China Railway Construction

Corp. Ltd (CRCC)

Equity Research Division 16th April 2021 HOLD: CNY 12.11-12.23
BUY: CNY
Analysts
(CNY M) FY18A FY19A FY20A FY21E
Enrico Conforto
Gross Profit 71412 80087 84338 93544
enrico.conforto@studbocconi.it
EBITDA 34355 36436 38234 44270
Edoardo Ferri Gr Rate (%) 20.6 6.1 4.9 15.8
edoardo.ferri@studbocconi.it EBIT 33627 35757 38233 40835
Andrea Brangi Margin (%) 5.16 15.42 7.73 7.73
andrea.brangi@studbocconi.it Net Income 19838 22624 25709 26940
Luciano Valerio Key Executives
luciano.valerio@studbocconi.it Wang Jianping Chairman of the Board
Victoria Di Vito Zhuang Shangbiao. President, Executive Director
victoria.divito@studbocconi.it
2020 annual announcement Highlights
Supervisors
• Significant expansion and consolidation on overseas
Gianmaria Bartoccioni, Head of Equity Research markets.
gianmaria.bartoccioni@studbocconi.it • Constant revenues growth of more than 9% YoY.
Tommaso Beverina, Head of Research • Extreme resilience to Covid-19: slight increase in
tommaso.beverina@studbocconi.it new contracts and very low decrease in output.

Basic Information Summary

CRCC is a vertically integrated leading construction company in
Last Closed Price CNY 8.07
China, operating mainly as a project contractor, covering
12M Target Price CNY 12.11-12.23 transportation infrastructures, but also energy-generating plants
+/- Potential 50% and real estate. The global and Asian engineering civil construction
sector is in great shape. The company mainly operates in emerging
Bloomberg Ticker 601186.SS markets where the demand of infrastructures is rising sharply,
GICS Sector Industrials mainly because of increasing population, GDP per capita, and
Engineering & environmental concern, leading to higher demand for railways
GICS Sub-Industry Construction construction, where the company has a competitive advantage.
The Chinese market is close to an oligopoly with few very big publicly
12 Month Price Performance (Yahoo Finance) owned companies covering the whole demand. In this environment,
CRCC is well positioned, and it covers most of the value chain.
Financially, the company is experiencing a notable and constant
increase in revenues (+9% per year). The financial analysis
has underlined that there might be some issues in the future
regarding liquidity, especially since the debt ratios are well above
industry average. Also, profitability ratios are still below average, but
recovering.

