EQUITY RESEARCH REPORT Alstom · Alstom is a French Multinational Company founded in 1928. It...

EQUITY RESEARCH REPORT Alstom

18th March 2019

DASWANI Deepak Roshan BHIMSARIA Ketan GANERIWALA Anirudh ABEDIN Salman Murtaza WIDJAJA Raymond ASHFAQ Salik Mohd.

Published by CityU Student Research & Investment Club (CURIC)

Copyright © CityU Student Research & Investment Club 2

THE FINAL PAGE OF THIS REPORT CONTAINS A DETAILED DISCLAIMER The content and opinions in this report are written by university students from the CityU Student Research & Investment Club, and thus are for reference only. Investors are fully responsible for their investment decisions. CityU Student Research & Investment Club is not responsible for any direct or indirect loss resulting from investments referenced to this report. The opinions in this report constitute the opinion of the CityU Student Research & Investment Club and do not constitute the opinion of the City University of Hong Kong nor any governing or student body or department under the University.


Rating HOLD* Price (12 Mar 19, Eu) 37.82 Target price (Eu) (from 37.82) 40.34¹ Market cap. (Eu m) 8,403.00 Enterprise value (Eu m) 8,920.0 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months.

Research Analysts Roshan Deepak Daswani

+852 61044469 [email protected]

Ketan Bhimsaria [email protected]

Anirudh Ganeriwala [email protected]

Murtaza Salman Abedin

[email protected]

Raymond Widjaja [email protected]

Mohd. Salik Ashfaq [email protected]

Share price performance

Europe/France Equity Research

Industrial Machinery (Capital goods - Engineering (Europe))

Alstom (ALO) Alstom is a French Multinational Company founded in 1928. It develops markets systems, equipment, and services for the transport sector in Europe, the Americas, Asia and Asia-Pacific, the Middle-East, and Africa. The company offers metros, tramways, tram-trains, suburban trains, regional trains, high-speed trains, passenger and freight locomotives, and signalling products, such as rail control systems, security and control, trackside, and interlocking products. It is also involved in the design and installation solutions for track laying, the electrification of and power supply to lines, and supply and installation of electromechanical equipment.

It is listed on Euronext Paris Exchange (ticker symbol ALO) with the current price at EUR 37.58. In 2017-18, its sales were at EUR 8 Bn with organic growth of 10% (9% inorganic). It possesses a free cash flow of EUR 128mn, a net Debt of EUR 255mn and equity of EUR 4 bn. In the 4 categories of products and services it offers, rolling stock contributes the maximum to the revenue with 49% followed by services at 32%, signalling at 10% and systems at 9%.

Alstom SA’s main Research and Development programs include Renewal of Rolling Stock Ranges, Smart Mobility Programs and Predictive Maintenance. In 2017-18, the company invested EUR 278mn in R&D, approximately 3.5% of the total revenue.

Figure 1


Table of Contents INTRODUCTION ......................................................................................................................................... 3

ASIA-PACIFIC ............................................................................................................................................. 5

EUROPE ....................................................................................................................................................... 7

AMERICAS ................................................................................................................................................ 12

MIDDLE-EAST AND AFRICA ................................................................................................................. 14

VALUATION ............................................................................................................................................. 18

SIEMENS-ALSTOM MERGER ................................................................................................................ 19

A EUROPEAN CHAMPION IN MOBILITY ............................................................................................ 21

INVESTMENT RISKS ............................................................................................................................... 22

APPENDIX ................................................................................................................................................. 23


Asia-Pacific

Figure 2 The Asia-Pacific region is predicted to show substantial growth until 2025 at 2.6% CAGR. Investments in the region are growing in number as well as the value. Majorly, India and the People's Republic of China are undertaking high-value projects compared to other countries in the region.

The Rail Industry growth in this region is mainly because of dominant current and future

products in the market. The Indian economy is currently promoting ‘Made in India' to a big extent, allowing foreign companies to set up the infrastructure for production in India with relaxed regulations and cost. International companies currently in the Indian Market with significant share include Hill International, Larsen and Toubro, Sojitz, Alstom, Siemens, and Stadler Bussnang AG. China Railway Construction Company (CRCC) controls more than 90% of the market of China.


