15%
10%
10% 7% 10%
4% 6% 8%
5% 3% 2% 2%
2% 4%
0%
FY2004 FY2005 FY2006 FY2007 FY2008
Source: VC estimates, The companies
*: In FY07, we excluded the USD8.3bn Nigeria project as it was suspended. Revenue New contract Backlog
While CRG’s overseas new contract value for FY08 amounted to Rmb24.5bn, representing 5.7% of its total new
contract value for the year, both figures are lower than that of CRCC (42.17bn/10.0% in the same year. CRG does
not report revenue from overseas business on an annual basis.
There are market views that a lower exposure to overseas business is a positive, as it will then allow the company
enjoy the strong growth in the domestic market. In our opinion, as long as domestic business is not limited by
capacity constraint, we prefer contractors with higher overseas business exposure for the following reasons.
- Overseas projects would serve to support a company’s sustainable growth when domestic
construction demand peaks out. In our current assumptions based on estimates of China’s
infrastructure investments, new contract values for both CRG & CRCC would hit their peaks in
FY11.
- According to the new contracts detail update announcements by both CRG & CRCC, overseas
projects command a higher average contract value per deal. This helps reducing selling &
administrative expense as percentage to revenue.
- This offers the chance for diversification (geographically) and at the same time remains in the core
competitive industry.
VC Research 7
According to Ministry of Commerce (MOC), the aggregate new contract value for overseas Chinese contractors
reached USD53.46bn (Rmb365bn) up to May09, up 43.7% yoy. As such, we expect overseas new contract value
of CRG and CRCC to grow at a similar speed FY09.
The main overseas markets for CRG & CRCC are Africa and the Middle East, from which it will be the major source
of top line growth after the domestic market reaches its peak because of:
- CRG & CRCC’s relatively high level of technology and experience

- Largely underdeveloped infrastructure systems in those countries
- China’s friendly relationship with those continentals
All in all, while maintaining the same market share as CRG in domestic market, CRCC is in a better position to
benefit from the growth of overseas infrastructure construction business.
Less dependent on “Other Income”

6) CRCC’s bottom line depends less on the performance of “other incomes”, of which the predictability
and growth sustainability are low.
Other income as % of profit before tax (Exclude FX effect) for CRG & CRCC
60%
51%
50%
40% 42%
30% 25% 23%

17% 18%
20%
10%
10% 6% 5% 5%
0%
FY2004 FY2005 FY2006 FY2007 FY2008
Source: VC estimate, The companies CRG CRCC
“Other incomes” may constitute a significant percentage of their bottom lines and can be a source of positive or
negative surprise for EPS estimates. From FY04 to FY08, other incomes constituted an average 30% & 10% of
profit before tax (Excluding FX effect) for CRG & CRCC, respectively. The high percentage of “other incomes” for
CRG could affect seriously its bottom line performance.
We think that the predictability and growth sustainability of “other incomes” are low because majority of them for
both CRG & CRCC were “Gain on sales of materials” and “Penalty income”, which constituted 60% & 75% of total
“other incomes” of CRG & CRCC in FY08. The remaining percentage of “other income” was mostly government
subsidies and grants.
Other income for CRG & CRCC

1,400
1,168
1,200
1,000 841
Rmb m
800
581
600
400 286 317
245
129 180
200 97 89
0
FY2004 FY2005 FY2006 FY2007 FY2008
VC Research 8
Less exposed to financial investments’ incomes

7) CRCC is less exposed to gain or loss of financial investments. CRG holds a relatively big portfolio of
financial investments (e.g. Listed / Unlisted equities, funds or bonds) and thus its bottom line and shareholders’
equity are more exposed to changes of fair value of these investments.
Financial investments and its % of total assets for CRG & CRCC
4,500
4,070 1.9%
4,000
3,500 1.7%
1.6%
3,074
3,000 1.5%
% of total asset
Rmb m
2,500 1.2% 1.4% 1.3%

1.1%
2,000 1,714
1.1%
1,500 1.0%
1,187 0.9%
970 1,054 1,040 0.9%
836 920 927 0.8%
1,000
0.7%
500 0.7% 0.7%
0.7%
- 0.5%
FY2004 FY2005 FY2006 FY2007 FY2008
During FY07 and 08, CRG increased its financial investment portfolio at a faster speed than its total assets. As a
result, it recorded a large gain of Rmb1064m in FY07 but incurred a loss of Rmb1234m in FY08.
Gain / (Loss) of financial investments as % of profit before tax (Exclude FX effect) for CRG & CRCC
40%
30% 29%
20%
9%
10% 4% 3%
1%
-1%
0%
FY2004 FY2005 FY2006 FY2007 FY2008
-10%
-3% -1% 0%
-20% -19%
-30%
We like CRCC better than CRG in the sense that it invests less aggressively in financial investments and
distributes excess cash to shareholders. We see no advantage for CRG or CRCC to further increase their financial
investments exposure as their track records showed that the rate of return of their investments were not high and
these investments tend to increase their earnings volatility.
VC Research 9
Better potential to improve ROA

8) Ratio analysis: CRCC has a better potential to improve ROA through NP margin expansion while keeping
its higher asset turnover ratio over CRG’s.
The following table shows that CRCC has a better asset turnover ratio while CRG has a better GP & net margin.
Excluding the FX loss, the ROA of CRG & CRCC stood at similar level in FY07 & FY08. We expect the ROA of
CRCC to exceed that of CRG through NP margin expansion while keeping its asset turnover ratios higher than that
of CRG in coming years.
Financial ratios comparison of CRG & CRCC

FY2007 FY2008
CRG CRCC CRG CRCC
Profitiablity ratios:
ROA (Average) 1.6% 1.6% 0.7% 2.0%
ROA (Average) - Exclude FX loss 1.7% 1.7% 2.5% 2.4%
ROE (Average) 8.1% 51.5% 2.8% 13.8%
ROE (Average) - Exclude FX loss & MI 9.8% 62.3% 10.4% 17.2%
Profit margin ratios:
Gross profit margin % 7.2% 6.6% 7.3% 7.2%
Net margin % 1.6% 1.3% 0.7% 1.7%
Net margin % - Exclude FX loss 1.7% 1.4% 2.6% 2.1%
Total operating expense as % of Sales 5.5% 4.4% 4.6% 4.9%
Working capital (WC) management ratios:
WC assets as % of Sales (Average) 57.0% 54.2% 57.7% 53.6%
WC liabilities as % of Sales (Average) 60.4% 65.9% 56.0% 62.2%
Net WC assets / (liabilities) as % of Sales (Average) -3.4% -11.7% 1.7% -8.6%
Fixed asset turnover ratios:
Net PPE as % of Sales (Average) 9.5% 8.8% 9.1% 8.6%
Net Capital investment as % of Sales (Average) 15.0% 11.0% 17.5% 11.2%
Debt ratios:
Long term debt to Total assets 18.0% 16.6% 21.4% 10.1%
Long term debt (Net of cash) to Total assets Net cash Net cash 2.8% Net cash
Other ratios:
Backlog to revenue ratio 1.2 1.9 1.9 2.1
Net Fx gains / (losses) as % of Profit after tax (exclude Fx effect) -8.0% -3.8% -71.3% -18.7%
Source: VC estimates
Profitability ratios:
The ROE and ROA (Included FX loss) are not indicative because they are distorted by the abnormally low level of
CRCC’s equity before listing in FY07 and the large sum of FX loss of CRG in FY08.
VC Research 10
Profit margin ratios:
That CRG carries a higher overall GP margin because it generates a higher percentage of revenue from high GP
margin non-construction businesses.
Non-construction revenue as % of total revenue (Bar) and its GP margin % (Line)

25.0% 25.0%
20.0%
20.0% 18.7% 20.0%
As % of total revenue
16.2%
GP margin %
15.0% 13.5% 15.0%
11.3% 11.5%
10.0% 9.8% 10.0%
6.4%
5.0% 5.0%
0.0% 0.0%
FY2007 FY2008
Given the higher construction GP margin of CRCC and the strong growth of construction revenues for both firms in
the coming years, CRCC’s total GP margin may catch up with that of CRG, in our view.
As discussed in the previous section regarding R&D, the lower net margin % (Excluding FX loss) of CRCC was due
to its much higher R&D expenditures. While CRCC commented that they expect a flat R&D expenditure for FY09,
the overall operating expense as percentage of sales for CRCC should drop to the similar level as that of in FY09.
As such, we expect CRCC’s net margin will match that of CRG in FY10.
Working capital (WC) management ratios:
We see that CRCC can run the business with lower WC asset and at the same time holding up more WC liability.
As such, there is larger room of improvement for CRG than CRCC. We expect CRG to catch up with CRCC in the
long run through better WC management. However, the gap of net WC as percentage of sales actually widened
from 8.3% to 10.3% during FY07 to FY08. We use total WC asset/liability as percentage of sales instead of just
receivable/payable for comparison to avoid distortion arising from different accounting classification made by the
two companies.
Fixed asset turnover ratios:
CRCC is able to generate sales with lower level of PPE & Capital investment (PPE + intangible assets & prepaid
land lease, etc.). The higher percentage of fixed asset required for CRG was mainly attributed to its larger size of
net intangible assets of Rmb13669m (CRCC: Rmb687m). Majority of the intangible assets of CRG & CRCC related
to service concession arrangements of BOT highways.
Both CRG & CRCC revealed their intention to develop more BOT projects as a means to secure more long-term
stable cash flows. While CRG usually has to develop BOT from start-up and thus incurring negative cash flows
from these projects during the initial years, majority of BOT projects for CRCC are injected from its parent after
operating with positive cash flows.
With the significant difference of the amount of intangible assets, we expect the gap of fixed asset turnover ratios to
persist.
VC Research 11
Debt ratios:
Both CRG & CRCC maintain a low level of long-term debt and hold big piles of cash. Given their low rate of return
from operating assets (3.0% & 2.8% for CRG & CRCC in FY08), it is a wise decision to keep a low level of debt
because ROEs are unlikely to be boosted up through increasing leverage by interest charging debts.
Other ratios:
CRCC has a higher backlog-to-revenue ratio, indicating that its revenue growth in the coming years is more secure
than CRG. Also, its lower percentage of FX loss may indicate its better cash management ability.
In sum, we believe NP margin for CRCC will continue to improve in the coming years. On the other hand, we do not
expect the asset turnover of CRG to catch up with CRCC in the near future. Therefore, we believe CRCC can get a
better return for its assets in coming years than its PRC peer.
Market overestimating property business

9) We think the market is overestimating the importance of property development business of CRG &
CRCC in the short run.
We agree that, relative to CRCC, CRG is better positioned to gain from a rally in the property market. It is because
CRG has a greater percentage of revenue and assets related to the property development business and it enjoys a
higher GP margin from property development.
Property / real estate business comparison of CRG & CRCC

