Post on 09-Oct-2020
transcript
Page 1 of 14
Company Report
7 Jul 2014
Lewis Pang
lewis.pang@cinda.com.hk
(852) 2235 7847
Trading data
52-Week Range (HK$)
3 Mth Avg Daily Vol (m)
No of Shares (m)
Market Cap (HK$m)
Major Shareholders (%)
Auditors
Result Due
1.24/2.03
1.2
1,026
1,498
Mr. Xuan Ruiguo
(44.65%)
Deloltte
1H14: Aug Company description
Listed in 2007, China Automation Group (CAG) is
primarily engaged in petrochemical and railway
industries. It offers two major product categories
for each sector, including 1) safety control
systems and 2) control valves for petrochemical
industry, as well as 3) signaling systems and 4)
auxiliary power supply and traction systems for
railway industry.
Price chart
Looking for the end of the tunnel Rating NOT RATED
Current price
HK$1.46
Improving orders from railway, expect a stronger boost in 2015
After years of weakness in railway segment since the Wenzhou train
accident in mid 2011, management expressed that both orders and
deliveries are improving in recent months. In April 2014, China
Railway Corporation (“CRC”) announced a spending target of
>RMB800bn, which is revised up from the original target of
RMB630bn, representing a ~20% yoy growth (RMB660bn in 2013).
As CAG’s products are generally installed at the later stage, we
expect it to enjoy a more significant boost in 2015.
Entering the metro traction system market
CAG won its first two traction system contracts for subway projects
in 2013, namely Guangzhou Subway Line 9 and Nanjing Subway
Line 1, which would contribute ~RMB100mn revenue to CAG in
FY14-16E. While a lower GPM is expected for these contracts as
CAG is still in the learning curve, management views it as a
significant breakthrough into the huge metro market. For instance,
there would be tender for ~20 metro lines nationwide in 2014.
Safety control system: putting more focus on margin
GPM of CAG’s safety control system segment dropped significantly
from 41-45% in FY09-12 to 29% in FY13, which was the results of
those low margin orders (mainly from overseas or other industries
including oil pipe network) taken in previous years. For instance, two
Singapore orders recorded ~RMB80mn revenue and RMB25mn
gross loss in FY13. CAG is now putting more focus on profitability,
we expect a rebound of GPM with a flattish sales in FY14E.
Control valve: the growth engine in petrochemical segment
In 2012, CAG completed the acquisition of Wuzhong Instrument, the
4th largest and the only domestic top 10 player in the PRC control
valve market. Sales of Wuzhong remained strong in 1H14, and we
expect control valve would be CAG’s growth engine in petrochemical
segment due to 1) its established reputation among petrochemical
and coal-chemical companies, and 2) cost advantage over oversea
players in high end control valve market.
Moderate growth in FY14E, expect a brighter future ahead
We expect 8% revenue and 6% operating profit growth in FY14E.
Provision for bad debt would remain the major uncertainty factor for
its earnings. Assuming RMB50mn provision, CAG is trading at ~13X
FY14E PER. we believe there would be a stronger boost for its
railway business in FY15E, and we like its strategy to expand into
control valves market. We suggest investors to keep an eye on the
company, potential catalyst included the further acceleration of PRC
railway spending and improvement in the liquidity of CRC.
RMB million FY10A FY11A FY12A FY13A FY14E
Revenue 1,595 1,981 2,211 2,309 2,532
Operating profit 394 416 366 317 337
Net Profit 286 196 85 74 91
EPS (RMB) 0.281 0.194 0.082 0.071 0.089
P/E ( x) 4.2 6.0 14.2 16.3 13.1
Sources: Bloomberg, CIRL estimates
China Automation Group | 569.HK
Page 2 of 14
System and equipment provider in petrochemical and railway industries
China Automation Group (CAG) is primarily engaged in petrochemical and railway
industries. It offers two major product categories for each sector, including 1) safety
control systems and 2) control valves for petrochemical industry, as well as 3) signaling
systems and 4) auxiliary power supply and traction systems for railway industry. As a
supplement to its core system and equipment businesses, CAG also provides 5)
engineering & maintenance and 6) equipment distribution services to their customers.