Figure 3

Alstom is enhancing its dominance in the region by winning contracts to big-value projects in India and China as Sole or Joint Ventures. Some major contracts in India include 800 electric freight locomotives (EUR 3.9 Bn), signalling, electrification and telecommunications work for Eastern Dedicated Freight Corridor (EUR 120 Mn), which is a World Bank funded project, Mumbai Metro - Signalling and Rolling Stock (EUR 415 Mn) and metro contracts in some states which total to EUR 382 Mn. The Mumbai Metro is the major entry point for Alstom into the Indian Metro market.

The growth of population and the need for green energy sources is evident because of which the Indian Government plans to extend the service of the metro to many states and cities. Alstom has a huge potential to win the contract for supplying rolling stock, services, signalling, and electrification to the 42 States that are under discussion for the metro. The government of India has already planned to bring metro to 15 cities. Another interesting thing to note is that every project of approximately EUR 16mn that Alstom wins in India has a 2% impact on global revenue. Therefore, if Alstom wins contracts for just 20 cities, there will be a 40% increase in revenue.


Country Projects

India Western and Eastern Dedicated Freight Corridors

India Kanchrapara EMU Project

India 800 Electric Freight Locomotives

India Mumbai Metro

China Zhengzhou Metro Extension

China Beijing Metro

China Dalian - Yantai Undersea Railway Tunnel

Singapore Kuala Lumpur - Singapore HS Train

Australia Brisbane - Melbourne HS Railway Link

Japan Tokyo - Nagoya Maglev Link Figure 4 China's Rail Industry is expected to grow at a 3.7% CAGR in the future. Although CRCC is dominating the Chinese market, Alstom has established six joint ventures in China to strengthen its localization because of fast-growing demand. Some of the projects include Shanghai Metro Line 15: train electrical design, traction systems, and train control monitoring systems (EUR 58 Mn), Chengdu Metro Line 9: traction systems and CBTC signalling systems (EUR 65 Mn), control centres in Beijing, Shanghai, Nanjing, etc., Qinghai-Tibet Railway: ITCS signalling system (EUR 15 Mn).

Alstom provided 25% of all control centers in the world. There is a substantial development in other countries such as Singapore: Northeast Line and Circle Line: rolling stock and services (450 Metro Cars), Australia (Sydney's first fully automated metro trains, Sydney Light Rail System, signalling systems).

Europe The rail transport industry plays a key role in mobilizing the European economy that will lead to a modern, secure and environmentally friendly transportation. Nevertheless, we believe that Europe, in particular, will experience a 0.8% decrease in its total market due to the lack of room for growth, heavy regulation from EU and more competition from other countries. Other regions are expected to grow up to 50% in total.


From the chart below, European sales from Alstom have decreased constantly and this indicates that they have generated less revenue as more order continues to take place in the Middle East and Asia Pacific region. Figure 5 The European rail industry mainly consists of 3 big companies, Alstom, Siemens and Bombardier. They collectively account for more than 70% of the market share in Europe. Even though the global rail industry is expected to grow, the growth in the European region will not grow to align with the global trend. ALSTOM would expect slight decreases despite some major orders of Coradia Polyvalent Trains in France, 5 Pendolino high-speed trains with associated maintenance for 30 years in Italy, and 25 Coradia Continental regional trains in Germany. Furthermore, statistically speaking, the orders in Europe for Alstom have decreased from 5.1 billion in 2017 to 3.5 billion as of March 2018. Hence, the room to grow is getting smaller in Europe, especially western Europe.

For these reasons, we believe that the main key that will be a game changer for European transport are high-speed trains, travel time and connections. Connecting new high-speed trains to airports and other local modes of transport, with fewer security checks, baggage collection time will have a great impact and improve competitiveness in the European rail transport industry. We would expect that this will drive the European rail industry growth once again.

