China Railway Group - Outperformed market

Excerpts from OCBC Investment research report

Outperformance vs market YTD; one of the leaders of the pack
Infrastructure sector and other SOEs rallied after CSRC Chairman’s remarks on exploring a valuation system for undervalued SOEs
One of few in the sector not on US Entity List

China Railway Group outperformed market year to date

Given slower economic growth as China rebalances its economy, infrastructure investments are often adopted as a counter-cyclical policy. We also see renewed focus on a highway-to-railway shift for cargo transportation as China seeks to lower logistics costs and accelerate its de-carbonisation push.

China Railway Group (CRG) is a key beneficiary as one of the leading infrastructure constructors, though timing of new contracts approval
could be volatile.

While China‘s Belt and Road initiative could be a medium-term driver, domestic contracts remain the key driver, accounting >90% of total.

The total return of China Railway Group-H is up 2%, outperforming the Hang Seng Index which is down 25% over the same period, based on 22 November 2022 closing prices.

This is also stronger than the performance of peers such as China Communications Construction (CCCC), HK China Railway Construction (CRCC), HK and China State Construction International (CSCI), which are down about 9-10% YTD.

We think this may be due to CRG’s efforts to improve margins, the group’s highest 9M22 order growth among Chinese infrastructure construction companies, and also less limitations on stock trading as CRG is not on the US Entity List, while CCCC and CRCC are.

For CSCI, the rangebound trading is not surprising considering the stock’s significant outperformance in 2021.

Valuation/Recommendation

The Chinese infrastructure construction sector, along with other state-owned enterprises (SOEs), also rallied on 22 November 2022

Mr Yi Huiman of China Securities Regulatory Commission (CSRC) highlighted at the 2022 Financial Street Forum Annual Meeting that “it is necessary to explore the establishment of a valuation system with Chinese characteristics to promote better market resource allocation”.

A number of stocks in the infrastructure sector, despite outperforming the broader market in 2021 and so far this year, are still trading at low valuations around 0.2-0.6x price-to-book (P/B) and 2-5x price-to earnings (P/E).

Like other SOEs, the low valuations are due to various reasons and we will be monitoring if more will be done to close the valuation gap. Meanwhile, we maintain our fair value estimate of HKD6.40 on CRG.