Exhibit 1: 4 core product segments of CAG
Source: CAG
Exhibit 2: Revenue and gross profit breakdown in FY13
Source: CAG, CIRL
Page 3 of 14
Expanded into new product segments through series of M&A
CAG entered the safety control system industry in 1999, and expanded to other product
segments through a series of M&A and cooperation during 2008-2012, including
acquisition of Beijing Jiaoda Microunion, Zhongjing, Nanjing Huashi, Wuzhong
Instrument as well as establishment of JV with ABB. This strategy allows CAG to
venture into other markets with high technological and licensing barriers, in our view.
Exhibit 3: CAG has expanded into various new business segments through M&A
Source: CAG
Strong position in all 4 core segments
CAG has established a strong position in PRC for all of its 4 core segments, which
included 1) ~70% market share in the safety control system market of petrochemical
and coal chemical industry, 2) the 4th largest and the only domestic top 10 player in the
PRC control valve market, 3) one of the four certified Railway Interlocking System (“RIS”)
suppliers, and 4) one of the five qualified electrified equipment suppliers recognized by
the China Railway Corporation (“CRC”).
Exhibit 4: CAG has established strong position in its core segments
Source: CAG
Time Period Company Key products Nature % of interestsConsideration /
Initial Investment
2008 Beijing Jiaoda Microunion Railway signaling system Acquisition 76.7% RMB303.5mn
2009 ABB Microunion Railway tractor converter and
auxiliary converter
Joint Venture 50.0% USD3mn
2010 Zhongjing Engineering and
construction design of
petrochemical plants
Acquisition 70.0% RMB25mn
2011 Nanjing Huashi Railway traction and auxiliary
power supply system
Acquisition 51.0% RMB160mn
2010-12 Wuzhong Instrument Control Valves Acquisition 100.0% RMB343.8mn
Page 4 of 14
Railway segment: improving orders, metro market a new opportunities
CAG is involved in the railway industry mainly through its 76.7% and 51.0% subsidiaries,
Beijing Jiaoda Microunion (“BJM”) and Nanjing Huashi (“Huashi”), which provided
signaling systems as well as electrified equipment (including auxiliary power supply and
traction systems) respectively.
~30% market share in RIS, a key component of the railway signaling system
BJM is one of the four certified Railway Interlocking System (“RIS”) suppliers granted by
CRC, with a market share of ~30%. RIS is a key component of the railway signaling
system, which is installed in the stations and locks the railroad switch when a train
passes by, in order to ensure that the trains will go through the right railroad and prevent
collision between trains.
While RIS remained the major contributor, BJM has also developed other signaling
system products to enrich its coverage in the railway signaling system segment over the
past few years. For instance, Centralized Traffic Control System (“CTC”) is another core
products of BJM, which is a centralized system that monitors and manages overall train
traffic and railway station operation. Products of BJM could be applied in both railway
and metro.
Exhibit 5: Railway signaling system products of BJM
Source: CAG
Products Functions
RIS (Railway Interlocking
System)
Used in railroad switch in railway stations to direct trains along the right
tracks and prevent collision, so as to protect life and property safety
CTC (Centralized Traffic
Control System)
Long-distance integrated monitoring towards signaling systems and train
operation and carry out centralized controls over train traffic in all stations
TCC (Train Control Centre
System)
An integrated control panel mainly used in highspeed railway and utilized
with operation monitoring, data sharing and emergency control
function. Capable of the real-time monitoring and management of data
like railway network video, train operation, daily traffic as well as disaster
information
ATS (Automated Train
Supervision)
Compulsory automated traffic control system of the Metro business,
which manage facilities and traffic data, monitor and control traffic and
assist traffic control technician to manage operation of the train
ATP (Automatic Train
Protection)
ATP system is installed in the train to provide train speed monitor and
speeding protection. The ATP system transmits signals affecting the
safety operation of the train from the ground onto the train and hence
allowing the train to be aware of it safety speed and attains the speed
supervision and management of the train
ATO (Automatic Train
Operation System)
The ATO system allows an unattended train to navigate, stop, open and
close train door automatically. ATO system can work on instructions from
signaling systems like ATP and accelerates or decelerates accordingly.