Investment Thesis
After having performed our valuations, our recommendation is a
“BUY”, indeed we believe that CRCC’s shares are currently
underpriced by the market. We performed a DDM analysis, due to
constantly increasing dividends compared to very unstable cash
Company Description flows.
China Railway Construction Corp. Ltd is a The target price obtained from the model is 12.23¥.
construction corporation under the administration To check for our results, we also performed a market multiples
of the State-owned Assets Supervision and analysis, using both asset-side and equity-side multiples. The average
Administration Commission of the State Council of price suggested by the different multiples was 13.38¥, which is
China. It operates in project contracting, survey slightly higher than the DDM target price due to a slight bias given by
and design consulting, equipment manufacturing, extreme values. To control for this, we computed the average price
material and logistic. using multiples calculated on median values. In this case the price
target is 12.11¥, which is coherent with DDM results. The target price
Key Financials range is then 12.11¥-12.23¥.
Market Cap CNY 101.7B The valuation suggests that stocks are underpriced, and it hints for a
Basic Shares O/S 13579.54M “STRONG BUY” (+50%). However, given the many investment risks
52-Wk High CNY 10.25 that we pointed out and the high uncertainty deriving from investing
52-Wk Low CNY 7.24 in emerging markets, and in particular in China, we recommend a
Fiscal Year End 31-Dec-2020 more cautious “BUY”.
 Company Overview
Figure 1. Annual Revenue China Railway Construction Corporation Limited (CRCC) is one of the
world’s largest construction corporation. It is headquartered in
Beijing and it is under the administration of the State-owned Assets
Supervision and Administration Commission of the State Council of
China (SASAC). Since 2008 CRCC is listed in Shanghai and Hong Kong
stock exchanges, with a registered capital RMB 13.58 billion. The
company provides its services in nearly 100 countries all over the
world, particularly in Asia and Africa. In the last decade CRCC has
signed several contracts with ECOWAS (Economic Community of
West African States) countries as the construction of Abuja – Itakpe –
Lokoja railway line in Nigeria and a project contract for 50,000 houses
at Port Bouët in Côte d'Ivoire.
China Railway Construction Corporation Limited main business areas
are project contracting, survey and design consulting, equipment
manufacturing, material and logistics.
Project contracting is the core business of the company and it covers
different infrastructures as railways, highways, bridges, tunnels,
Source: Minerva Investment Management water conservancy, hydropower, and urban track.
Society Through the Survey and Design section, China Railway Construction
Corporation Limited promotes the evolution of traditional design
enterprises in more comprehensive engineering companies. CRCC has
two subsidiaries, CRCC High-Tech Equipment Corporation Limited
Figure 2. Annual Net Profit/Loss and China Railway Construction Heavy Industry Corporation Limited,
that operate in the railway maintenance and equipment field.
Another subsidiary of the company is China Railway material Group
Co, which is a supplier of railway materials and an engineering
logistics system service provider. CRCC is also present in the real
estate business by adhering to the regional layout strategy and
focusing on the most developed city in the Chinese mainland.

Industry Outlook
The global construction industry value is forecasted to reach 1110
USD billion by 2024, registering a CAGR of 9.2% during the forecast
period (2021-2024), as reported by GlobeNewswire.
Key Highlights
• Numerous developed countries are predicted to experience an
Source: Minerva Investment Management infrastructure boom as many of their infrastructure is in need of
Society upgrades and repairs.
• While it is not the largest market yet, the Asia-Pacific region is set
to overtake the USA in terms of market size by the forecast date,
and it is the fastest growing region today.
• Rail transportation is increasingly seen as a better and cleaner
alternative to road transportation or even naval in some cases,
Figure 3. Value of new contracts by
due to its increases in efficiency and a global shift towards
CRCC in China
sustainable alternatives.

Boom in infrastructure construction

The global infrastructure sector is predicted to pick up substantial
momentum in the following years; especially in North America, Europe
and Asia Pacific; the three key players in this industry. In the USA and
Europe, the infrastructure built after the great depression and post
WWII do need processes of renovation, and it is time for many
countries to refurbish its roads and railways. Moreover, COVID-19
helped accelerate this revamp as the Chinese Government will act
against unemployment rate (that is still very low, 4.2%, according to
Statista) through massive investments in the sector.
To keep up with the economic growth and climate change in the Asia
Pacific region, an estimated $1.7 trillion in infrastructure investments
are needed. Meanwhile, the US and EU are spending an annual $400
billion and $800 billion annually on public infrastructure. A good part
Source: Statista of this is spend on upkeep, and it is estimated that an additional $2
trillion in infrastructure investments is necessary by 2025 to meet
demand and reduce negative impacts on the economy.
Figure 4. China Civil Engineering: Value, Source: Statista
2016 – 2020
Concern for the environment helping the railway sector
Pre-pandemic railway sector had been experiencing significant
growth, both due to the continuous increase in demand for tourism
related travelling and investments from governments looking for a
greener mode of transportation. We therefore expect this trend to
continue in the medium run, (CAGR of 4.6% for 2021-2027 for railway
construction) as the global economy recovers from the pandemic and
investments towards green transportation solutions increase.
Improvements in efficiency and technology have made this a greener
alternative, but a cheaper and safer one as well.
Policies such as the European Green Deal and the US government’s
investments in green energy and transportation provide a positive
Source: Market line and outlook for the industry. The US has committed an investment of
$320 million in railway infrastructure improvements across the
Figure 5. China Civil Engineering: Value Forecast, country in 2021 alone, after seeing the need to upgrade its network.
2020 – 2025 Meanwhile the EU invested $540 million as part of its green initiative
and to improve connections between member states.Consumers are
also becoming more conscious of their choices, and so demand for rail
transportation is expected to rise. In recent times, technology has led
to an improvement in freight car designs, while more efficient
locomotives have reduced energy consumption, pollution and
greenhouse gas emissions, allowing for trains to be 75% more efficient
on average than trucks for freight transportation – their biggest
competitor.
Rivalry
This market is geographically segmented, and usually state owned, or
domestic companies are contracted for work in the developed
countries. However, in many Third World countries local companies
lack the size and technology to engage in substantial infrastructure
Source: Market line projects, so foreign companies will often be contracted. Hence why
there are numerous Chinese companies being contracted for projects
in Sub-Saharan Africa and Central Asia; but this rarely happens in
Figure 6. Leading Chinese construction Europe or the USA. These less developed countries are an untapped
companies potential for the infrastructure construction industry, as they will
require better highways and railway systems in order to keep
growing.