FY2007 FY2008
(in Rmb m unless otherwise specified) CRG CRCC CRG CRCC
Revenue 3,282 681 3,805 1,072
% of total revenue 1.9% 0.4% 1.7% 0.5%
Gross Profit margin % 31.8% 25.4% 30.0% 18.4%
Property under development or for sale 11,911 3,862 19,948 9,100
Book value per share (in Rmb) 0.56 0.48 0.94 0.74
% of total asset 5.5% 2.5% 7.9% 4.1%
Source: VC estimates, The Company
Both CRG and CRCC have expressed their intentions to develop a stronger property development arm. In FY08,
CRG/CRCC had GFA land bank of around 18mn m2/10mn m2, making them among the top-15 listed China
property companies in terms of land bank.
However, we still think that property development business should not be a critical factor for CRG & CRCC in the
short run because:
- Given the strong growth of their core infrastructure construction business, the contribution of the
property business will still be relatively low in the coming years.
- Although CRG’s land bank is around 39% of the largest listed land bank holder, Country Garden,
the market capitalisation of CRG is around 2.7x bigger than Country Garden. Therefore, the overall
valuation of CRG would not depend much on the property development business at least in the
medium term in our view.
- Competing with a large number of property developers (like Country Garden – 2007.HK, Aglie
Property – 3383.HK & Shimao Property – 813.HK, etc.), CRG or CRCC are unlikely to reap fruitful
returns given the additional risks of competition in a non-core business line.
VC Research 12
Recent share price performance of CRG & CRCC relative to the HSI
Relative performance of HSI, CRG & CRCC since 9-Mar-09

90%
80%
70%
% change since 9-Mar-09
60%
50%
40%
30%
20%
10%
0%
10- 17- 24- 31- 7- 14- 21- 28- 5- 12- 19- 26- 2- 9- 16- 23- 30- 7- 14- 21- 28-
-10%
Mar Mar Mar Mar Apr Apr Apr Apr May May May May Jun Jun Jun Jun Jun Jul Jul Jul Jul
Source: Bloomberg HSI CRG CRCC
Following the noticeable bounce back of the global stock market since Mar09, the HSI has risen 81% while CRG
71%. The performance of CRG is more or less in line with that of the HSI. Its slight underperformance may be
perhaps attributed to its defensive nature relative to the overall market
However, CRCC under performed by around 40% with respect to CRG. Given the recent strong performance of the
Metals & China Property sectors, we believe the market is overestimating the earning contributions of the mining &
property development businesses of CRG.
VC Research 13
Valuation
Our TPs for CRG/CRCC are set at HKD7.15/HKD14.56, representing a potential upside of 2% and 18%
respectively.
Given the long investment and construction period of the infrastructure construction sector, we adopted the
“Discounted free cash flow (DCF) method” to derive our TPs for CRG & CRCC.
For the discount rate, we applied the same 10% for both CRG & CRCC despite the higher historical beta of CRG
(CRG: 0.98 V.S. CRCC: 0.79). It is because, in our opinion, investors should have the same perception regarding
the level of risk by investing in CRG or CRCC, given their high level of similarity. Therefore, the market should
demand the same level of required rate of return from the two companies. Also, given the short listing period (Less
than 2 years), their individual betas may not be that much indicative.
The table below shows our discount rate calculation:
Weighted average cost of capital ("WACC")
Cost of equity
Risk-free rate 4.18%
Unlevered beta 0.75
Levered beta 0.85
Equity risk premium 8.00%
Cost of equity 10.99%
Rounded 11.00%
Cost of debt
Cost of debt 5.40%
Tax 25.00%
After tax cost of debt 4.05%
Proportion of debt 15.75%

Proportion of equity 84.25%
WACC 9.90%
Rounded 10.00%
Source: Bloomberg, VC estimates
Risk free rate and cost of debt are the yield of the long term China government bond and the prime lending rate of
China extracted from Bloomberg as at 31 July 09.
The proportion of debt used in the WACC calculation is the average of expected proportion of debt for CRG (21.4%)
& CRCC (10.1%). The impact on WACC is small and the resultant WACC is still 10% for 0% to 34% of the
proportion of debt.
VC Research 14
The unlevered beta of 0.75 is derived from the adjusted average of 15-listed infrastructure constructor including
CRG & CRCC. Please refer to following tables for the betas and company descriptions of all of the comparable
companies.
VC Research
Infrastructure construction
As at 31 July 2009
Summary of betas
(In Rmb million unless otherwise stated)
Bloomberg Levered Total Market Debt/ Unlevered
Comparable company Ticker Country beta Tax rate debt cap equity beta
China Railway Group Ltd - H 390 HK Equity China 0.98 25% 53,909 144,164 37% 0.77
China Railway Constructio-H 1186 HK Equity China 0.79 25% 22,131 131,285 17% 0.70
China Communications Const-H 1800 HK Equity China 1.25 25% 57,874 131,470 44% 0.94
Vinci Sa DG FP Equity France 1.06 33% 203,672 177,764 115% 0.60
Acs Actividades Cons Y Serv ACS SM Equity Spain 0.77 30% 132,490 115,034 115% 0.42
Fomento De Construc Y Contra FCC SM Equity Spain 0.90 30% 87,836 34,601 254% 0.32
Skanska Ab-B Shs SKAB SS Equity Sweden 1.06 28% 2,944 39,563 7% 1.01
Hyundai Engineering & Const 000720 KS Equity Korea 1.29 28% 7,255 39,089 19% 1.14
Daewoo Engineering & Constr 047040 KS Equity Korea 1.18 28% 15,961 23,545 68% 0.79
Impregilo Spa IPG IM Equity Italy 1.09 31% 9,366 10,524 89% 0.68
United Group Ltd UGL AU Equity Australia 1.08 30% 2,865 11,228 26% 0.92
Sumitomo Mitsui Construction 1821 JP Equity Japan 1.02 41% 499 1,907 26% 0.88
Meiko Construction Co Ltd 1869 JP Equity Japan 0.61 41% 1,311 1,088 120% 0.35
Tuksu Construction Co Ltd 026150 KS Equity Korea 0.86 28% 87 650 13% 0.78
Eehwa Construction Co Ltd 001840 KS Equity Korea 0.87 28% 0 423 0% 0.87
Minimum 0.61 0% 0.32

Maximum 1.29 254% 1.14
Average 0.99 63% 0.75
Median 1.02 37% 0.78
Adjusted average 0.99 54% 0.75
VC Research 15
VC Research
As at 31 July 2009
Comparable companies descriptions
Comparable company Ticker Country Description
China Railway Group 390 HK Equity China China Railway Group Ltd. offers transportation systems construction services. The Company
Ltd - H builds railroads, roads, tunnels, and bridges.
China Railway 1186 HK Equity China China Railway Construction Corporation Ltd is a full service construction company. The
Constructio-H Company's services include construction operations, survey design and consulting. China
Railway also has manufacturing operations, real estate operations, and logistics. The
Company specializes in railway construction.
China Communications 1800 HK Equity China China Communications Construction Company Ltd. is a transportation infrastructure group.
Const-H The Company is involved in infrastructure construction, infrastructure design, dredging, and
port machinery manufacturing. China Communications has operations worldwide.
Vinci Sa DG FP Equity France Vinci SA builds roads, offers electrical, mechanical, and civil engineering and construction
services, and operates toll roads. The Company builds and maintains roads and produces road
construction materials, builds electricity and communications networks, installs fire protection
and power and ventilation systems, and operates toll highways, bridges, parking garages, and
a stadium.
Acs Actividades Cons ACS SM Equity Spain ACS, Actividades de Construccion y Servicios, S.A. designs, builds, and maintains roads,
Y Serv railroads, hydraulic works, ports, and residential and commercial buildings. The Company
also installs and maintains electricity distribution systems, natural gas distribution systems,
telephone networks, and road signaling systems, collects and treats waste, and operates buses.
Fomento De Construc FCC SM Equity Spain Fomento de Construcciones y Contratas S.A. (FCC) offers construction services and
Y Contra manufactures building materials. The Company offers civil engineering services, constructs
housing and commercial buildings, roads, and other infrastructure projects, develops real
estate, collects, treats, and disposes of solid waste, markets street cleaning machines, and
produces cement.
Skanska Ab-B Shs SKAB SS Equity Sweden Skanska AB offers construction related and project development services. The Company
focuses on construction of housing, commercial buildings, roads, and railways, as well as
develops and carries out international civil engineering projects. Skanska is also a provider of
facilities management services. The Company is active in Northern Europe, North and South
America, and Asia.
Hyundai Engineering & 000720 KS Korea Hyundai Engineering & Construction Co., Ltd., a general construction company, provides
Const Equity civil engineering, architectural, industrial, and electrical engineering services. The Company
constructs roadways, dams, bridges, ports, industrial plants, apartment complexes, and
cultural facilities.
Daewoo Engineering & 047040 KS Korea Daewoo Engineering & Construction Co., Ltd. is a general engineering constructor. The
Constr Equity Company's projects include architectural works, such as commercial buildings, public
facilities, schools, hospitals, and civil works, such as highways, ports, tunnels, railways, and
dams. Daewoo Engineering & Construction also constructs power plants, and residential
buildings.
Impregilo Spa IPG IM Equity Italy Impregilo S.p.A. offers construction services. The Company constructs dams, hydroelectric
plants, roads and motorways, railways and subways, ports and other maritime projects,
irrigation systems, waste treatment plants, desalination plants, thermal and nuclear power
stations, and hospitals. Impreglio holds interests in companies that operate toll highways.
United Group Ltd UGL AU Equity Australia United Group Limited is a diversified engineering, construction and maintenance company.
The Company's operations include railway manufacturing, maintenance and engineering along
with providing design, construction, operating and maintenance services in the mining,
commercial property, water services, defense and petrochemicals industries.
Sumitomo Mitsui 1821 JP Equity Japan Sumitomo Mitsui Construction Co., Ltd. is a general contractor nationwide and overseas. The
Construction Company constructs infrastructure such as railways, roads and energy facilities. Sumitomo
Mitsui Construction also builds residential, commercial, and institutional buildings such as
high-rise housings. Additionally, the Company operates real estate brokerage and leasing
businesses.
Meiko Construction Co 1869 JP Equity Japan MEIKO CONSTRUCTION CO., LTD. is a general contractor based in Chubu region. The
Ltd Company constructs infrastructure such as railways, bridges, highways, and water and sewage
facilities.
Tuksu Construction Co 026150 KS Korea Tuksu Construction Co., Ltd. provides construction and civil engineering services,
Ltd Equity specializing in grouting and boring. The Company's projects include subway, railway, and
bridge construction.
Eehwa Construction Co 001840 KS Korea Eehwa Construction Co., Ltd. provides civil engineering, architectural, and construction
Ltd Equity services. The Company constructs government issued projects, such as railways, roadways,
power plants, and subways. Eehwa Construction also sells and leases real estate.
Source: Bloomberg
VC Research 16
The following table shows the consensus expected P/E for all of the comparable companies including CRG &
CRCC. We are more optimistic regarding the earnings growth and thus our expected FY10 P/E for CRG & CRCC
are 14.2 and 14.0, which are lower than consensus.
VC Research
As at 31 July 2009
Peers comparison
(In Rmb million unless otherwise stated)
Bloomberg Market P/E
Comparable company ticker Country cap FY09 FY10 FY11 FY12
China Railway Group Ltd - H 390 HK Equity China 144,164 24.00 18.46 15.32 12.99
China Railway Constructio-H 1186 HK Equity China 131,285 21.21 16.10 13.43 10.82
China Communications Const-H 1800 HK Equity China 131,470 16.46 13.62 11.48 9.02
Vinci Sa DG FP Equity France 177,764 12.82 13.62 12.68 11.67
Acs Actividades Cons Y Serv ACS SM Equity Spain 115,034 9.41 13.85 13.23 12.06
Fomento De Construc Y Contra FCC SM Equity Spain 34,601 11.89 11.59 10.68 8.45
Skanska Ab-B Shs SKAB SS Equity Sweden 39,563 14.70 16.69 15.70 12.89
Hyundai Engineering & Const 000720 KS Equity Korea 39,089 14.21 13.55 11.67 9.31
Daewoo Engineering & Constr 047040 KS Equity Korea 23,545 16.78 13.45 10.94 8.84
Impregilo Spa IPG IM Equity Italy 10,524 13.22 11.12 9.86 9.08
United Group Ltd UGL AU Equity Australia 11,228 13.35 13.66 12.96 11.74
Sumitomo Mitsui Construction 1821 JP Equity Japan 1,907 neg n/a n/a n/a
Meiko Construction Co Ltd 1869 JP Equity Japan 1,088 38.77 n/a n/a n/a
Tuksu Construction Co Ltd 026150 KS Equity Korea 650 n/a n/a n/a n/a
Eehwa Construction Co Ltd 001840 KS Equity Korea 423 n/a n/a n/a n/a
Minimum neg 11.12 9.86 8.45