The use of ATO system can reduce the time required for acceleration
and deceleration and shorten s train interval
Page 5 of 14
One of the five qualified electrified equipment suppliers recognized by the CRC
On the other hand, Huashi is one of the five qualified electrified equipment suppliers
recognized by the CRC. Major products of Huashi included auxiliary power supply
system (which is used to supply power to door, lighting, air-conditioning, etc) and
traction system (assembled in a power car to convert power between direct current and
alternating current). Its major revenue contributor, DC600V traction system, which
mainly applied in passenger cars, has a market share of >30%, according to
management.
Huashi also provides other supplementary products such as electrical control cabinets.
In FY13, GPM of Huashi is particularly low (32% versus 36-40% in FY11-12) as a higher
proportion of sales came from these lower margin supplementary products. Based on
current orders on hand, this situation is expected to continue at least until 2H14E.
Exhibit 6: Products of Huashi
Traction system Electical control cabinet
Source: Huashi
Improving orders from railway segment, stronger demand is expected in 2015
After years of weakness in railway segment since the Wenzhou train accident in mid
2011, management expressed that both orders and deliveries are improving in recent
months. In April 2014, CRC announced a spending target of >RMB800bn, which is
revised up from the original target of RMB630bn, representing a ~20% yoy growth
(RMB660bn in 2013). As CAG’s products are generally installed at the later stage of a
new railway development, it generally received orders 1-1.5 years after the railway
construction kickoff, hence we expect the re-acceleration of PRC railway spending
would bring a more significant boost to CAG in 2015.
Page 6 of 14
Exhibit 7: Railway fixed-asset investment is expected to have ~20% yoy growth in 2014
Source: CRC
Entering the metro traction system market
Besides, Huashi won its first two traction system contracts for subway projects in 2013,
namely Guangzhou Subway Line 9 and Nanjing Subway Line 1, which would contribute
~RMB100mn revenue to Huashi in FY14-16E. While a lower GPM is expected for these
contracts as CAG is still in the learning curve, management views it as a significant
breakthrough into the huge metro market. For instance, there would be tender for ~20
metro lines nationwide in 2014.
Page 7 of 14
Safety control system: putting more focus on margin
Leading safety control system provider with ~70% share in PRC
CAG enjoys ~70% share in safety control system market in PRC’s petrochemical and
coal chemical industry. CAG’s dominant position could be attributed to 1) its ability in
providing a total solution to customers and 2) exclusive cooperation agreement with
leading hardware supplier.
Providing a wide range of safety control system products
The chemical plants generally need a range of system products to ensure safe and
smooth production. Through years of R&D, CAG has developed various system
software to meet the needs of different customers. Besides, by acquiring 70% interests
of Zhongjing in 2010, CAG could offer engineering design service to the chemical plants,
making CAG a total safety control system solution provider.
Exhibit 8: CAG offers a wide range of safety control system products to its customers
Source: CAG
Exclusive cooperation agreement with Triconex
CAG has acted as the sole supplier of Triconex’s products in the PRC since 2006, and
the two companies have extended the cooperation agreement for 3 more years in 2014.
Triconex is a global leader of safety control system products with >20% market share.
With key hardware supplied by renovated global company, CAG becomes a reliable
partner to the petrochemical and coal chemical plant operators including included
Sinopec, PetroChina, Shenghua etc.
Products Functions
ITCC (Integrated Turbine &
Compressor Control System)
Used in compressor machinery, flow, anti-surge control etc. Other
functions include logic control, turbine speed regulation and emergency
shutdown
iMEC (Intelligent Machinery
Expert Control Systems)
With mature ITCC technology, iMEC system is able to continuously
collect, monitor and manage various forms of compressor data, lower the
rate of faults and reduce equipment maintenance quantity and operation
cost
iSOM (Intelligent Safety
Operation Management)
ISOM system is aimed at completely resolving such problems as
generator set alarm and shutdown messages for our clients, sharing our
experiences in generator set control parameter, parameter adjustment,
generator set operation parameter monitoring, etc so as for our clients to
better understand the generator set, find out faults and clear them in the
set
ITCC-OTS (Integrated Turbine
& Compressor Controls -
Operation Training System)
OTS is an ITCC-based simulation system for operation training that CAG
have developed on the basis of the summary of over a decade of
successful experiences in applying ITCC. OTS may enhance the safety
and reliability of equipment operation to a maximum extent through the
improvement of operators' skill and contingency ability
ESD (Emergency Shutdown
Devices )
A control system which will override and interfere the production systems
when it is at risk, assuring the safety during the production as well as
preventing it from signficant harm
FGS (Fire and Gas Systems) A significant component of the system which ensures safety production.