China in particular is a prominent player in infrastructure

construction both domestically and abroad. Internally, it is developing
the largest high-speed rail network in the world and is looking to
complete it in the following years. Moreover, due to China’s belt and
road initiative many substantial investments in numerous countries in
central Asia and Africa have been realized through the development of
infrastructure, including highways, ports, airports and railways.

One setback of this industry is that it is very capital intensive, and any
project requires a considerable amount of funding, pre-planning and
Source: Statista engineering. Hence, it can take a long time for projects to get approved
and for funding to be collected; it is not uncommon for projects to be
Figure 7. CAGR of the global rolling stock market cancelled due to lack of funding. Infrastructure assets are long-term
investments characterized by high expenditure and most
governments are subject to budget constraints, legislature and
bureaucracy.
 SWOT Analysis
Opportunities:
Strengths: Positive trend for construction industry: Construction industry has
Diversified business portfolio: The company is active in registered an increasing trend in volumes (+0.6% in 2020, +27.5%
many businesses. The core one is project contracting, projected for 2025). The areas with the higher projected growth are
but it is also active in equipment manufacturing. the ones where CRCC is operating Asia, Middle East and Africa. These
CRCC has factories all over China, which allow it to areas are quickly developing in terms of GDP and quality of life: the
vertically integrate and to supply to third parties. It middle-class is in big expansion and they will need to create new
also operates in the service sector, providing financial infrastructure to keep up with increasing demand for transportation.
services (especially in the form of leasing) and Survey
and Design consultation, on top of supply chain Belt and Road initiative: CRCC is expected to benefit from the Belt and
services. Road Initiative in China. The initiative regards the creation of
infrastructure all over the world to support trade through shipping
Diversified projects portfolio: Also, the core business is lanes and especially railroads, which represent the company’s core
by itself diversified: by looking at the past and ongoing business.
projects, it is possible to notice that there is a
differentiation both in geographic terms and in terms Increasing global population: population is expected to increase to 9
of kind of facility. In fact, CRCC is active especially in billion before 2050. This growth will be driven especially by Africa and
China (about 80% of its business), but also in Africa Asia, where the company is very well positioned. The increase in
and Middle East. Furthermore, it is building railways, population will automatically drive up the need for more investments
but also highways, tunnels, bridges, residential in infrastructures.
houses, business facilities and solar panel fields.
Threats:
Market position and R&D: CRCC is present in 32 Slowing growth in China: China’s GDP is still growing rapidly, faster the
Chinese provinces, in Hong Kong and Macau. The developed countries. However, over the recent years the growth rate
company is dominant in railway construction: it has has slightly decreased. The economy is in good shape, but there is still
constructed more then 50% of the Chinese railway risk of slow growth that has to be considered.
system. Furthermore, even though it is not the core
business, the firm also covers 80% of domestic Investments in politically unstable countries: A lot of investments of
demand for large rail track maintenance machinery infrastructure are in politically unstable countries (such as Pakistan,
and 50% of domestic demand for excavating Angola and Afghanistan), where governments are less trustworthy, the
machines. law system is precarious, and the risk of war is not negligible.
CRCC maintain its dominant position through the huge
focus put on research and development. Covid-19: Many projects have already been disrupted by the pandemic
and many other have been postponed, meaning that the company is
Backed by Chinese government: Given the influence of behind schedule, but recovering. This could be a problem considering
the Chinese Government and the fact that it represents the high debt the company has.
the major shareholder, there are not many
uncertainties about the company’s future
development. Indeed, since the Communist Party’s
focus right now is on infrastructure, there will be
several incentives to develop that sector through its
own company.