Maximum 38.77 18.46 15.70 12.99
Average 15.51 14.16 12.54 10.62
Median 14.21 13.62 12.68 10.82
Adjusted average 15.28 14.01 12.49 10.60
Adjusted average excludes minimum and maximum as outliers
From the peer comparison table, we can see that both CRG and CRCC are trading at a higher expected P/E than
their global peers. Given their promising growth trend in the coming years, the higher multiples are justified in our
view.
VC Research 17
Recommendation
The China railway infrastructure constructor sector is attractive in the sense that it offers a promising top line
growth, backed by the Chinese government’s huge investment in infrastructure construction. Relative to general
infrastructure constructors, CRG & CRCC are expected to deliver promising growth given the under-investment in
railway infrastructure relative to highways & ports on the mainland.
CRG & CRCC’s recent underperformance relative to HSI may attribute to their defensive nature. However, given
their strong and highly visible growing trend, we expect investment interest will return when market volatility
increases.
Between the two players, we prefer CRCC to CRG at their current prices because of CRCC’s:
- Greater focus and higher GP margin % in railway construction

- Higher survey & design capabilities and commitment to R&D
- Higher and growing percentage of overseas revenue & new contract value
- Lower dependency on other income & financial investment performances
- Potential ROA improvement through total GP & net margin expansion while keeping its higher
asset turnover ratios over CRG’s
- Share price underperformance relative to CRG in recent months
- Higher upside potential from the current price to our TP
We recommend company that concentrates on its core business and is more willing to make long-term investment
to strengthen its core competency.
We believe the market is overestimating the earning contributions of the mining & property development
businesses of CRG and underestimating the impact of design capabilities and overseas revenue source on the
long-term growth of the industry.
Therefore, we believe CRCC’s lagged valuation provides a good chance for investors to capitalize on China’s high
growth in the railway infrastructure sector. We upgrade CRCC to BUY with a TP of HKD 14.56 and downgrade
CRG to HOLD with a TP of HKD 7.15.
VC Research 18
Company Update
03 August 2009
China Railway Group (0390.HK) HOLD (Downgraded)

Company Update – China Railway Group (0390.HK)
Calvin K.H.Ho (852) 2913 6704
Investment Summary
Price (HK$)
6.98 We have revised down CRG from BUY to HOLD following its 30% share price
Target price (HK$) increase since the beginning of May09.
7.15
Based on the recent strong new contracts inflows and higher than expected
Mkt Cap (HK$bn)
163.54 MOR investment up to Jun09, we have revised upward our revenue forecasts
52-week high for FY09 & FY10 by 9.6% & 24.3% and EPS from HK$0.25/HK$0.37 to HK$0.31
7.24 /HK$0.43 for FY09/FY10.
52-week low
3.00 Given the decrease in average raw material costs in 1H09 and management
FY09 PE (x)
cost control policy, we believe CRG can at least keep its GP margin flat in
19.9 FY09.
FY10 PE (x) NP margin (Exclude FX effect) improve by 0.1% as we expect selling &
14.2
administrative expenses as % of revenue to decrease from 4.6% in FY08 to
Historic P/B (x)
2.2 4.5% in FY09.
Forward P/B (x) However, we revise downward our growth rate assumptions of FCFs for FY14
2.0
to FY20 from CAGR 10% to CAGR -0.9%, as we believe the recent strong
FY09 ROE (%)
10.9 growth cannot sustain.
FY10 ROE (%) Our DCF based TP is set at HKD7.15, representing 2% upside from the
13.8
current trading price. We think CRG is fully valued at current price level. We
FY09 Yield (%)
1.3 prefer CRCC (1186.HK) to CRG.
FY10 Yield (%)
1.8
Earnings Summary - China Railway Group (0390.HK)
Y/E 31 Dec FY2007A FY2008A FY2009E FY2010E
Revenue (Rmb m) 177,391 225,029 316,795 442,970
YoY change 15.5% 26.9% 40.8% 39.8%
Profit / (Loss) attributable to shareholders (Rmb m) 2,488 1,350 6,570 9,211
Basic EPS (Rmb) 0.186 0.063 0.308 0.432
YoY change 16.1% -65.8% 386.7% 40.2%
PER (x) 33.2 97.1 19.9 14.2
PBR (x) 2.2 2.2 2.0 1.8
Dividend Yield (%) 0.0% 0.0% 1.3% 1.8%
Gross profit margin 7.2% 7.3% 7.3% 7.3%
Return on Equity (ROE) (Average) 8.1% 2.8% 10.9% 13.8%
Total Liabilities to Total Assets 72.4% 75.8% 79.8% 82.7%
Debt to Total Assets 18.0% 21.4% 21.4% 21.4%
Debt (net of cash) to Total Assets Net cash 2.8% 3.2% 2.7%
Sources: VC estimates, The company
VC Research 19
Business development & News update
Sales growth surprises on the upside
Strong new contracts inflows. Total new contract value secured and announced from
Jan09 to Apr09 already reached Rmb200bn, more than 50% management’s annual
target of Rmb390bn for FY09. Based on the new contracts inflows pattern over the past
few years for CRG and CRCC, the value of new contracts inflows in 2H would usually be
much higher than that in 1H. Therefore, we expect the strong growth of new contract
value in FY08 to carry over in FY09. Taking into account the newly announced contract
value in our projection, we have revised up our contract value forecast from Rmb413.8bn
to Rmb583.9bn for FY09.
New contract value (in Rmb m) - China Railway Group (0390.HK)

FY2009E
Recent company announcement for Jan09 - Apr09 Around 200,000
Management target for the year 390,000
Last year total 428,450
Change
Our current estimate 583,869 41.1%
Our previous estimate (4-May-09) 413,882
MOR investments may beat expectations. According to the latest announcement by

the Ministry of Railways (MOR), the amount of railway investments up to Jun09 grew
155% yoy to Rmb201bn. The MOR has followed an investment pattern over the past few
years that the amount spent in 2H of the year is higher than that in 1H. If this investment
pattern will repeat in 2009 and given the 1H09 investment number is already quite high,
it is possible that the total investment by the MOR would come in at Rmb860bn, 43%
higher than market consensus of Rmb600bn.
Railway infrastructure monthly spending by MOR

100
90
80
70
60
Rmb bn
50
40
30
20
10
-
Jul-07
Sep-07
Jul-08
Sep-08
Jan-07
Mar-07
May-07
Nov-07
Jan-08
Mar-08
May-08
Nov-08
Jan-09
Mar-09
May-09
Source: VC estimates, MoR

*There is a regular jump in Dec due to project settlements made before the end of the year.
VC Research 20
Revenue recognition rate to increase. In the absence of serious natural disasters in

2009, construction projects are expected to complete at a faster rate and thus we revise
upward our revenue recognition rate, i.e., the revenue as % of current new contract and
backlog, from 27.2% to 30.8% for FY09. However, given the expected strong new
contract value growth rate in FY09, the revenue recognition rate in FY09 will likely come
in lower than that in FY08.
Historical & Assumed Revenue as % of (Current year New contract + Last year Backlog)
FY2007A FY2008A FY2009E FY2010E
Revenue as % of (Current year New contract + Last year Backlog) 45.2% 35.1% 30.8% 32.5%
Our previous estimate (4-May-09) n/a n/a 27.2% 28.3%
New contract value Historical or Assumed growth rate 18.0% 69.9% 47.5% 10.6%
Sources: VC estimates
Factoring in a higher-than-expected new contract value inflows and a higher revenue

recognition rate, we have revised upward our revenue growth forecasts for FY09/FY10
from 28.5%/23.2% to 40.8%/39.8%. Our revenue forecast for FY09 is now 6% higher
than market consensus from Bloomberg.
Margin Analysis
GP margin to remain flat

There are market views that CRG’s overall GP margin will improve drastically in 2009
due to decreases in raw material prices and the company’s cost controls. We hold a
different view and project that CRG’s overall GP margin will be flat for FY09 and FY10. It
is because:
- Revenue from construction projects, of which margins are relatively lower than other
lines of businesses, constitutes a higher % of total revenue in FY09.
- Raw material costs will start bounce back towards the end of 2009, when stronger
demands for construction materials emerges.
- The MOR, as the largest customer who contributes a good share of CRG’s revenue,
will unlikely increase contract prices.
- We do not expect CRG to gain much from economies of scale through project
management because its existing construction operation scale is already sizeable
by national standards.
- The decline in raw material prices since 4Q08 does not warrant an improvement in
CRG’s overall GP margin in 2009. The diagram overleaf shows a positive
correlation between CRG’s construction GP margin and the prices of Rebar and
425-grade cement since 2007.
VC Research 21
Construction GP margin % (Left bar) and Construction material prices (Right bar)
6.5% 4,900
Average prices per Ton (or per 10 Tons)

6.3% 4,400
GP margin %
6.1% 3,900
5.9% 3,400
5.7% 2,900
5.5% 2,400
FY05 FY06 FY07 FY08
Rebar per Ton Cement (42.5 grade) per 10 Tons
CRG infrastructure GP margin CRCC infrastructure GP margin
Source: VC estimate, Bloomberg, CEIC
Conservative overall GP margin assumptions. Management guided that they are

looking to bolster GP margin through better internal cost controls. Also, given the
continued decrease in average raw material costs in 1H09, we believe CRG will be
capable of maintaining its overall GP margin.
Railway GP margin to be intact for FY09 & FY10. Railway GP margin for CRG was
around 6.8% in FY08. We believe this margin will remain intact in the medium term, and
this view complies with management conservative tone regarding the outlook of this
particular segment.
NP margin (ex-FX loss) rises slightly

Foreign exchange (FX) loss distortions. That the company NP margin dropped to
0.7% in FY08 was distorted by the huge amount of FX loss of Rmb4139m. Excluding this
amount and net of tax, NP margin would have been 2.1% for FY08. We project no
further FX loss to incur in FY09 because the company has obtained government’s
approval to repatriate Rmb10bn of its Rmb15bn H-share IPO proceeds to the mainland.
Also, management confirmed that certain FX losses would be written back due to a
stronger AUD.
A smaller S&A expense to revenue ratio to improve NP margin. On an ex-FX loss
basis, we believe CRG’s NP margin will improve from 2.1% in FY08 to around 2.2% in
FY09. This can be attributable to a smaller S&A expense to revenue ratio. We believe
there is room for CRG to decrease its S&A expenses as % of revenue from 4.6% in
FY08 to 4.5% in FY09 and 4.4% FY10. However, the chance of a further decrease is
limited given that the relevant % in CRCC (1186.HK) & CCCC (1800.HK) have stabilized
at around 4.4% over the past few years.
VC Research 22
Assumptions - China Railway Group (0390.HK)