Alstom has been a major player in the rail transport industry in Europe for the last

30 years. Alstom's line of business mainly comprises of rolling stock, services, and systems. Rolling stock constitutes the biggest segments of the industry with around 43%

01,0002,0003,0004,0005,0006,0007,0008,0009,000

2014 2015 2016 2017 2018

DEMOGRAPHIC BREAKDOWN(in million Euro)

EUROPE AMERICA ASIAPACIFIC MIDDLEEAST/AFRICA


of the total business. However, the sales of rolling stock fluctuate from 2015 to 2018 due to inconsistent order and services available. We would expect that the rolling stock order and sales will decrease over the following years.

One of the major reasons is the law of competition enacted by the EU that will further drive competition towards Europe. The current political and economic uncertainty would be one of the key problems that could cloud our forecasts. On the other hand, the fastest growing market segments are systems and signalling technology. Electrification, rail automation, emission reduction, and digital solutions were among the key aspects that drive the growth of systems and signalling in this region. It is really important to set our goal to align with where the market is going to move. Revenue Division Figure 6 Systems are the best-growing segment which recorded the highest growth rate at 31% overall, followed by signalling technology whereas services have shown a slight decrease. As of 2018, rolling stock accounts for 43% of total business, followed by, systems at 21%, services at 18.5% and signalling 16.5%. Our analysis verdicts that the product sales from the previous years will align with the overall 2019 outlook of the company that states, "Rolling stock will contribute up to 40% of total sales and the rest will account for 60% of total sales." We expect constant growth in the signalling and systems segments for the next couple of years.

2868 3308 3146 3170 3464

683 1015 128616911,264 1,404 1,3821,316

2425 1769 14681480

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2014 2015 2016 2017 2018

PRODUCT BREAKDOWN (m Euro)

Rolling Stock SYSTEM SIGNALLING SERVICES


Global Leader in the Rail Industry

Figure 7

Combination of Alstom and Siemens would make them as the biggest company in the European industry. However, the proposed merger was declined by the EU. The European market is a highly competitive market that further continues to decline in margins. Alstom, Siemens, and Bombardier were the big players in Europe holding more than 20% of the market share. Furthermore, Chinese CRRC, the largest rail industry in the world, has not entered the European market. Given the technological progress and innovation power of both Siemens and Alstom, we believe that these powerhouses will continue to compete and create a more competitive environment that will bring about further growth in this market in the future. There is a high chance that CRCC will make a move towards Europe due to the saturation in the Chinese market due to a decrease in domestic demands.

26.8

15.6

8.1 7.5 6.8

0

5

10

15

20

25

30

CRRC ALSTOM+SIEMENS SIEMENS ALSTOM BOMBARDIER

Leader in Rail Transport


Backlog

Figure 8

Despite high competition across Europe, Alstom has gained 43% of total backlog order valued at 14.73 billion as of March 2018. This flags strong visibility on future sales compared to last year’s 15 billion. Accordingly, this means that Alstom has completed their previous contracts as well as received new orders for an additional revenue source. The overall outlook for rail supply is positive. The European rail industry is expected to increase as it is an important element for future mobility. For the next five years, experts have forecasted a stable annual growth of around 3% until 2021. This is supported by the MEPS that voted for an overall increased budget for transport of EUR 37.8bn.

Innovation (in euro millions) ENDED 2018 ENDED 2017 R&D GROSS COST (278) (248) Funding received 58 51 NET R&D SPENDING (220) (197) Development cost (81) (70) Amortization of cost 49 48 R&D Expenses (188) (175) Figure 9

With the electrification, automation, and reliability to the railway increase in Europe, rail transport companies need to make rail travel more innovative and creative to compete against other modes of transport. In 2018, Alstom has increased its overall budget relative

ASIA PACIFIC14%

EUROPE15%

AMERICAS28%

MIDDLE EAST43%

BACKLOG PER REGION

ASIA PACIFIC EUROPE AMERICA MIDDLE EAST


to 2017, with development in the Avelia range (a high-speed train) with 750 seats and a 35% decrease in energy consumption. Furthermore, they are well en route to developing zero carbon emission trains, which are Coradia stream regional trains associated with reversible power supply stations.

There is also a big opportunity in the digital systems, which is expected to grow specifically in the sector of cybersecurity with an expected annual growth of 8%. Iconis Security is one of the major achievements of Alstom in securing information and communication flow throughout the system. The group has also developed a Urbalis fluence signalling solution and APS ground level electrification solution for the tram system for the upcoming generation. Despite the verdict of a decline of the European order, they have provided a strong vision for smart mobility. With that being said, Alstom will definitely continue to grow and prosper throughout the year, especially in the Asia-Pacific region where demands have soared.