Weaknesses:
Chinese government influence: As just cited,
communist party influence is extremely
preponderant. This can also represent an element to
consider since Chinese companies have to face more
stringent regulations and they are continuously
monitored by authorities, elements that could be a
constrain to their growth.

Capital expenditure/debt: The company is highly

indebted (debt/equity ratio is very high at over 4 and
debt/assets ratio is at 71.5%).
Considering that infrastructure projects are extremely
expensive in terms of capital expenditure and it takes
many years to recover from the investment, it could
slow down future growth.
 Financial Analysis
Figure 8. Profitability rations The financial statement analysis has been conducted computing ratios
and other metrics to assess liquidity, solvency and profitability
compared with industry average. Also, some ratios have been
computed from a selected number of peers in order to better interpret
the figures. The comparable companies considered are: Power
Construction Company of China, China Communications Construction
Source: Minerva Investment and China State Construction Engineering Corporation.
ManagementSociety Estimates
Profitability:
Figure 9. DuPont analysis To pursue a profitability analysis of CRCC the study focused on return
ratios together with profit margins. The ROA shows an increasing
trend between 2016 and 2019, going from 1.96% to 2.09% in 2019.
Nonetheless, the value is considered very low and below the industry
average of 6.54%. On the other hand, the ROE experiences a
downward trend in the analyzed period. It decreases form 10% in
Source: Minerva Investment 2016 to 8.63% in 2019. The main drivers of this movement are
ManagementSociety Estimates investigated through a DuPont Analysis. For what concerns the asset
Figure 10. Liquidity turnover, its value is slightly decreasing during the 2016-2020
period, however its role in the ROE fluctuation is limited since the
decline is of low intensity. With respect to the net profit margin, it is
possible to see a positive trend. It improves, reaching a value of
2.72% in 2019. Thus, the drop of the ROE value is mainly due to a
reduction of financial leverage which decreases from 5.1 to 4.1 in the
period. Nevertheless, the ROE value is below the industry median of
9% (Thomson Reuters).
Liquidity:
The cash position of CRCC as of June 2020 is RMB 124,770,685M.
With the aim of analyzing the liquidity position of CRCC the current,
Source: Minerva Investment quick and cash ratios are considered. The current ratio has been
ManagementSociety Estimates computed as current assets on current liabilities. As shown in
Figure 10 and 11, this ratio has been declining from 2016 to 2020,
Figure 11. Liquidity going from a value of 1.25 to 1.11. This is a worrying trend because
the ratio is deteriorating, and the value is approaching 1. A current
ratio over 1 signal that the company’s current assets exceed its
current liabilities. Thus, the value of this ratio indicates that the
company currently has a good liquidity position and in line with the
industry average, but if the downward trend continues its liquidity
Source: Minerva Investment position could weaken. The quick ratio instead is increasing due to
ManagementSociety Estimates a reduction of the value of inventories over time. It takes values
smaller than 1, but increasing form 0.7 in 2016 to 0.8 in 2020. This
Figure 12. Leverage value is considered reasonable and in line with the industry
average. The same is true for the cash ratio, which fluctuates
around 0.22.
Cash Conversion Cycle:
The Cash Conversion Cycle (CCC) for CRCC is determined by Day
Sales Outstanding (DSO), Days of Inventory Outstanding (DIO) and
Day Payables Outstanding (DPO). These ratios are called Duration
Ratios, and they measure the average number of days it takes for a
company to turn its resource inputs into cash. The cash conversion
cycle formula is aimed at assessing how efficiently a company is
managing its working capital. As with other cash flow calculations,
the shorter the cash conversion cycle, the better the company is at
Source: Minerva Investment Management selling inventories and recovering cash from these sales while
SocietyEstimates paying suppliers. If CCC ratio is significantly high, the company may
have difficulties in managing cash transactions with customers and
suppliers. Although, a short cash conversion cycle could strain the
relationship with suppliers, it may also create alternative
investment opportunities through the usage of cash collected from
receivables. CRCC has a high DPO, which is stable at around 190
days, while DIO and DSO decreased during the period, leading the
CCC to become negative in 2018.
Leverage:
To assess the Solvency of CRCC Debt-to-Equity,
Debt-to-Assets and interest coverage ratios are
analyzed. The Debt-to-Equity ratio reported in the
2016-2020 years is very high, exceeding 4 in 2016
but decreasing steadily during the period, reaching
3.06 in 2020. This is of particular concern since
companies operating in the same industry as CRCC,
like Power Construction Company of China, China
Communications Construction and China State
Construction Engineering Corporation, reported
values of Debt/Equity ratio between 1.9 and 2.9 in
the 2018-2019 years, lower than CRCC’s one. This is
also reflected in the Debt-to-Assets ratio which
shows the percentage of Debt with respect to Total
Assets. This ratio has experienced a downward
trend, as well, in the 2016-2020 period, settling at
71.5% in 2020. CRCC’s capital structure is not
effectively balanced: in fact, with respect to peer
companies, it strongly relies on debt financing.
Notwithstanding the high levels of debt, the interest
coverage, which is calculated as EBIT on interest
expense, assumes very satisfactory levels. An
interest coverage ratio indicates how easily a
company is able to pay expenses on its outstanding
debt. Generally, a value higher than 1.5x is deemed
good and considering that CRCC interest coverage
currently is at 3.46x, it is possible to affirm that the
Company can easily face its financing costs.