FY2007A FY2008A FY2009E FY2010E
Historical or Assumed GP margin % of:
Railways 6.3% 6.8% 6.8% 6.8%
Highways 3.8% 4.1% 4.1% 4.1%
Municipal works 6.6% 6.6% 6.6% 6.6%
Survey, design & consulting services 29.5% 27.0% 27.0% 28.0%
Engineering equipment & component manufacturing 16.2% 16.0% 17.0% 17.0%
Property development 31.8% 30.0% 30.0% 30.0%
Other businesses 13.7% 13.0% 13.5% 13.5%
Total GP% 7.2% 7.3% 7.3% 7.3%
Revenue mix - China Railway Group (0390.HK)

FY2007A FY2008A FY2009E FY2010E
Railways 44.6% 48.2% 49.1% 55.7%
Highways 23.6% 17.3% 18.4% 13.4%
Municipal works 26.8% 24.9% 25.2% 25.3%
Survey, design & consulting services 1.9% 1.9% 1.4% 1.2%
Engineering equipment & component manufacturing 2.9% 3.1% 2.6% 2.3%
Property development 1.9% 1.7% 1.5% 1.3%
Other businesses 4.6% 4.8% 3.5% 2.7%
Elimination of inter-segment revenue -6.3% -1.8% -1.8% -1.8%
Total Revenue 100.0% 100.0% 100.0% 100.0%
Valuation
Given the long investment and construction period of the infrastructure construction
sector, we adopt DCF methodology to come up with our TP for CRG.
Growth sustainability. The implied growth rate assumption in our DCF model for FY14
to FY20 is of -0.9% CAGR, as we believe the recent strong growth cannot sustain in a
very long run. In our current valuation, we expect new contract value and revenue to
peak out in FY11 & FY13, respectively.
A discount rate of 10%. Our WACC is derived from the following assumptions: Risk
free rate: 4.18%, Unlevered beta: 0.75, Equity risk premium (ERP): 8%, Cost of debt:
5.4%, Tax rate: 25% and expected capital structure for CRG. Meanwhile, the low
unlevered beta of 0.75 is justified by the average of global railway constructors.
VC Research 23
DCF - China Railway Group (0390.HK)

Value Average
(in Rmb millions) As at before Terminal
31/7/2009 Terminal Year
FY2009 FY2010 Year FY2012
Free Cash Flow available to firm (FCF) (851) 2,129 13,126 14,709
Total Firm Value 152,939
Net (Debt) / financial asset (13,447)
Minority interest (5,154)
Total Equity value 134,338
Total no. of shares 21,300
Fair value per share 6.31
HKD/RMB exchange rate 1.13 Terminal growth % 3.0%
Fair value per share (in HKD) 7.15 WACC % 10.0%
Recommendation: HOLD
Following the noticeable bounce back of the global stock market since Mar09, the HSI
has risen 81% while CRG 71%. The performance of CRG is more or less in line with that
of the HSI. Its slight underperformance may be perhaps attributed to its defensive nature
relative to the overall market.
Our DCF based TP is set at HKD7.15, representing a 2% upside from the current share
price. In our view, CRG is fully valued and unattractive at current share price relative to
CRCC (1186.HK), which commands an 18% potential upside based on our estimates.
However, CRG is a defensive play and may become again an investment focus when
market volatility increases. We downgrade CRG to HOLD on valuation base.
Sensitivity analysis
We identified 6 major assumptions, namely Sales growth rate, GP margin, Capital

investment growth rate, S&A expenses as % of revenue, terminal growth rate & WACC
for DCF, and prepared sensitivity tables to show the TP if those assumptions derivate
from our base case. Please refer to appendix for details.
VC Research 24
Income Statement - China Railway Group (0390.HK)

Y/E 31 Dec
Historical and Projected Consolidated Income Statement

(in RMB millions, RMB for per share figures) FY2007A FY2008A FY2009E FY2010E
Revenue 177,391 225,029 316,795 442,970

Cost of sales (164,659) (208,534) (293,579) (410,689)
Gross profit 12,732 16,495 23,215 32,281

Other income 841 1,168 1,226 1,288
Other gains / (losses) 516 (4,232) 0 0
Selling and marketing expenses (932) (933) (1,235) (1,728)
Administrative expenses (8,913) (9,499) (12,989) (17,719)
Interest income 982 1,581 1,154 1,856
Interest expenses (1,850) (2,372) (2,171) (3,224)
Share of profits / (losses) of jointly controlled entities (3) 44 39 43
Share of profits / (losses) of associates 11 48 37 41
Profit before taxation 3,384 2,300 9,277 12,838

Income tax expense (549) (631) (2,319) (3,210)
Profit for the year 2,835 1,669 6,958 9,629
Minority interests (347) (319) (388) (418)
Profit attributable to equity holders of the Company 2,488 1,350 6,570 9,211
Earning per share (Basic) 0.186 0.063 0.308 0.432

VC Research 25
Balance Sheet - China Railway Group (0390.HK)

Y/E 31 Dec
Historical and Projected Consolidated Balance Sheet

(in RMB millions) FY2007A FY2008A FY2009E FY2010E
ASSETS
Non-current assets
Total Property, plant and equipment (PPE) 30,276 36,457 43,748 51,186
Accumulated Depreciation - PPE (11,969) (13,772) (16,295) (19,496)
Net Property, plant and equipment (PPE) 18,307 22,685 27,454 31,690
Deposit for acquisition of property, plant and equipment 683 1,328 1,594 1,865
Deposit for land use rights & investment and other
prepayments & receivables 107 301 301 301
Lease prepayments 6,091 6,314 7,577 8,865

Investment properties 857 1,502 1,802 2,109
Intangible assets 7,223 13,806 16,567 19,384
Mining assets 1,104 1,333 1,600 1,872
Total depreciable assets other than PPE 15,275 22,955 27,546 32,229
Accumulated Depreciation / Amortisation (132) (267) (567) (938)
Net depreciable assets other than PPE 15,143 22,688 26,979 31,291
Interests in jointly controlled entities 651 741 815 897

Interests in associates 2,591 3,539 3,893 4,282
Goodwill 779 836 920 1,012
Available-for-sale & Held-to-maturity financial assets 2,908 3,929 3,929 3,929
Other loans and receivables 989 914 914 914
Deferred income tax assets 1,925 2,554 2,554 2,554
44,083 59,515 69,352 78,733
Current assets
Lease prepayments - current 106 108 130 152
Properties held for sale & under development for sale 11,911 19,948 23,781 19,976
Inventories 10,448 18,482 26,333 37,825
Trade and other receivables 63,375 78,260 109,293 154,838
Amounts due from customers for contract work 27,021 25,197 35,704 51,152
Other loans and receivables - current 272 892 892 892
Held-for-trading & held-to-maturity financial assets 166 141 141 141
Restricted cash 2,171 2,530 2,783 3,061
Cash and cash equivalents 56,772 46,846 59,674 79,367
172,242 192,404 258,731 347,403
Total assets 216,325 251,919 328,083 426,137

VC Research 26
Balance Sheet - China Railway Group (0390.HK)

Y/E 31 Dec
Historical and Projected Consolidated Balance Sheet

EQUITY
Equity attributable to the equity holders of the Company 55,791 55,995 60,923 67,831
Minority interests 3,950 4,929 5,317 5,735
Total equity 59,741 60,924 66,239 73,565
LIABILITIES
Non-current liabilities
Other payables 232 366 519 715
Borrowings 10,239 16,829 21,917 28,467
Obligations under finance lease (beyond 1 year) 69 266 319 373
Financial guarantee contracts 77 35 35 35
Retirement and other supplemental benefit obligations 8,650 7,368 7,368 7,368
Provisions 0 47 47 47
Deferred income government grant 209 138 138 138
Deferred income tax liabilities 588 398 398 398
20,064 25,447 30,741 37,542
Current liabilities
Trade and other payables 95,869 111,270 157,632 217,611
Amounts due to customers for contract work 11,144 15,509 22,331 31,171
Current income tax liabilities 541 870 2,133 2,952
Borrowings - current 28,527 36,594 47,658 61,901
Obligations under finance lease (within 1 year) 44 220 264 309
Financial guarantee contracts - current 10 2 2 2
Retirement and other supplemental benefit obligations -
current 385 1,003 1,003 1,003
Held-for-trading financial liabilities 0 80 80 80
136,520 165,548 231,103 315,029
Total liabilities 156,584 190,995 261,844 352,571
Total equity and liabilities 216,325 251,919 328,083 426,137
Net current assets 35,722 26,856 27,628 32,374
Total assets less current liabilities 79,805 86,371 96,980 111,107

VC Research 27
Financial Ratios - China Railway Group (0390.HK)

FY2007A FY2008A FY2009E FY2010E
Valuation
PER (x) 33.2 97.1 19.9 14.2
PBR (x) 2.2 2.2 2.0 1.8
Dividend Yield (%) 0.0% 0.0% 1.3% 1.8%
Dividend payout ratio 0.0% 0.0% 25.0% 25.0%
Profitability and Efficiency

EBITDA margin 4.1% 2.8% 4.6% 4.3%
EBIT margin 2.4% 1.4% 3.2% 3.2%
Net margin 1.6% 0.7% 2.2% 2.2%

Return on Assets (ROA) (Average) 1.6% 0.7% 2.4% 2.6%
Liquidity ratios
Current ratio (x) 1.26 1.16 1.12 1.10
Cash ratio (x) 0.43 0.30 0.27 0.26
Asset turnover ratios

Average Receivables / Sales 45.9% 43.1% 39.2% 39.6%
Average Inventory / Relevant CGS 10.8% 15.3% 15.5% 13.4%
Average net WC assets / (liabilities) as % of Sales -3.4% 1.7% 2.9% 2.1%
Total operating expense / Sales 5.5% 4.6% 4.5% 4.4%
Average net PPE / Sales 9.5% 9.1% 7.9% 6.7%
Average net capital investment / Sales 15.0% 17.5% 15.8% 13.3%
Financial leverage ratios

Debt (net of cash) to Total Assets Net cash 2.8% 3.2% 2.7%
Interest Coverage 2.30 1.30 4.74 4.41
VC Research 28
VC Research 29
Values from DCFF
Sensitivity analysis - Sales growth rate assumption Sales growth rate assumption
(Per share in HKD) WACC Our Base case Average of
-2% -1% 0% 1% 2% FY2009E FY2010E FY11 to FY18
-20% 7.96 6.42 5.32 4.49 3.85 40.8% 39.8% 2.8%
% change of -10% 9.20 7.44 6.18 5.23 4.50
Total Sales 0% 10.62 8.60 7.15 6.08 5.24
growth rate* 10% 12.23 9.91 8.26 7.03 6.07
20% 14.06 11.41 9.52 8.10 7.01
* % change of sales growth rate for each year in projection period
** This table changes sales growth rate of all kinds of revenues at the
same rate (e.g. Sales growth rate expands 20% from 40% to 48%, etc.)
Sensitivity analysis - Gross profit margin assumption Gross profit margin assumption
-2% -1% 0% 1% 2% FY2009E FY2010E FY11 to FY18
-10% 7.83 6.22 5.08 4.23 3.57 7.3% 7.3% 7.5%
% change of -5% 9.22 7.41 6.12 5.15 4.40
GP Margin 0% 10.62 8.60 7.15 6.08 5.24
%* 5% 12.02 9.78 8.19 7.00 6.07
10% 13.41 10.97 9.23 7.92 6.90
* % change of gross profit margin for each year in projection period

** This table changes GP margin % of all kinds of revenues at the same
rate (e.g. GP margin expands 10% from 7% to 7.7%, etc.)
Sensitivity analysis - CAPEX assumption CI growth rate assumption