Americas In the USA, Alstom's revenue increased (2016/17 to 2017/18) to EUR 15bn, which is 2% greater than that of the preceding years. The revenue accounted for 19% of the total revenue. The factors that resulted in the increase were rolling stock contracts with Amtrak high-speed trains in the USA (EUR 1.8bn), light rail vehicles for Ottawa and supply of bogies for Montreal Metro in Canada. Rolling stocks witnessed a 9% growth.

Some of the major orders won by Alstom included Los Angeles LRV P2000 light rail fleet modernization of Green, Blue and Expo lines, and a traction system for New York metro. The decrease in revenue between 2016/17 and 2017/18 was because the former included a contract signed with Amtrak for the delivery of a new generation and more sophisticated high-speed trains with a 15 years maintenance bundle which had a significant impact on the revenue.


Figure 10 The above graph shows CAGR growth expected in specific product lines and services offered in the industry for 2019 to 2021. Alstom also benefited in cost-minimization due to rationalization and competitiveness schemes, particularly in the USA, UK, and Brazil, which amounted to approximately EUR 47mn. The effective tax rate fell from 33% to 25% for the same period last year- this reduction was the result of a favorable tax environment in France and the USA.

Country Project

Canada Surrey Light Rail System

USA Northeast Corridor

California HS Rail

Mexico Mexico City Metro System Figure 11 Some of the major projects in NAFTA include the above mentioned.


According to the report by Grand View Research, Inc. the global railroads market has the potential of reaching USD 829.3bn by 2025. Simultaneously, an increase in demand for freight rail and increasing investments for the expansion of lines will result in a 5.7% CAGR in the future. Specifically, to the USA market, AAR (Association of American Railroads) says the USA freight rail industry has substantial and efficient networks globally. The private investment for railroads maintenance, modernization, and advancement of rail tracks amounts to approximately USD 25bn.

Middle-East and Africa The Middle-East and African demographic represents one of the world's most rapidly developing markets for railway manufacturing and solutions providers. This is evident from it having the second highest CAGR of 3.02% for the forecast period of 2019 to 2021 in comparison to other similar regions. With an average estimated market size of around EUR 8.7bn (EUR) p.a., this market has seen large increases in its recent history with high rolling stock and system-based cumulative sales driving growth with almost 63% of the market share.

Figure 12

42%

24%

13%

21%

Middle East & Africa Railway Manufacturing Market Breakdown

Rolling Stock Services

Signalling and Control Infrastructure and Systems


This has been made possible by two main regional factors: 1) Oil & resource-rich Middle Eastern nations boosting spending on building or expanding

their own consumer mass transport and mobility systems. 2) Major population increases in Arab and African countries resulting in increased

pressure on governments to build and expand mass transportation systems and increased pressure on Arab leaders to keep populations content in the midst of the "Arab Spring".

Figure 13

Some Notable projects that have spurred growth in the Middle East include but are not limited to:

Figure 14

-2.00%-1.00%0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%

- 0.50000 1.00000 1.50000

2.00000 2.50000 3.00000 3.50000 4.00000

Rolling Stock Services Signalling andControl

Infrastructureand Systems

Middle East & Africa railway manufacturing Product Revenues & Predicted CAGR (%)

EUR (Billions) (CAGR)


Contrarily for the forecast period of 2019 to 2021, there is a slowdown expected in the short run in rolling stock train orders due to market saturation, with the focus shifting to existing order completion and a heightened focus on signalling, services, and systems representing the high expected CAGR’s of (3.3%), (5.3%) and (6.1%) respectively as seen in the chart above. With the development of service solutions of Turn Key management provision and long-term maintenance contracts, industry veterans are moving to secure longer timeline-based maintenance contracts to secure regional relationships and develop newer and more consistent revenue-generating assets. This is evident from the market behavior of Alstom, Accocia and Siemens Mobility all competing to secure long-term maintenance contracts.