It covers gas (flammable gas and toxic gas) detection and fire alarm
systems
Page 8 of 14
Exhibit 9: CAG utilizes key hardware supplied by Triconex for its safety control systems
Source: Triconex
Putting more focus on profitability
CAG’s safety control system segment achieved 27% sales CAGR during FY07-12. In
addition to the organic demand growth from petrochemical and coal chemical industry,
CAG also expanded their footprint into overseas as well as other industries including oil
pipe network and electricity plants. However, some of these new customers brought a
negative effect to profitability. For instance, two orders on hand from Singapore
recorded ~RMB80mn revenue and RMB25mn gross loss in FY13, according to
management. As a result, GPM of CAG’s safety control system segment dropped
significantly from 41-45% in FY09-12 to 29% in FY13 (GPM would be 35% if we
excluded the two Singapore orders).
CAG became more selective and avoided taking orders of which they are less familiar
with in FY13. Along with the sluggish economy and tight liquidity environment, safety
control system sales declined 3% yoy in FY13. We expect a flattish sales with a rebound
in GPM for this segment in FY14E, however, the margin would still be lower than
historical average as CAG is expected to incur another ~RMB10mn gross loss from the
unfinished Singapore orders mentioned above.
Page 9 of 14
Control valve: the growth engine in petrochemical segment
Stepped into control valve market leverage on the success in safety control system products
CAG gradually acquired 100% interests in Wuzhong Instrument (Wuzhong) during
2010-12. Prior to the acquisition, Wuzhong was a SOE which primarily engaged in
manufacturing control valves with 50 years of history. Control valve is widely applied in
petrochemical, coal-chemical, chemical, power and metallurgy industries to adjust the
flow, pressure, temperature or liquid level during the production process in response to
the control signal from automation systems.
Exhibit 10: Control valves products of CAG
Source: Wuzhong
4th
largest control valve manufacturer in the PRC
Wuzhong enjoys the synergy with CAG’s original safety control system business, as 1)
CAG has established strong reputation among petrochemical and coal-chemical
companies, which are the major target customers of Wuzhong, and 2) both safety
control system and control valve are a critical part to ensure safe production, hence it’s
convenient for CAG to do cross selling.
After acquired by CAG, Wuzhong achieved decent results in recent years, which turned
profitable in 2012 and achieved 28% organic sales growth in 2013 (70% in financial
statement as only 8 months of Wuzhong’s sales was consolidated in 2012), way above
the industrial growth rate of ~8-10%. In 2013, Wuzhong was the 4th largest and the only
domestic top 10 player in the PRC control valve market with ~4% share according to
“Control Valve Magazine”.
Page 10 of 14
Exhibit 11: Top 10 control valve manufacturers in the PRC market in 2013
Source: “Control Valve Magazine”
Huge room for further growth in a fragmented market
We believe Wuzhong still has huge potential going forward, since annual demand of
control valve in PRC is huge (~RMB15bn), and it is less cyclical in comparison to safety
control system products as it consists more replacement demand (the life cycle of
control valve and safety system are 3-5 years and 8-10 years respectively). Wuzhong is
taking a more aggressive pricing strategy to obtain more market share, we expect a
3-4ppt decline in GPM with ~20% sales growth in FY14E.
Opportunity from high end market in medium growth
In medium term, CAG could also increase Wuzhong’s exposure in high end control
valve market. Currently, domestic control valve manufacturers are mainly involved in the
low to mid end segment while the high end market is dominated by the foreign brands.