-2% -1% 0% 1% 2% FY2009E FY2010E FY11 to FY18
-10% 12.19 10.27 8.89 7.84 7.01 20.0% 17.0% 6.3%
% growth of -5% 11.24 9.34 7.98 6.94 6.13
Capital 0% 10.62 8.60 7.15 6.08 5.24
Investment* 5% 9.87 7.65 6.09 4.93 4.05
10% 8.83 6.34 4.61 3.36 2.43
* Change of % growth of total capital investment for each year (except
the final year) in projection period
** This table changes % growth of all kinds of CIs at the same rate (e.g.
From CIs increase at 20% to 30%)
Note: This table reflects change in amount of CAPEX each year
Sensitivity analysis - Operating expense assumption Operating expense assumption

-2% -1% 0% 1% 2% FY2009E FY2010E FY11 to FY18
-1.0% 14.32 11.77 9.94 8.57 7.51 4.5% 4.4% 4.4%
% of sales -0.5% 12.47 10.18 8.55 7.32 6.37
for operating 0.0% 10.62 8.60 7.15 6.08 5.24
expenses* 0.5% 8.77 7.01 5.76 4.83 4.10
1.0% 6.92 5.43 4.37 3.58 2.97
* Change of % of sales for total operating expense (e.g. SGA) for each
year in projection period
** This table changes the % of sales of total operating expenses (except
CGS) to revenue (e.g. From 4.5% to 5.5% of sales)
Sensitivity analysis - Terminal growth rate assumption Terminal growth rate assumption
(Per share in HKD) WACC Our Base case
-2% -1% 0% 1% 2% Terminal g WACC
-2% 8.28 7.02 6.04 5.26 4.63 3.0% 10.0%
Terminal -1% 9.25 7.69 6.53 5.62 4.90
growth 0% 10.62 8.60 7.15 6.08 5.24
rate - FCFF* 1% 12.67 9.86 7.99 6.66 5.66
2% 16.08 11.76 9.16 7.43 6.19
* Change of terminal growth rate from our base case assumption.
VC Research 30
Company Update
03 August 2009
China Railway Construction Co.
BUY (Upgraded)
(1186.HK)
Company Update – China Railway Construction Co. (1186.HK)
Calvin K.H.Ho (852) 2913 6704
Investment Summary
Price (HK$)
12.36 We have revised up CRCC from HOLD to BUY given the 18% potential upside
Target price (HK$) based on our new TP.
14.56
Based on the recent strong new contracts inflows and higher than expected
Mkt Cap (HK$bn)
148.93 MOR investment up to Jun09, we have revised upward our revenue forecasts
52-week high for FY09 & FY10 by 20.5% & 34.0%.
13.44
Given the decrease in average raw material costs in 1H09 and management
52-week low
7.10 expectation, we believe CRCC can improve its overall GP margin slightly by
FY09 PE (x)
0.1% in FY09.
19.5
NP margin (Exclude FX effect) improve by 0.2% as we expect selling &
FY10 PE (x) administrative expenses as % of revenue to decrease from 4.7% in FY08 to
14.0
4.5% in FY09.
Historic P/B (x)
2.8
However, we are cautious on the sustainability of the recent strong growth.
Forward P/B (x) We expect new contract value & revenue to peak out in FY11 & FY13,
2.5
respectively.
FY09 ROE (%)
13.6
DCF based TP is set at HKD14.56, representing 18% upside from the current
FY10 ROE (%) trading price.
16.8
FY09 Yield (%) We prefer CRCC to CRG (390.HK), where CRG’s DCF based TP is estimated at
1.3 HKD7.15, representing only 2% upside from the current trading price.
FY10 Yield (%)
1.8 Earnings Summary - China Railway Construction Corporation (1186.HK)
Y/E 31 Dec FY2007A FY2008A FY2009E FY2010E
REVENUE (Rmb m) 171,997 219,410 312,347 425,998
YoY change 12.0% 27.6% 42.4% 36.4%
Profit / (Loss) attributable to shareholders (Rmb m) 2,301 3,644 6,887 9,636
Basic EPS (Rmb) 0.288 0.324 0.558 0.781
YoY change 89.7% 12.7% 72.1% 39.9%
PER (x) 37.9 33.6 19.5 14.0
PBR (x) 16.5 2.8 2.5 2.2
Dividend Yield (%) 5.4% 1.0% 1.3% 1.8%
Debt (net of cash) to Total Assets Net cash Net cash Net cash Net cash
VC Research 31
Business development & News update
Stronger than expected top line growth
New contracts inflows surprise on the upside. Total new contract value secured and
announced from Jan09 to Mar09 already reached Rmb128bn, around 40% of
management’s annual target of Rmb322bn for FY09. Based on the new contracts inflows
pattern over the past few years for CRG and CRCC, the value of new contracts inflows
in 2H would usually be much higher than that in 1H. Therefore, we expect the strong
growth of new contract value in FY08 to carry over in FY09. Taking into account the
newly announced contract value in our projection, we have revised up our contract value
forecast from Rmb407.5bn to Rmb581.7bn for FY09.
New contract value (in Rmb m) - China Railway Construction Corporation (1186.HK)
FY2009E
Recent company announcement for Jan09 - Mar09 128,000
Management target for the year 322,000
Last year total 423,105
Change
Our current estimate 581,725 42.8%
Our previous estimate (24-Oct-08) 407,460
MOR investments may beat expectations. According to the latest announcement by

the Ministry of Railways (MOR), the amount of railway investments up to Jun09 grew
155% yoy to Rmb201bn. The MOR has followed an investment pattern over the past few
years that the amount spent in 2H of the year is higher than that in 1H. If this investment
pattern will repeat in 2009 and given the 1H09 investment number is already quite high,
it is possible that the total investment by the MOR would come in at Rmb860bn, 43%
higher than market consensus of Rmb600bn.
Railway infrastructure monthly spending by MOR

100
90
80
70
60
Rmb bn
50
40
30
20
10
-
Jul-07
Sep-07
Jul-08
Sep-08
Jan-07
Mar-07
May-07
Nov-07
Jan-08
Mar-08
May-08
Nov-08
Jan-09
Mar-09
May-09
Source: VC estimates, MoR

*There is a regular jump in Dec due to project settlements made before the end of the year.
VC Research 32
Revenue recognition rate to increase. In the absence of serious natural disasters in

2009, construction projects are expected to complete at a faster rate and thus we revise
upward our revenue recognition rate, i.e., the revenue as % of current new contract and
backlog, from 25.4% to 28.8% for FY09. However, given the expected strong new
contract value growth rate in FY09, the revenue recognition rate in FY09 will show no
improvement.
Historical & Assumed Revenue as % of (Current New contract + Last Backlog)

FY2007A FY2008A FY2009E FY2010E
Revenue as % of (Current New contract + Last Backlog) 35.2% 28.9% 28.8% 29.7%
Our previous estimate (24-Oct-08) n/a n/a 25.4% 25.7%
New contract value Historical or Assumed growth rate 36.2% 47.7% 42.9% 10.7%
Factoring in a higher-than-expected new contract value inflows and a higher revenue

recognition rate, we have revised upward our revenue growth forecasts for FY09/FY10
from 28.5%/23.2% to 42.4%/36.4%. Our revenue forecast for FY09 is now 10.5% higher
than market consensus from Bloomberg.
Margin Analysis
GP margin to improve slightly

There are market views that CRCC’s overall GP margin will improve drastically in 2009
due to decreases in raw material prices and the company’s cost controls. We hold a
different view and project that CRCC’s overall GP margin will just has small improvement
for FY09 and FY10. It is because:
- Revenue from construction projects, of which margins are relatively lower than other
lines of businesses, constitutes a higher % of total revenue in FY09.
- Raw material costs will start bounce back towards the end of 2009, when stronger
demands for construction materials emerges.
- The MOR, as the largest customer who contributes a good share of CRCC’s
revenue, will unlikely increase contract prices.
- We do not expect CRCC to gain much from economies of scale through project
management because its existing construction operation scale is already sizeable
by national standards.
- The decline in raw material prices since 4Q08 does not warrant an improvement in
CRCC’s overall GP margin in 2009. The diagram overleaf shows a positive
correlation between CRCC’s construction GP margin and the prices of Rebar and
425-grade cement since 2006.
VC Research 33
Construction GP margin % (Left bar) and Construction material prices (Right bar)
6.5% 4,900
Average prices per Ton (or per 10 Tons)

6.3% 4,400
GP margin %
6.1% 3,900
5.9% 3,400
5.7% 2,900
5.5% 2,400
FY05 FY06 FY07 FY08
Rebar per Ton Cement (42.5 grade) per 10 Tons
CRG infrastructure GP margin CRCC infrastructure GP margin
Source: VC estimate, Bloomberg, CEIC
Conservative overall GP margin assumptions. Management commented that they

expect flat to slightly up GP margin for FY09. Given its higher construction GP margin
and strong growth of construction revenue, we believe CRCC will catch up with CRG in
terms of overall GP margin in FY09 & FY10.
Railway GP margin stays flat in FY09 & FY10. Railway GP margin for CRCC was
around 7.5% in FY08. While CRCC management commented that the GP margins for
railways, metro-light-rails and reservoir projects would stay flat in FY09, we expect the
railway GP margin for CRCC to sustain at 7.5% for FY09 & FY10.
NP margin (ex-FX loss) rises slightly

Foreign exchange (FX) loss distortions. The low NP margin of 1.7% in FY08 was
distorted by the FX loss of Rmb850m. Excluding this amount and net of tax, NP margin
would have been 2.0% for FY08. We project no further FX loss in FY09 because the
company has obtained government’s approval to remit its Rmb equivalent proceeds
back to Rmb.
A smaller S&A expense to revenue ratio to improve NP margin. On an ex-FX loss
basis, we believe CRCC’s NP margin will improve from 2.0% in FY08 to around 2.2% in
FY09. This can be attributable to a smaller S&A expense to revenue ratio. This ratio had
been as low as 4.3% in FY07 but climbed to 4.7% in FY08. The increase was due to the
increase of R&D expense from 1bn in FY07 to 1.7bn in FY08. Management
commended that this expense would not grow in FY09. So, we expect S&A expenses %
to decrease to 4.5% & 4.4% for FY09 & FY10, respectively.
VC Research 34
Assumptions - China Railway Construction Corporation (1186.HK)

FY2007A FY2008A FY2009E FY2010E
Historical or Assumed GP margin % of:
Railway 6.4% 7.5% 7.5% 7.5%
Highway 5.2% 4.1% 4.1% 4.1%
Metropolitan railway 6.8% 6.6% 6.6% 6.6%
Water conservancy and hydropower facility 7.2% 7.0% 7.0% 7.0%
Construction - others 5.5% 6.4% 6.4% 6.4%
Survey, design & consultancy operations 21.7% 21.9% 23.0% 23.0%
Manufacturing 16.4% 12.9% 17.0% 17.0%
Real estate development 25.4% 18.4% 20.0% 20.0%
Logistics 6.7% 6.7% 8.0% 8.0%
Others 24.8% 31.5% 30.0% 30.0%
Total GP% 6.6% 7.2% 7.3% 7.3%
Revenue mix - China Railway Construction Corporation (1186.HK)