Figure 15 Some Notable mentions include:

1) The 13-year maintenance contract for the Dubai Tram 2) The long-term servicing contract for the maintenance for the Doha Metro

Within this major regional market, Alstom represents a major portion of market share by being amongst the Top 3 in the market. Furthermore, its total sales composition coming from this region has consistently been rising from 14.6% in 2014/2015 to 17.44% in 2015/2016 and then 19.18% in 2016/2017 only to fall slightly to 16.25% in 2017/2018.

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9

2014-2015 2015-2016 2016-2017 2017-2018

Alstom Middle East Sales Global Sales

Middle East and Africa Revenue Global Revenue


Figure 16 Orders have seen a similarly growing upwards trend for Alstom as seen by its percentage of orders from the Middle East and Africa out its total orders rising from 10.30% in (2015/2016) to 15.30% in (2017/2018). The skewed (2014/2015) percentage is a result of Alstom landing huge orders in the Middle East valued at EUR 5.2bn to be realized over the next 4 to 8 years. With industry pundits predicting growth in signalling services and systems, the overall sales outlook for Alstom seems promising given the fact that the KSA metro and the Doha Metro near phases that open bidding for long term maintenance contracts. As Alston set the precedent in securing the 13-year maintenance deal for the prestigious Dubai Tram, coupled with its industry relationships, it is placed in a good position for securing these new bids. Iran and Israel are also scheduled to start bidding for their own planned metro systems, but the geographic and political instability place their importance and realistic execution much harder to predict. Qatar's diplomatic upheaval with the rest of the Gulf states, primarily the Kingdom of Saudi Arabia, also proves to hamper logistical movements in and out of Qatar with its land embargo, and so places its upcoming rail projects under a microscope for future feasibility.

0.00%

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60.00%

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6

2014-2015 2015-2016 2016-2017 2017-2018

Alstom Middle East Order Value & The Percentage it makes up of its Global Orders

In (EUR) billion

Percentage % make up of Orders from the Middle East and Africa


Valuation Our DCF valuation of Alstom gives us an implied share price of EUR 40.34. The forecast is for a 5-year period ranging from 2019-2024. The revenue forecasts are driven by strong projections and possible projects in the Indian cities and well as the Middle-Eastern market. We have applied a WACC % of 6.2% and a terminal growth rate of 2% which remains constant. The change in working capital is also forecasted on the basis of revenue growth. The long-term valuation leads to an EBIT margin of 4%. Currently, Alstom is trading at € 37.62. the 52-week range is from €33.40 - €41.52.

Figure 17 Figure 18 The global rail transport market posted another solid year in 2018 with estimated market value up to 183 billion, and the market is expected to grow as much as 5% over the next 5 years. The trends of urbanization and modernization are expected to support the growth.

Alstom Discounted Cash Flow Valuation SummaryAmt in mill and € 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

Revenue 5,726 6,163 6,881 7,306 7,951 8,249 8,559 8,879 9,212 9,558 9,916

Earnings Before Interest and Taxes EBIT 162 (603) (226) 358 381 284 292 300 305 310 315

EBIT margin 3% -10% -3% 5% 5% 3% 3% 3% 3% 3% 3%

Depreciation 565 311 470 157 161 201 256 306 356 403 452

Capital Expenditure (811) (756) (514) (220) (283) (250) (250) (250) (250) (250) (250)

Change in Working Capital (302) 726 (1,800) 104 (33) (337) (350) (363) (376) (390) (405)

Free cash flows to the firm (FCFF) (292) (314) (2,667) 323 153 (173) (124) (82) (42) (5) 33

Discount Factor 0.99 0.94 0.88 0.83 0.78 0.74

Alstom Discounted Cash Flow Valuation SummaryFrance 10-year Government Bond 0.53%CAPM Cost Of Equity 7.1%Tax rate 25.0%After Tax Cost Of Debt 2.8%WACC 6.2%Perpetual growth of firm cash flows (post year 5) 2.00%

Enterprise Value 220

Net Debt 8,857

Equity Value (Market Cap) 9,077

Diluted Shares outstanding 225

Fair Value Share Price 40.34€


Siemens–Alstom Merger

The merger proposal between the French and the German companies planned to create a European rail champion with revenues of about EUR 15bn (USD 17bn).