The financial analysis highlighted some critical

aspects. Firstly, the leverage is particularly high
with respect to the industry average. However, in
the current low interest rate environment, this
finding signals a favorable cost of debt achieved by
the company on the markets. However, the main
concerns regard the profitability. The return ratios
are below the industry average for most of the years
analyzed and the ROE is on a decreasing trend.
Regarding the liquidity position, instead, both the
current ratio and the quick ratio are in line with
their pers’ and show that the company is liquid.
Regarding the liquidity position, instead, both the
current ratio and the quick ratio are in line with
their peers’ and show that the company is liquid.
 Valuation
Figure 13. Computed Results
Valuation Price Target: CNY 12.23
Our analysis followed two main approaches:
• an intrinsic valuation regarding the Dividend Discount Model (DDM)
• a relative valuation with market multiples of comparable companies

Dividend Discount Model Approach

In the set of the different valuation methods, we chose the dividend

discount model since it assumes a non-controlling shareholder valuation
perspective and also because CRCC is a mature company with an history
of stable dividend payments. Moreover, the firm’s dividends have a
constant relationship with the firm’s earnings and other types of cash
flows were highly unstable.

Analyzing the various steps, we started by computing the cost of equity,

which is based on the following assumptions:
Source: Minerva Investment Management
Society Estimates • Risk Free Rate (3.22%): we used the last available 10-year Chinese
Government Bond yield (Source: Thomson Reuters Eikon);
• Equity Risk Premium (7.87%): it represents the premium an investor
will require investing in the stock rather than in the risk-free security
(Source: Thomson Reuters Eikon);
• Beta Levered (0.899): it represents the risk specifically attached to
the Company, comparing the performance of the market with the
performance of the Company.