FY2007A FY2008A FY2009E FY2010E
Railway 43.0% 50.2% 56.1% 59.6%
Highway 31.9% 24.3% 17.6% 15.7%
Metropolitan railway 3.0% 4.2% 3.1% 3.1%
Water conservancy and hydropower facility 3.5% 2.9% 2.6% 1.8%
Construction - others 13.3% 10.0% 14.5% 14.5%
Survey, design & consultancy operations 2.2% 2.1% 1.7% 1.4%
Manufacturing 1.1% 2.2% 1.0% 0.9%
Real estate development 0.4% 0.5% 0.4% 0.4%
Logistics 2.2% 4.4% 4.0% 3.7%
Others 0.6% 0.6% 0.5% 0.4%
Elimination of inter-segment revenue -1.1% -1.4% -1.4% -1.4%
Total Revenue 100.0% 100.0% 100.0% 100.0%
Valuation
Given the long investment and construction period of the infrastructure construction
sector, we adopt DCF methodology to come up with our TP for CRCC.
Growth sustainability – We believe the recent strong top line growth cannot sustain in
a very long run. To be conservative, we assume new contract value and revenue to peak
out in FY11 & FY13, respectively.
A discount rate of 10%. Our WACC is derived from the following assumptions: Risk
free rate: 4.18%, Unlevered beta: 0.75, Equity risk premium (ERP): 8%, Cost of debt:
5.4%, Tax rate: 25% and expected capital structure for CRCC. Meanwhile, the low
unlevered beta of 0.75 is justified by the average of global railway constructors.
VC Research 35
DCF - China Railway Construction Corporation (1186.HK)

Value Average
(in Rmb millions) As at before Terminal
31/7/2009 Terminal Year
FY2009 FY2010 Year FY2018
Free Cash Flow available to firm (FCF) 1,277 4,026 13,901 10,506
Total Firm Value 132,456
Net (Debt) / financial asset 26,457
Minority interest (583)
Total Equity value 158,329
Total no. of shares 12,338
Fair value per share 12.83
HKD/RMB exchange rate 1.13 Terminal growth % 3.0%
Fair value per share (in HKD) 14.56 WACC % 10.0%
Recommendation - BUY
Following the noticeable bounce back of the global stock market since Mar09, the CRG
& HSI rose 71% & 81% while CRCC 30%. We consider its underperformance is not
justified given its visible growth trend and various merits over CRG, as discussed in our
sector report.
With conservative assumptions in GP margins and long-term growth rate after FY11, our
DCF based TP is set at HKD14.56, representing a 18% upside from the current share
price. With the higher potential upside, we prefer CRCC to CRG (390.HK), which
commands only 2% potential upside based on our estimates. Moreover, given its nearly
identical revenue source, company size and greater focus in its core business, the
underperformance of CRCC relative to CRG in the recent rally is expected to narrow or
even reverse. We upgrade CRCC to BUY on valuation base.
Sensitivity analysis
We identified 6 major assumptions, namely Sales growth rate, GP margin, Capital

investment growth rate, S&A expenses as % of revenue, terminal growth rate & WACC
for DCF, and prepared sensitivity tables to show the TP if those assumptions derivate
from our base case. Please refer to appendix for details.
VC Research 36
Income Statement - China Railway Construction Corporation (1186.HK)

Y/E 31 Dec
Historical and Projected Consolidated Income Statement (Rmb m)

(in RMB millions, RMB for per share figures) FY2007A FY2008A FY2009E FY2010E
REVENUE 171,997 219,410 312,347 425,998

Cost of sales (160,598) (203,607) (289,409) (394,788)
Gross profit 11,399 15,803 22,938 31,211
Other income 180 244 312 400

Other gains / (losses) 341 (681) 0 0
Selling and distribution costs (696) (849) (1,209) (1,648)
Administrative expenses (6,736) (9,384) (12,806) (17,040)
Other expenses (119) (610) (312) (426)
Finance revenue 652 1,325 1,259 1,812
Finance costs (1,272) (1,270) (901) (1,341)
Share of profits and losses of jointly-controlled entities 15 16 19 21
Share of profits and losses of associates 24 (25) 8 9
PROFIT FOR THE YEAR 3,788 4,569 9,309 12,997

Tax expense (1,482) (863) (2,327) (3,249)
PROFIT FOR THE YEAR 2,306 3,706 6,982 9,748
Minority interests (5) (62) (95) (112)
Profit attributable to Equity holders of the Company 2,301 3,644 6,887 9,636
Earning per share (Basic) 0.288 0.324 0.558 0.781

VC Research 37
Balance Sheet - China Railway Construction Corporation (1186.HK)

Y/E 31 Dec
Historical and Projected Consolidated Balance Sheet (Rmb m)

ASSETS
Non-current assets
Total Property, plant and equipment (PPE) 27,821 36,755 46,311 56,500
Accumulated Depreciation - PPE (11,822) (14,868) (19,146) (24,513)
Net Property, plant and equipment (PPE) 15,999 21,887 27,165 31,987
Prepaid land lease payments 4,696 4,859 6,122 7,469

Intangible assets 1,190 747 941 1,148
Total depreciable assets other than PPE 5,886 5,606 7,064 8,618
Accumulated Depreciation / Amortisation (58) (60) (168) (314)
Net depreciable assets other than PPE 5,828 5,546 6,896 8,303
Interests in jointly-controlled entities 72 97 107 117

Interests in associates 257 347 382 420
Held-to-maturity & Available-for-sale investments 890 1,661 1,661 1,661
Deferred tax assets 3,140 2,755 2,755 2,755
Trade and bills receivables - non-current portion 1,034 1,236 1,802 2,496
Prepayments, deposits and other receivables 82 65 95 131
Total non-current assets 27,302 33,594 40,862 47,870
Current assets
Prepaid land lease payments - current 102 102 129 157
Inventories 8,027 13,050 19,197 26,784
Properties held under development or for sale 3,862 9,100 8,040 6,432
Construction contracts 35,928 36,317 54,221 75,806
Trade and bills receivables 30,265 32,774 47,776 66,178
Prepayments, deposits and other receivables 23,544 36,320 52,898 73,281
Held-to-maturity investments & Financial assets at fair
value through P&L 150 43 43 43
Pledged deposits 1,298 2,464 2,710 2,981
Cash and cash equivalents 26,190 55,006 62,331 73,562
129,366 185,176 247,345 325,224
Non-current asset held for sale 210 1,331 1,331 1,331

Total current assets 129,576 186,507 248,676 326,555
TOTAL ASSETS 156,878 220,101 289,538 374,426

VC Research 38
Balance Sheet - China Railway Construction Corporation (1186.HK)

Y/E 31 Dec
Historical and Projected Consolidated Balance Sheet (Rmb m)

LIABILITIES
Current liabilities
Trade and bills payables 44,677 62,824 87,155 116,941
Construction contracts 17,392 16,804 23,912 32,377
Other payables and accruals 53,200 60,453 83,821 112,408
Interest-bearing bank and other borrowings 20,766 16,412 21,590 27,919
Provision for early retirement benefits - current 1,077 1,000 1,000 1,000
Tax payable 1,022 573 1,860 2,596
Provision 8 3 3 3
Total current liabilities 138,142 158,069 219,341 293,246
NET CURRENT ASSETS / (LIABILITIES) (8,566) 28,438 29,335 33,310
TOTAL ASSETS LESS CURRENT LIABILITIES 18,736 62,032 70,197 81,180
Non-current liabilities
Trade and bills payables - non-current portion 741 1,002 1,390 1,865
Other payables and accruals 382 506 699 938
Interest-bearing bank and other borrowings 5,298 5,818 7,653 9,897
Provision for early retirement benefits 6,668 5,947 5,947 5,947
Deferred tax liabilities 195 301 301 301
Deferred revenue 178 157 157 157
Total non-current liabilities 13,462 13,731 16,148 19,105
Total liabilities 151,604 171,800 235,489 312,351
NET ASSETS 5,274 48,301 54,049 62,075
EQUITY
EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
Issued share capital 8,000 12,338 12,338 12,338
Reserves (2,942) 34,201 39,366 46,593
Proposed dividend 0 1,234 1,722 2,409
5,058 47,773 53,426 61,340
MINORITY INTERESTS 216 528 623 735
TOTAL EQUITY 5,274 48,301 54,049 62,075
VC Research 39
Financial Ratios - China Railway Construction Corporation (1186.HK)

FY2007A FY2008A FY2009E FY2010E
Valuation
PER (x) 37.9 33.6 19.5 14.0
PBR (x) 16.5 2.8 2.5 2.2
Dividend Yield (%) 5.4% 1.0% 1.3% 1.8%
Dividend payout ratio 203.6% 33.9% 25.0% 25.0%
Profitability and Efficiency

EBITDA margin 4.6% 4.0% 4.7% 4.6%
EBIT margin 2.6% 2.1% 2.9% 2.9%
Net margin 1.3% 1.7% 2.2% 2.3%

Return on Assets (ROA) (Average) 1.6% 2.0% 2.7% 2.9%
Liquidity ratios
Current ratio (x) 0.94 1.18 1.13 1.11
Cash ratio (x) 0.20 0.36 0.30 0.26
Asset turnover ratios

Average Receivables / Sales 47.9% 45.4% 42.6% 44.3%
Average Inventory / Relevant CGS 6.4% 8.8% 8.9% 7.9%
Average net WC asset / (liabilities) as % of Sales -11.7% -8.6% -5.6% -4.1%
Total operating expense / Sales 4.4% 4.9% 4.6% 4.5%
Average net PPE / Sales 8.8% 8.6% 7.9% 6.9%
Average net capital investment / Sales 11.0% 11.2% 9.8% 8.7%
Financial leverage ratios

Debt (net of cash) to Total Assets Net cash Net cash Net cash Net cash
Interest Coverage 3.47 3.55 9.94 9.34
VC Research 40
VC Research 41
Values from DCFF
Sensitivity analysis - Sales growth rate assumption Sales growth rate assumption
-2% -1% 0% 1% 2% FY2009E FY2010E FY11 to FY18
-20% 14.42 12.54 11.18 10.15 9.34 42.4% 36.4% 2.3%
% change of -10% 16.54 14.34 12.75 11.55 10.60
Sales 0% 19.00 16.42 14.56 13.15 12.04
growth rate* 10% 21.85 18.82 16.63 14.98 13.69
20% 25.15 21.58 19.02 17.08 15.56
* % change of sales growth rate for each year in projection period
** This table changes sales growth rate of all kinds of revenues at the same
rate (e.g. Sales growth rate expands 20% from 40% to 48%, etc.)
Sensitivity analysis - Gross profit margin assumption Gross profit margin assumption
-2% -1% 0% 1% 2% FY2009E FY2010E FY11 to FY18
-10% 14.55 12.61 11.22 10.17 9.34 7.3% 7.3% 7.3%
% change of -5% 16.77 14.52 12.89 11.66 10.69
GP Margin 0% 19.00 16.42 14.56 13.15 12.04
%* 5% 21.22 18.32 16.23 14.64 13.40
10% 23.45 20.22 17.89 16.13 14.75
* % change of gross profit margin for each year in projection period
** This table changes GP margin % of all kinds of revenues at the same rate
(e.g. GP margin expands 10% from 7% to 7.7%, etc.)
Sensitivity analysis - CAPEX assumption CI growth rate assumption

-2% -1% 0% 1% 2% FY2009E FY2010E FY11 to FY18
-10% 19.38 17.24 15.67 14.46 13.48 26.0% 22.0% 6.9%
% growth of -5% 18.52 16.35 14.76 13.54 12.57
Capital 0% 19.00 16.42 14.56 13.15 12.04
Investment* 5% 20.05 16.81 14.51 12.80 11.47
10% 21.58 17.40 14.49 12.35 10.73
* Change of % growth of total capital investment for each year (except the
final year) in projection period
** This table changes % growth of all kinds of CIs at the same rate (e.g.
From CIs increase at 20% to 30%)
Note: This table reflect change in amount of CAPEX each year
Sensitivity analysis - Operating expense assumption Operating expense assumption