Wuzhong has gradually developed various high end products including axial flow valves,
tank bottom valves, high-temperature high-pressure ball valves, etc. We expect
Wuzhong could gain market share in high end market gradually due to its cost
advantage over oversea players, which would enhance its margin.
Rank Company Country Market Share
1 Fisher USA 12%
2 Koso Japan 6%
3 Pentair valves & controls USA 5%
4 Wuzhong Instrument PRC 4%
5 Flowserve USA 4%
6 Spirax Sarco UK 3%
7 Metso Finland 3%
8 Rotork UK 3%
9 CCI USA 3%
10 Burkert Germany 3%
Page 11 of 14
Moderate growth in FY14E, expect a brighter future ahead
Moderate revenue and operating profit growth in FY14E
After achieved a historical high profit of RMB286mn in FY10, CAG has entered a down
trend during FY11-13, which could be attributed to 1) sluggish orders from railway sector,
2) increased in financing costs after a series of M&A (from RMB25mn in FY10 to
RMB123-135mn in FY11-13), and 3) sizable net provision for bad debt (RMB72mn and
RMB60mn in FY12 and FY13 respectively).
For FY14E, we expect a moderate revenue growth of 8%, driven by the railway related
products as well as control valves. GPM would likely to be under pressure, as 1) CAG is
taking a competitive pricing strategy for control valves products, 2) GPM of railway
signaling system would be normalized (48% in FY13 versus 41-42% in FY11-12) and 3)
higher contribution from low margin products in the traction and auxiliary power supply
system segment. CAG targets to maintain a stable operating margin by tightly SG&A
costs and R&D costs. All in all, we expect a 6% yoy growth in operating profit.
Bad debt for provision remained the major uncertainty
Provision for bad debt would remain the major uncertainty factor for CAG earnings
performance. According to management, currently there are >RMB100mn account
receivables which is overdue for more than 2 years. Most of these receivables came
from the railway constructors such as CRG (390 hk). However, we believe the PRC
government is considering various options to solve the liquidity problem of CRC, and
one potential solution is to open railway construction to private capital.
Medium term likely to improve while short term earnings still insecure
CAG is trading at ~13X FY14E PER if we assume RMB50mn net bad debt provision.
While the short term earnings outlook of CAG is still relatively insecure, we believe its
railway business would soon be seeing the end of the tunnel, and the increasing railway
spending of CRC should provide a stronger boost to CAG in FY15E. We also like its
strategy to expand into control valves market after it has established a dominant
position in the petrochemical safety control system market. We suggest investors to
keep an eye on the company, potential catalyst included the further acceleration of PRC
railway spending and improvement in the liquidity of CRC.
Page 12 of 14
Exhibit 12: Financial statement
Source: Bloomberg, CIRL
Year to Dec (RMB mn) FY10A FY11A FY12A FY13A FY14E
Total revenue 1,595 1,981 2,211 2,309 2,532
- Peterochemical - safety control systems 610 796 920 892 900
- Peterochemical - control valves 0 0 343 583 700
- Railway - railway signaling systems 589 476 317 349 402
- Railway - traction and auxiliary power supply system 0 108 222 130 162
- Engineering & maintenance 124 151 156 169 178
- Distribution of Equipment 272 450 252 186 190
Gross profit 664 758 865 828 875
- Peterochemical - safety control systems 278 338 376 260 293
- Peterochemical - control valves 0 0 123 197 212
- Railway - railway signaling systems 256 195 133 167 167
- Railway - traction and auxiliary power supply system 0 39 90 42 45
- Engineering & maintenance 84 104 107 119 123
- Distribution of Equipment 46 82 39 45 35
SG&A expenses (263) (371) (474) (487) (519)