§ EU commissioner for competition policy said the merger would result in higher

prices for the signalling systems that keep passengers safe and for the next generations of high-speed trains.

§ The EU's competition authority specified that the proposed merger would have

created an "undisputed" market leader in several mainline signalling markets, as well as reducing the number of suppliers by removing one of the two largest manufacturers of very high-speed rolling stock.

§ "No Chinese supplier has ever participated in a signalling tender in Europe or

delivered a single very high-speed train outside China. And there is no prospect of Chinese entry into the European market in the foreseeable future," said EU Commissioner Margrethe Vestager.

§ The two companies are looking to the deal to stave off the competitive threat from

bigger Chinese rival CRRC (China Railway Rolling Stock Corporation) and Canada’s Bombardier Transportation.

§ Siemens Alstom, as the combined company was to be called, would have had about

62,000 employees and become the second-largest maker of rail cars and locomotives after China’s CRRC Corp.

§ Earnings before interest and tax of EUR 1.2bn.

§ Siemens will own 50 percent plus a few shares of the joint venture, to be called

Siemens Alstom, while Alstom will supply Henri Poupart-Lafarge as chief executive, helping to counter criticism that France is giving up control of another national industrial icon.

§ Siemens will receive newly issued shares in the combined company representing 50 percent of Alstom's share capital and warrants allowing it eventually to acquire another 2 percent of Alstom shares.

§ However, the deal prevents Siemens from owning more than 50.5 percent of Alstom for four years after closing and includes "certain governance and organizational and employment protections", Siemens and Alstom said in their statement.


§ The global headquarters, rolling stock business, and the stock-market listing of the new entity will be in Paris and the signalling and technology business in Berlin.

§ The new company, with 62,300 employees, targets synergies of EUR 470mn over four years at the latest after the closing of the deal, which was expected to go through at the end of 2018.

§ Alstom presents growth markets in the Middle East and Africa, India, and Central and South America, while Siemens was strong in China, the United States, and Russia.

§ In total, the new entity will have 62,300 employees in over 60 countries.

§ As part of the combination, Alstom's existing shareholders at the closing of the day preceding the closing date, will receive two special dividends: a control premium of EUR 4 per share (in total EUR 0.9bn) to be paid shortly after closing of the transaction and an extraordinary dividend of up to EUR 4 per share (in total EUR 0.9bn) to be paid out of the proceeds of Alstom's put options for the General Electric joint ventures of approximately EUR 2.5bn, subject to the cash position of Alstom. Siemens will receive warrants allowing it to acquire Alstom shares representing two percentage points of its share capital that can be exercised the earliest four years after closing.

§ Signed Memorandum of Understanding grants exclusivity to combine mobility businesses in a merger of equals.

§ Listing in France and group headquarters in Paris; led by Alstom CEO with 50 percent shares of the new entity owned by Siemens.

§ Business headquarters for Mobility Solutions in Germany and for rolling stock in France.

§ Comprehensive offering and global presence will offer the best value to customers all over the world.

§ Combined company's revenue EUR 15.3bn, with adjusted EBIT of EUR 1.2bn.

§ Annual synergies of EUR 470mn expected latest four years after closing.

§ The new group would be headquartered in the Saint-Ouen suburb of Paris and would continue to be listed on the Paris stock exchange. As part of the transaction, Siemens would receive newly issued shares in the combined company representing 50% of


the share capital of Alstom on a fully diluted basis.

§ "Siemens and Alstom are both champions in the rail industry", explained Commissioner in charge of competition policy Margrethe Vestager when she made the announcement on February 6. "Without sufficient remedies, this merger would have resulted in higher prices for the signalling systems that keep passengers safe and for the next generations of very high-speed trains. The Commission prohibited the merger because the companies were not willing to address our serious competition concerns."

§ The Commission concluded that the merger would create an ‘undisputed' leader in the supply of mainline and urban signalling including ETCS and CBTC, and a ‘dominant' player in the market for trains capable of 300 km/h and above in the European Economic Area and the rest of the world, except for South Korea, Japan, and China ‘which are not open to competition'.