-2% -1% 0% 1% 2% FY2009E FY2010E FY11 to FY18
-1.0% 25.06 21.62 19.14 17.26 15.79 4.5% 4.4% 4.4%
% of sales -0.5% 22.03 19.02 16.85 15.21 13.92
for operating 0.0% 19.00 16.42 14.56 13.15 12.04
expenses* 0.5% 15.97 13.81 12.26 11.09 10.17
1.0% 12.93 11.21 9.97 9.03 8.30
* Change of % of sales for total operating expense (e.g. SGA) for each year
in projection period
** This table changes the % of sales of total operating expenses (except
CGS) to revenue (e.g. From 4.5% to 5.5% of sales)
Sensitivity analysis - Terminal growth rate assumption Terminal growth rate assumption
(Per share in HKD) WACC Our Base case
-2% -1% 0% 1% 2% Terminal g WACC
-2% 16.11 14.47 13.18 12.15 11.29 3.0% 10.0%
Terminal -1% 17.31 15.30 13.78 12.59 11.63
growth 0% 19.00 16.42 14.56 13.15 12.04
rate - FCFF* 1% 21.52 17.98 15.59 13.87 12.56
2% 25.74 20.31 17.03 14.82 13.22
* Change of terminal growth rate from our base case assumption.
VC Research 42
Appendix – Railway Sector Overview
Railway Sector Overview

• Promising growth for railway infrastructure sector. We expect railway infrastructure sector in China to
be one of the best performing sector. Its unique strategic importance in the economic development of
China, current favourable policy environment, recent high-growth period is strong support factors.
• Railway construction critical for national development. Railway construction in China had been lagging
behind highway construction and economic growth in the past decade. Total railway operating length only
grew at a 1.7% CAGR in 1998-2007, far below highway’s 27.3% annual growth rate. Extensive railway
construction is critical to promote overall economic development of China.
• Fiscal infrastructure boost. The Chinese government has decided to boost infrastructure investment
spending as a major measure to cope with the current economic slowdown. About Rmb1.5tr has been
budgeted and will be allocated for transportation and electricity transmission infrastructure construction by
2010. This enables adequate funding for massive railway infrastructure construction and train purchases in
the coming years.
• Huge revenue for railway builders induced by massive development plans. The Chinese government
formulated massive railway network construction plans. New construction of 17000km and electrification of
13400km railway lengths by 2010 are targeted. Such plans are expected to generate substantial
construction orders and revenue for railway builders.
• Significant growth from 2009 onward. High railway investment growth is expected to continue to 2012
and beyond as large-scale projects usually take 3-5 years to complete. Construction boom of metro railway
transits will also go beyond the 11 Five-Year Plan (11FYP) periods as many municipal governments had
submitted their development plans to Beijing for approval. Investment of about Rmb600bn is under
construction and another Rmb800bn under planning.
RAILWAY INVESTMENT STIMULATING POLICIES
To improve passenger and freight handling capacity of the railway network in China, both quantity in terms of
operating length, and efficiency in terms of train speed, should be strengthened. In addition to the economic
stimulus funding announced in Nov08, the Chinese government introduced various policy strategies to support the
industry:
• Fiscal stimulus – earlier and larger investment funding

• Development planning – extensive railway construction & improvement
• Railway speed up program – production of high-speed trains
Major railway infrastructure development related policies

Jan04 Approval of Mid- and Long-Term Railway Network Plan (2004-20)
May06 Approval of the 11th Five-Year Plan
Oct06 Approval of the 11th Railway Five-Year Plan
Apr07 Commencement of the 6th Nationwide Railways Speed-up program
Nov08 Announcement of “Ten Measures to Boost Domestic Demand &
Promote Economic Growth” and the Rmb4tr stimulus investment
Nov08 Revision of Mid- and Long-Term Railway Network Plan
Jan09 Opening of 2009 National Railway Working Committee with planning
details up to 2012
Sources: MOR, Xinhua News
VC Research 43
Stimulus spending supported railway infrastructure funding. Funding used to be a significant constraint in
large-scale railway network constructions as private capital participation and BOT appeared relatively uncommon in
railway constructions compared with highway projects. The Rmb4.0tr investment spending announced by the
central government helped solve the issue. It is because Rmb1.5tr or 38% of total spending will be used for
transportation and electricity transmission networks constructions. Railway investment accounted for Rmb15bn out
of the Rmb100bn expenditure spent in 4Q08. Along with the government’s investment boost, the Ministry of
Railways revised the Long- and Mid-Term Railway Network Plan in Nov08 and raised its railway construction
targets for 2010 and 2020.
Breakdown of Rmb4tr Economic Stimulus Investment Plan
Post-disaster Housing
reinvestment 10%
25%
Agriculture
9%
Innovative structure
9%
Environment Transportation &

5% electricity
Healthcare & education
38%
4%
Source: National Development and Reform Commission
Development planning. As a key strategic sector of the country’s overall development, the Chinese government
formulated the Long- and Mid-Term Railway Network Plan (2004-20) (LMTRNP), which paved the way for
extensive railway infrastructure investment. The national 11th Five Year Plan (2006-10) highlighted railway and
other transportation infrastructure as a major part of national development, which was further elaborated in the 11th
Railway Five Year Plan (2006-10) (11FYP). In Nov08 the LMTRNP was revised with more aggressive development
goals and entails larger investments. Major planning outlines included:
• Development of high-speed railways and passengers inter-city transits networks;

• Establishment of coal transportation network;
• Extension, strengthening, and fulfilment of railway networks in western, central, and eastern China.
The 11FYP revised up the total operating length target to 90,000km from 85,000km by 2010 with the construction
of 17,000km new lines. Total target length of passenger-dedicated lines went up 40% from 5,000km to 7,000km.
The 2008 revision of the MLTRNP also raised the total operating length target from 100,000km to 120,000km and
the total length of new lines to 41,000km from 16,000km by 2020. As a result of the increase in railway
construction goal, total railway infrastructure construction investment for 2006-2010 was revised up by 60% from
Rmb1.25tr to Rmb2.00tr. As large-scale railway infrastructure constructions usually take 3 to 5 years, the majority
of the projects are scheduled for completion by 2012.
VC Research 44
Railway construction planning targets

Year FY2007 FY2010 FY2012 FY2020
Target Plan Actual 11FYP MLTRNP MLTRNP
Original Revision Original
Total operating length (km) 77,966 90,000 85,000 110,000 120,000 100,000
Electrification rate 31% 45% 41% 50% 60% 50%
Multi-track rate 45% 41% 50% 50% 50%
Passenger line 7,000 5,000 13,000 16,000 12,000
New line 17,000 41,000 16,000
Multi-track 8,000 19,000 13,000
Electrification 15,000 25,000 16,000
Source: MOR, VC estimates
List of railway infrastructure construction projects under LMTRNP (2008 revision)
Source: MOR
New railways construction (passenger-dedicated railways):

• Beijing-Shanghai
• Beijing-Guangzhou-Shenzhen
• Tianjin- Qinhuangdao
• Harbin-Dailin
VC Research 45
• Shanghai-Ningbo-Shenzhen
• Xuhou-Zhengzhou-Xian-Baoji
• Shijiazhuang-Jinan
• Nanjing-Wuhan-Yichang
• Bengbu-Hefei
• Nanjing-Hangzhou
• Liuzhou-Nanjing
• Mianyang-Chengdu-Luoshan
• Harbin-Qiqihar
Electrification and multi-tracks development of existing lines:

• Coastal line
• Beijing-Shanghai
• Manzhouli-HK/Macau/Taiwan
• Baotou-Guangzhou
• Linhe-Fangcheng Port
• North Northwest-Coastal
• Qingdao-Lhasa
• Continental Bridge
• Zhangjiang Adjacent
• Shanghai-Ruili
The 6th Nationwide Railway Speed-up program. Enormous orders for new high-speed trains and upgrading of
existing vehicles are expected as the 11FYP spurred the 6th Nationwide Railway Speed-up program in China.
About 480 railways traversing 17 provinces and autonomous cities will move at a high speed of more than
200km/hr. Speed of some major railways, like Beijing-Tianjin Inter-city Railway, can exceed 350km/hr. It is
estimated that the speed-up program can increase passenger and freight handling capacities by 18% and 12%
respectively.
Historical Nationwide Railway Speed-up Programs

Started Average speed Highest speed Remark
(Km/hr) (km/hr)
1st Apr97 54.9 140 Average speed up from 48.1km/hr
2nd Oct98 55.2 160 Expressway average speed 71.6km/hr
3rd Oct00 60.3 - -
4th Oct01 61.6 - -
5th Apr04 65.7 200 Expressway average speed 92.8km/hr
6th Apr07 > 350
Source: Xinhua News
The speed-up program mainly focuses at investment purchases of high-speed trains, known as CRH (China
Railway High-speed). Recently, the Ministry of Railways ordered 100 trains in Mar09 for the Beijing-Shanghai
Railway at a total consideration of Rmb39.2bn. Currently, the Beijing-Tianjin Inter-city Railway is running at
350km/hr by CRH3. The Beijing-Shanghai Railway is designed for the same speed. Other CRH trains may run at a
designed speed of 200-250km/hr or 350-370km/hr. Electrification of locomotives is another major growth area due
to railway line electrification as stipulated in the 11FYP. Locomotives electrification rate is expected to go up from
32.4% in 2007 to 80% in 2010.
CRH series high-speed trains

Series Designed Max speed Started
speed (km/hr) (km/hr) operation
CRH1 200 250 Jan07
CRH2A 250 370 Jan07
CRH2B 250 370 Aug08
CRH2C 350 370 Aug08
CRH2E 250 370 Dec08
CRH3 350 394 Aug08
CRH5 250 250 Apr07
VC Research 46
BEHIND THE INVESTMENT PLAN

– THE NEED FOR EXTENSIVE RAILWAY INFRASTRUCTURE CONSTRUCTION
Laggard railway construction as bottleneck of economic development. Building of nationwide railways had
been severely lagging behind that of highways and the country’s economic development since early 1990s and
requires intensive catch-up in the coming years. Total operating length of railways and electrified railways grew by
1.9% and 7.3% p.a. respectively during 1992-07, sharply lower than the 32.5% CAGR of total highway length. This
restrains China’s railway traffic capacity and economic activities. Railway transportation accounted for 33.3% and
23.8% of passengers and freight traffic in 2007, down from 45.8% and 39.2% respectively in 1991. Passengers and
freight transportation by railway grew 6.1% and 5.0% annually respectively during 1992-2008, far below 16.4%
GDP and 15.1% total retail sales CAGR during that period. Congestions were observed in major railway stations
prior to peak seasons such as Chinese New Year. Relatively slow development in railway infrastructure
construction in the past decade constrained the country’s overall development and growth capacity. Intensive
development of railway system is necessary to pass through this bottleneck.
Total operating length of railways and highways

90
80
70
60
in '000 km
50
40
30
20
10
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: VC estimates, MOR, National Bureau of Statistics Railway Electricified railway Highway
Share of passengers and freight traffic by railway