R&D expenses (34) (34) (74) (96) (81)
Profit from associates and JVs (3) (7) (13) (2) (3)
Other income / expenses 30 71 61 74 65
Operating profit 394 416 366 317 337
Net provision of bad debt (6) 4 (72) (60) (50)
Finance costs (25) (123) (131) (135) (130)
Profit before tax 362 297 163 122 157
Tax expenses (42) (53) (34) (37) (42)
Minority interest (35) (48) (44) (11) (23)
Net profit 286 196 85 74 91
Page 13 of 14
Exhibit 13: Peers comparison
Source: Bloomberg, CIRL
Ticker Mkt cap Price
(HKD mn) (HKD) FY12A FY13A FY14E FY12A FY13A FY14E
CSR CORP LTD-H 1766 HK
Equity80,036 6.25 17.0 16.5 13.1 2.1 1.8 1.7
CHINA CNR CORP-H 6199 HK
Equity71,431 5.53 13.2 11.0 9.8 1.3 1.2 1.1
ZHUZHOU CSR-H 3898 HK
equity28,858 24.55 17.7 14.6 13.8 3.5 2.5 2.2
CHINA ITS HOLDIN 1900 HK
equity2,667 1.62 16.5 14.3 12.3 0.9 0.8 0.7
CHINA CITY RAILW 1522 HK
equity2,317 1.80 14.0 24.3 12.0 4.2 3.6 N/A
XIANGTAN ELEC-A 600416 CH
Equity7,343 12.07 N/A 119.6 29.8 2.9 2.7 N/A
JINXI AXLE -A 600495 CH
Equity7,284 17.36 35.3 40.5 24.1 2.6 1.9 2.2
BAOTOU BEIFANG-A 600967 CH
Equity14,143 17.19 51.2 43.0 23.6 5.8 5.0 4.4
Average 23.5 35.5 17.3 2.9 2.4 2.1
HONEYWELL INTL HON US
Equity575,866 735.34 25.3 19.0 17.1 5.7 4.3 3.8
EMERSON ELEC CO EMR US
Equity366,407 522.13 25.1 24.2 17.9 4.7 4.5 4.3
GENERAL ELECTRIC GE US
Equity2,087,510 208.17 20.8 21.0 15.9 2.3 2.1 2.1
WOODWARD INC WWD US
Equity25,812 389.30 24.3 23.6 21.5 3.4 3.0 2.6
ROCKWELL AUTOMAT ROK US
Equity135,402 978.00 24.2 23.2 20.3 9.5 6.8 6.5
SIEMENS AG-REG SIE GR
Equity906,399 1,028.82 21.5 19.9 14.8 2.9 2.9 2.7
ABB LTD-REG ABBN VX
Equity412,410 178.16 19.5 19.0 16.8 3.1 2.8 2.7
NARI TECHNOLOG-A 600406 CH
Equity43,086 17.74 26.7 21.3 17.2 6.5 5.5 4.3
GUODIAN NANJ-A 600268 CH
Equity3,928 6.18 21.9 490.1 19.1 1.3 1.3 N/A
Average 23.3 73.5 17.8 4.4 3.7 3.6
CAG 569 HK 1,498 1.46 14.2 16.3 13.1 0.7 0.6 0.6
International Automation system or equipment
P/E(x) P/B(x)
Railway system or equipment
Page 14 of 14
Rating Policy
Rating Definition
Stock Rating Buy Outperform HSI by 15%
Neutral Between -15% ~ 15% of the HSI
Sell Underperform HSI by -15%
Sector Rating Accumulate Outperform HSI by 10%
Neutral Between -10% ~ 10% of the HSI
Reduce Underperform HSI by -10%
Analysts List
Antony Cheng Research Director (852) 2235 7127 antony.cheng@cinda.com.hk
Hayman Chiu Senior Research Analyst (852) 2235 7677 hayman.chiu@cinda.com.hk
Kenneth Li Senior Research Analyst (852) 2235 7619 kenneth.li@cinda.com.hk
Lewis Pang Senior Research Analyst (852) 2235 7847 lewis.pang@cinda.com.hk
Susanna Chui Research Analyst (852) 2235 7131 susanna.chui@cinda.com.hk
Analyst Certification
I, Lewis Pang hereby certify that all of the views expressed in this report accurately reflect my personal views about the
subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is /
are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.
Disclaimer
This report has been prepared by the Cinda International Research Limited. Although the information and opinions
contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International
cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not
be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and
comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers
prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from
the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so
uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is
published solely for information purposes, it does not constitute any advertisement and should not be construed as an
offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential
loss arising from any use of the materials contained in this report. This document is for the use of intended recipients
only, the whole or a part of this report should not be reproduced to others.