Beta Computation: Beta is a coefficient that expresses how much the

return of the security is captured by the return of the market portfolio; in
brief, we consider the systematic risk of the security. For its computation
we used the market model introduced by W. Sharpe, which describes the
coefficient as the ratio between the covariance of market index returns
and stock returns, and the variance of the market index in a given
estimation window. We put in comparison the security’s return with
those of the Shanghai SE Composite Index, which was considered the
Market Index. In doing so, we applied, as required by the model, an OLS
regression between the streams of returns of the stock and market index.
We considered two different return’s frequencies and estimation
windows:
▪ 3 year-weekly
▪ 5 year-monthly

To assess the most reliable and significant regression we considered the

regression line with higher Adjusted R2. This factor measures how much
of the security returns (dependent variable Y) is explained by movements
of the market index (independent variable X), in terms of variance. In
other words, for higher values of Adjusted R2, more of the stock returns
variance is captured by the market variability of stocks’ returns. In our
case, the higher adjusted R2 was associated with a 3 year-weekly
estimation window. Additionally, the raw beta so obtained has been
adjusted with the Blume Formula in order to have a forward-looking
Beta.

Moreover, the dividend growth rate for the terminal value has been
estimated with a fundamentals’ analysis as the product of the marginal
return on equity and the retention rate.
Figure 14. Comparables’ Multiples Market Multiples Approach
Comparables EV/EBITDA EV/EBIT EV/REVENUES P/E
China Railway Group 7.16 9.67 0.31 5.47
China Communication Construction
Company 12.03 17.01 0.83 8.03
China State Construction Engineering 7.69 7.19 0.49 5.80
Power Construction Corporation of China 13.16 19.29 1.17 9.22
Shanghai Construction Group 6.18 5.98 0.2 7.95
China State Construction International
Holding 6.50 6.52 0.87 4.02
China Gezhouba Group 8.95 11.51 0.97 9.06
China Railway Construction Company 5.51 8.46 0.30 5.27

Source: Minerva Investment Management

Society Estimates After the first approach, in order to have a different valuation
perspective to compare with the forecasts obtained through the DDM
analysis, we have performed a multiple analysis. The purpose of the
Figure 15. Equity side multiples method is to double check the target price we identified with the other
approach. Hence, we collected data for market multiples of a set of
seven comparable companies.
EV/EBITDA EV/EBIT EV/REVENUES P/E
MIN 8.53 4.43 4.18 6.0 Description of selected comparable companies
Q1 10.39 6.43 17.59 8.5
All these companies are active in the civil engineering sector and are
MEAN 16.08 15.95 37.12 10.6
all taking advantage of the big investments on infrastructures that the
MEDIAN 12.86 12.86 46.41 11.9 Chinese government is pursuing.
Q3 20.91 23.35 52.44 12.8
MAX 28.58 34.84 69.20 13.8 China Railway Group:
CREC takes a leading position in infrastructure construction, industrial
Source: Minerva Investment Management equipment manufacturing, scientific research and consulting, real
Society Estimates estate development, resources development, financial trust, trade and
other fields. The company experienced a 15% revenue growth from
Figure.16 Football Field 2019 (416.303 M CNY), EPS doubled since 2016 and cash increased
50% in 1 year (+298 M CNY).
Football Field
8.07
China Communication Construction Company:
EV/EBITDA 12.86 16.08 The company is engaged in the design and construction of
transportation infrastructure and heavy machinery manufacturing
EV/EBIT 12.86 15.95
business.
It covers transportation infrastructures (ports, road, railways), heavy
EV/REVENUES 37.12 46.41
marine machinery, road machinery manufacturing, and international
P/E 10.62 11.93
project contracting, import and export trading services. The company
shows increasing revenues but also presents stagnant net income.
DDM 12.23
China State Construction Engineering Corporation:
0 10 20 30 40 50
China State Construction is present all over the world. It covers
Source: Minerva Investment Management investments and development, construction engineering as well as
Society Estimates survey and design. In China, China State Construction has built
skyscrapers, key airports, satellite launch bases, urban utility tunnels
and of nuclear power plants. CSCEC operating revenues have been
increasing tenfold every twelve years on average.