50%
45%
40%
35%
30%
25%
20%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: VC estimates, MOR, National Bureau of Statistics Passengers Freight
STRONG GROWTH OF RAILWAY INFRASTRUCTURE INVESTMENT SINCE 2008
Primarily government policy driven. We consider government policy rather than economic situation will hold the
key for railway infrastructure investment. The adoption of the MLTRNP in 2004 led to a rebound of railway
investment in 2005. The yearly growth in railway infrastructure investment exceeded 50% yoy in 2005 and 2006.
Railway investment accounted for 2.08% of total fixed asset investment (FAI) and 0.81% of GDP in average during
1998-2008. Various stimulating policies spurred railway investment to account for 2.44% FAI and 1.40% GDP in
2008, up 1.84% FAI and 1.01% GDP in 2007.
VC Research 47
Railway fixed asset investment and its % of total FAI & GDP
450 3.5%
400
3.0%
350
2.5%
300
Rmb bn
250 2.0%
200 1.5%
150
1.0%
100
0.5%
50
0 0.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: VC estimates, MOR, National Bureau of Statistics Railway FAI % of total FAI % of GDP
Growth continues despite economic slowdown. We expect railway infrastructure investment to experience
strong counter-cyclical growth rather than drawback amid global financial turmoil and slowdown in the Chinese
economy. The Chinese government decided to boost investments in railway infrastructure construction projects to
stimulate domestic demand. Railway infrastructure investment went up 66.6% yoy in 2008, versus 20.7% in 2007,
even though economic growth in China fell to 9% from 11.4% in the period.
The Chinese government targeted that economic growth for 2009 will lower to 8%. Some international research
agencies foresee the growth may decline to 7% or less. We believe this is an affirmative factor, as the Chinese
government tend to rely on infrastructure investment to maintain economic growth. As side evidence, chairman of
China Banking Regulatory Commission said new bank loans made in 1H09 were mainly for infrastructure
investment projects.
During Jan-09, total railway investment surged 128% yoy to Rmb118bn whilst total urban fixed asset investment in
China only went up 30.5% yoy during the period. We expect total railway investment will raise another 69% yoy to
Rmb700bn and railway infrastructure investment raise 78% yoy to Rmb600bn in 2009 despite single-digit economic
growth. Strong growth for the sector is likely to continue to 2012 or later as large-scale railway projects usually take
3-5 years to complete.
Railway infrastructure and other fixed asset investments YoY growth rate
70%
60%
50%
YoY Growth rate
40%
30%
20%
10%
0%
-10% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-20%
Source: VC estimates, MOR, National Bureau of Statistics GDP FAI Railway FAI
VC Research 48
Railway infrastructure and other fixed asset investments

450
400
350
300
Rmb bn
250
200
150
100
50
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: VC estimates, MOR Railway infrastructure Renewal & renovation Purchases of rolling stocks
Progress of railway infrastructure construction

% of annual
1Q09 target
Railway investment (Rmb bn) 64 10.7%
Completion of new railway (km) 950 18.5%
Completion of multi-tracks (km) 1014 29.3%
Commencement of electrified railway (km) 369 6.6%
Sources: VC estimates, MOR
Partial list of major railway construction projects commenced in 4Q08

7Oct Beijing-Shijiazhuang Railway Passenger Line
13Oct Guizhou-Guangzhou Railway
15Oct Shijiazhuang-Wuhan Railway Passenger Line
4Nov Chengdu-Dujiangyan Railway
8Nov Tianjin-Qinhuangdao Railway Passenger Line
9Nov Nanning-Guangzhou Railway
11Dec Xianggui Railway Extension and Guangzi Coastal Railway (Nanning-
Qinzhou) Extension
19Dec Nanjing-Anqing Inter-city Railway
26Dec Lancun-Yantai Railway Electrification, Zaolin Railway, Dongping Railway
27Dec Hangzhou-Ningbo Railway Passenger Line
27Dec Nanjing-Hangzhou Railway Passenger Line
28Dec Hengchalingji Railway
29Dec Chongqing-Lichuan Railway
29Dec Chengdu-Mianyang-Luoshan Railway Passenger Line
Source: Renmin Tiedao (People’s Railway News)
Further growth from metro railway transits. Metro transits developments in major Chinese cities are expected to
spur another around of construction boom, after the 11FYP that ended in 2010. Presently, about 20 metro rail lines
commenced operations in 10 cities in China. In Beijing, Shanghai, and Guangzhou, about 30-50km operating
length were added each year. Construction works started in 15 cities already. Railway networks of nearly 20 cities
are under planning. About Rmb800bn investment in metro railways of more than 5000km are under planning, in
addition to the Rmb600bn investment for 1700km railway length by 2015.
VC Research 49
Progress of metro railways transits

Stages Operations Under Under planning
commenced construction
No. of cities 10 15 18
Total length (km) 770 1100 --
Investment (Rmb bn) -- 600 800
Cities Beijing Beijing Qingdao
Tianjin Tianjin Ningbo
Shanghai Shanghai Zhengzhou
Guangzhou Guangzhou Xiamen
Shenzhen Shenzhen Dongguan
Nanjing Nanjing Kunming

Chongqing Chongqing Changsha
Wuhan Wuhan Urumqi
Dalian Dalian Nanning
Chongchun Chongchun Jinan
Shenyang Lanzhou
Chengdong Taiyuan
Hangzhou Fuzhou
Xian Hefei
Suzhou Wuxi
Guiyang
Yantai
Shijiazhuang
Source: Renmin Tiedao (People’s Railway News)
Railway Infrastructures. Investments in railway infrastructure mainly include four parts, namely construction of
new railways, multi-tracks and extension, railways electrification, and hub & stations.
Breakdown of railway fixed asset investment 2007

Rolling stocks Multi-tracks
22% Infrastructure 9%
68% Electrification
2%
Hub & stations

6%
New railways
51%
Renewal & renovation Regional lines

8% 1%
Others
Source: VC estimates, MOR 1%
New railways construction. New railways construction formed the largest part of railway infrastructure investment
and accounted for 74% of national railway infrastructure investments in 2007. The Ministry of Railways targeted
that new railways of 17,000km will be built in 2006-10 and another 24,000km in 2011-2020. As only 5,260km
railways were built in 2006-08, about 5,100km and 6,600km new constructions are expected for 2009 and 2010
respectively, implying a 39.9% CAGR for the coming 2 years.
VC Research 50
Multi-tracks construction. Some existing railway networks were designed and constructed based on the old
standard, whereby passengers and freight trains share the same track. This affects the efficiency of passenger
traffic. As freight wagons usually carry heavy loading, this limits their own travelling speed as well as the speed of
passenger carriages that move next to them. Hence, construction of multi-track railways, especially lines dedicated
for passenger traffic, is an essential part of the railway network renovation program.
Railways electrification. Electrification of railways helps improve speed of locomotives. Current state-of-the-art
high-speed electrified railway can travel at 250km/hr or faster. The speed of Beijing-Tianjin Inter-city Railway can
reach 350km/hr. Comparatively, traditional locomotives are mostly fuel-driven, many of them move at below
200km/hr.
Hubs & stations. The Ministry of Railways announced it planned to invest Rmb150bn to build 548 stations during
the 11FYP period. These include 6 national hub stations, including and 10 regional passenger traffic centres. By
2012, it is expected that more than 800 new passenger stations will be built.
Length of newly built railway infrastructure construction

4,500
4,000
3,500
3,000
2,500
Km
2,000
1,500
1,000
500
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: VC estimates, MOR New line Multi-track Electrification
Major railway infrastructure investments 2007
New railways
74%
Multi-tracks and extension

14%
Electrified railways
3%
Hub & stations
Source: VC estimates, MOR 9%
VC Research 51
Major railway infrastructure investment items

200
180
160
140
Rmb bn
120
100
80
60
40
20
0
2004 2005 2006 2007
Source: VC estimates, MOR New railways Multi-tracks and extension Electrified railways Hub & stations
Electrified multi-units (EMU). Latest CRH vehicles are electrified multi-units (EMU) trains of which each unit can
be self-powered. This enables significant speed improvement compared to traditional locomotive-driven train-rows.
Major passenger dedicated railways are operated by EMU. The 11FYP stipulate that by 2010, about 1,000 EMU
will be operating in China, versus only 105 units available at end-2007.
(All cut-off prices are as of 31 July 09 unless indicated otherwise.)
VC Research 52
Specific Disclosures
Mr. Patrick Sun, a director of VC Brokerage Limited, is an Independent Non-Executive Director of China
Railway Group Limited.
VC Brokerage Limited and / or its affiliates acted as co-manager to China Railway Group Limited in connection
with initial public offering.
VC Brokerage’s investment recommendations are based on Absolute Total Return, which is the sum of the
expected price appreciation and dividend yield. Rating definitions are set forth as follows:
STRONG BUY (>20% total return over the next three months)
BUY (>15% total return over the next 12 months)
HOLD (0-15% total return over the next 12 months)
SELL (negative total return over the next 12 months)
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with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed
accurately reflect his or her personal views about those securities or issuers; 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
by that research analyst in the research report.
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VC Research 53

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Sector Report

China Railway Infrastructure Constructor

Calvin K.H.Ho (852) 2913 6704

COMPANY UPDATE – CHINA RAILWAY CONSTRUCTION CO. (1186.HK) ....................................................... 31

APPENDIX – RAILWAY SECTOR OVERVIEW ...................................................................... 43

Background information (FY2008)

Prefer CRCC to CRG

Higher railway GP margin

Railway GP margin % of CRG & CRCC

Additional MOR investments

The MOR may increase more in railway infrastructure

Railway infrastructure annual spending by MOR

CRCC to benefit more if the MOR increases railway investments

Higher research capacities

Major Railway Survey and Design Institutes in China

Source: VC estimate, The companies CRG CRCC CRG CRCC

Source: VC estimate, The companies CRG CRCC CRG CRCC

More overseas business

Overseas revenue, new contract value and backlog value of CRCC

CRCC overseas portion as % of respective total amount

- CRG & CRCC’s relatively high level of technology and experience

Less dependent on “Other Income”

30% 25% 23%

Source: VC estimate, The companies CRG CRCC

Other income for CRG & CRCC

Source: VC estimate, The companies CRG CRCC

Less exposed to financial investments’ incomes

2,500 1.2% 1.4% 1.3%

Source: VC estimate, The companies CRG CRCC CRG CRCC

Better potential to improve ROA

Financial ratios comparison of CRG & CRCC

Profit margin ratios:

Non-construction revenue as % of total revenue (Bar) and its GP margin % (Line)

Working capital (WC) management ratios:

Fixed asset turnover ratios:

Market overestimating property business

Property / real estate business comparison of CRG & CRCC

Relative performance of HSI, CRG & CRCC since 9-Mar-09

Source: Bloomberg HSI CRG CRCC

The table below shows our discount rate calculation:

Weighted average cost of capital ("WACC")

Proportion of debt 15.75%

Minimum 0.61 0% 0.32

Minimum neg 11.12 9.86 8.45

- Greater focus and higher GP margin % in railway construction

China Railway Group (0390.HK) HOLD (Downgraded)

Business development & News update

Sales growth surprises on the upside

New contract value (in Rmb m) - China Railway Group (0390.HK)

MOR investments may beat expectations. According to the latest announcement by

Railway infrastructure monthly spending by MOR

Source: VC estimates, MoR

Revenue recognition rate to increase. In the absence of serious natural disasters in

Factoring in a higher-than-expected new contract value inflows and a higher revenue

GP margin to remain flat

Average prices per Ton (or per 10 Tons)

Conservative overall GP margin assumptions. Management guided that they are

NP margin (ex-FX loss) rises slightly

Assumptions - China Railway Group (0390.HK)

Revenue mix - China Railway Group (0390.HK)

DCF - China Railway Group (0390.HK)

We identified 6 major assumptions, namely Sales growth rate, GP margin, Capital

Income Statement - China Railway Group (0390.HK)