China State Construction International Holding:

CSCI is mainly engaged in infrastructure investment, construction
projects, housing project, civil engineering works, foundation works,
site investigation, mechanical and electrical engineering, concrete
production, prefabricated construction and project supervision
services.

Power construction corporation of China:

The Company's principal businesses include the construction
contracting, electric investment and operations, real estate
development, equipment manufacturing and leasing. The Company is
also engaged in the commodity trading, sales of materials and the
construction of highways and bridges. The company’s growth is in line
with construction trend and its revenues have been almost tripled in
the last 7 years.
China Gezhouba Group: Investment Risks
The group is divided into many segments: project
investments, real estate, construction, environmental Many risks can be identified when investing in a Chinese company
protection, cement, civil explosives and financials. This Exchange risk: the company operates mainly in China; however, it has
company is the one having more problems, indeed its many ongoing projects in Asia, Africa and the middle east. Those
revenues are growing slower than the market and the countries have high political uncertainty, which reflects in high
current dividend is a third of 4-year-ago level (DPS from fluctuations in the currency value. A drop in currencies in those
0.21 to 0.7). countries may be detrimental for the company’s revenues, especially
since CNY has been appreciating during the last year. There is also an
Shanghai Construction Group: exchange risk from the point of view of the investor, especially since that
The Company's main businesses include the general now CNY is relatively expensive, but it is forecasted to drop in price in
contracting of housing construction businesses, the next months as the Chinese Central Bank is perusing a massive
landscaping, real estate development and management, purchase of foreign assets in order to depreciate the currency to keep
stone mining, concrete processing and manufacturing, exports up. We assessed the exposure towards shift in currency and
municipal engineering construction and management, interest rate as moderate in the short term. We further investigate on
urban infrastructure investment. The company has the topic in two other report: Minerva IMS credit opportunities (interest
doubled revenues over the last 6 years, taking advantage rate risk) and emerging markets outlook (currency risk), respectively
of the good industry momentum, indeed, apart from written by the markets and alternatives and macro research team of
those related to this sector, all other metrics have not Minerva IMS.
increased.
Chinese Communist party: the party has almost full control over the
Methodology and results company. The Chinese government puts the interests of the party and
the country over the interests for its shareholders. This is reflected in
We decided to consider equity and asset side multiples the annual reports: all state-owned companies are very vague in the
as both are relevant to assess the relative value of the balance sheet and keep some vital information private. This creates
company. To derive the share price from the asset side uncertainty, and investors dislike uncertainty.
multiples, we first obtained the EV, then subtracted total Human rights: Chinese government is well known for not respecting
debt and added back cash and equivalents to arrive at the human rights. CRCC operates in a sector that has a strong past record of
equity value. We divided by the number of outstanding violations and if more information about a company’s involvement were
shares to get the intrinsic share price. For the equity side released, western-countries investors might pull out their money.
multiple, we simply multiplied the ratio by the EPS of Reversion in globalization trend: CRCC is benefiting from the “Belt and
CRCC. To get a range of values for the football field chart Road” initiative, which it is going to be successful only if high level of
we used the mean and median of the multiples as upper trade and hence globalization will be registered. If tensions between the
and lower bound, except for the DDM value from which Western countries and China were to escalate, the trend might reverse.
we obtained a single value. Negative pricing momentum (not related to Chinese financial
environment): at the moment, the market is very bearish on the whole
The asset side multiples we considered are EV/Revenue, civil engineering sector in China. We deem important to point out this
EV/EBITDA and EV/EBIT. The first factor shows element to deliver a complete vision on this stock that represents a
investors how much it costs to purchase a company’s “BUY” because of the risks we have here depicted.
sales. The second and third ratio show the market
appreciation of different capital and revenues-costs
structure and is useful to compare companies with
different levels of debt.

On the one hand, as for the equity side multiple we chose

to consider the P/E ratio since it is one of the most
diffused tools in relative valuation. It depicts the number
of years the company would takes to repay investors
with their profit.

As can be seen from the football field chart and the data,
the EV/Revenues ratio is an outlier and gives unrealistic
values for share price. This could be due to capital
intensive nature of CRCC’s business, where a relatively
large amount of assets and leverage is needed in order to
produce revenues. All the other ranges are above the
current share price, indicated by the blue line, and are
fairly consistent with each other.
 Appendix:
Income statement
Income Statement

Millions of CNY 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Operating revenue 629327.09 680981.13 730123.05 830452.16 910324.76 983150.7408 1061802.8 1146747.024 1238486.786 1337565.729
Operating cost of sale 571377.53 618059.39 658711.27 750365.07 825987.27 890464.8464 961702.0341 1038638.197 1121729.253 1211467.593
Gross profit 57949.56 62921.74 71411.78 80087.09 84337.5 92685.89437 100100.7659 108108.8272 116757.5334 126098.136
Operating costs 27530.61 34446.27 37057.09 43651.32 46103.29 48821.72874 52727.46704 56945.6644 61501.31755 66421.42296
EBITDA 30418.95 28475.47 34354.69 36435.77 38234.21 43864.16563 47373.29888 51163.16279 55256.21582 59676.71308
Depreciation, amortisation, impairments and write-downs 1013.73 940.93 727.39 679.01 781 1113.786692 1202.889627 1299.120798 1403.050461 1515.294498
EBIT 21538.06 27534.55 33627.29 35756.76 38233.43 42750.37894 46170.40925 49864.04199 53853.16535 58161.41858
Net finance cost -2160 -2645.08 -3532.87 -2710.83 -7850 -3505.11247 -3898.91538 -4314.84231 -4754.16053 -5218.21096
Gross Income From Continuing Operations 19378.06 24889.47 30094.42 33045.93 30383.43 39245.26647 42271.49387 45549.19969 49099.00482 52943.20763
Net Extraordinary items -408.49 -3633.71 -4989.16 -5019.28 1107.12 -5818.14128 -6170.19867 -6559.80087 -6990.4541 -7465.97284
EBT 18969.58 21255.76 25105.26 28026.65 31490.55 33427.12519 36101.2952 38989.39882 42108.55072 45477.23478
Taxation on profit/(loss) 4118.74 4336.57 5266.85 5402.96 5781.88 6734.354959 7273.103356 7854.951624 8483.347754 9162.015574
Net Income 14850.83 16919.19 19838.41 22623.69 25708.67 26692.77023 28828.19185 31134.44719 33625.20297 36315.21921
Valuation
 Disclaimer

This research material has been prepared by Minerva Invest. Minerva Invest specifically prohibits the redistribution
of this material in whole or in part without the written permission of Minerva Invest. The research officer(s) primarily
responsible for the content of this research material, in whole or in part, certifies that their views are accurately
expressed and they will not receive direct or indirect compensation in exchange for expressing specific
recommendations or views in this research material. Whilst we have taken all reasonable care to ensure that the
information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee
its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any
opinion or estimate contained in this report is subject to change without notice. We have not given any consideration
to and we have not made any investigation of the investment objectives, financial situation or particular needs of the
recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is
accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting
on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the
suitability of the securities mentioned herein, taking into consideration your investment objectives, financial
situation or particular needs, before making a commitment to invest in the securities. This report is published solely
for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an
offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed
or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein.
The research material should not be regarded by recipients as a substitute for the exercise of their own judgement.
Any opinions expressed in this research material are subject to change without notice.

© 2020 Minerva Investment Society