§ The Commission said it had ‘carefully considered' future competition from China. It found Chinese suppliers were currently not present in the EEA signalling market and had 'not even tried to participate'. It would take a 'very long time' before Chinese companies could become credible suppliers. In the high-speed train market, the Commission felt it was ‘highly unlikely' that a Chinese supplier would ‘represent a competitive constraint on the merging parties in the foreseeable future.

A European Champion in Mobility A merger is an essential business practice globally. Amidst the intense competition, sometimes companies adopt a strategy to merge with another firm with an aim to penetrate the market, restrict potential entrants, boost up the market share, and even to achieve the object of profit maximization. Likewise, two European rail giants, Alstom and Siemens Mobility, inked an MoU and then an agreement to merge themselves. This deal would be revolutionary in the rail industry as this will raise their revenue to USD 17bn, and EBIT to USD1.36bn. Similarly, another merit of the proposed deal was that Siemens would receive 50% share capital in the combined company. The total number of employees in the new venture in around 60 countries is also promising.

Accordingly, they believed that they are creating a new European champion in the rail industry for the long-term, which gives customers around the world a more innovative and more competitive portfolio. However, earlier in February 2019, the European Union Commission in charge of competition policy conducted an in-depth investigation and prohibited the merger because the companies were not willing to address the commission's serious competition concerns. They concluded that the merger would create an ‘undisputed'


leader in the supply of mainline and urban signalling and a ‘dominant' player in the market. They further added that they had thoroughly considered future competition from China and in their perspective, it would take a long time for Chinese companies to strengthen their roots in the high-speed train market and become credible suppliers. Thus, the merger compromises the competitiveness of the European rail market.

Investment Risks The assumptions are deemed reasonable as of the date of the present document and could change and evolve due to significant risk and uncertainties, especially regarding external factors which are not known at this stage such as future general industry conditions and competition, technological advances, future market conditions, sourcing difficulties, financial instability, and sovereign risk and exposure to regulatory action or litigation. Alstom is exposed to volatility risk in currency and interest rate, to credit risk and liquidity risk which could affect potential investment. Investment principal on shares can be eroded depending on the sale price or market price. Care is required when investing in such instruments. Alstom has various competitors in the railway industry acting globally or locally and covering part of or the entire portfolio. There is growing concern regarding competition from the Asian regions, especially from China. The Siemens-Alstom merger was proposed to counter the Chinese penetration into the European market, but it failed. If a Chinese competitor can enter the European market, it would have an adverse impact on its business activities, financial position, results or future outlook. Alstom's operations lead to the risk of litigation and contractual claims from third parties, and the group faces on-going investigations and procedures by judicial authorities with respect to alleged illegal payments in certain countries. Contract disputes or claims for liquidated damages against Alstom could have a significant impact on future cash flows. In some instances, Alstom is jointly liable for any underperformance of a subcontractor. It is not a guarantee that an audit conducted in accordance with professional standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken based on these consolidated financial statements


Appendix

Figure 19

Figure 2

Alstom Cash Flow Statement for Years Ending 31st MarchAmt in mill and € 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

Funds From Operating Activities

Net income (loss) 566 (683) 3,011 303 485 261 301 379 310 314 317

Depreciation of PP&E 565 311 470 157 161 201 256 306 356 403 452

Stock-based compensation and tax benefits - - 8 10 18 - - - - - -

Deferred taxes (162) 77 350 (24) (52) - - - - - -

Cost of foreign hedging 8 183 1 5 - - - - - -

Post employment benefits (17) 25 (3) 2 19 - - - - - -

Net (gain)/loss from disposal of assets (23) (242) (4,372) (77) 2 - - - - - -

Share of net income of equity-accounted investments (6) 109 (5) (75) (197) - - - - - -

Change in working capital (302) 726 (1,800) 104 (33) (337) (411) (503) (617) (760) (938)

Cash Flow from Operating Activities 621 331 (2,158) 401 408 125 146 182 49 (43) (168)

Funds From Investing Activities

Disposal in Fixed & Intangibles assets 33 22 58 1 3 - - - - - -

Capital Expenditure (including R&D capitalized costs) (811) (756) (514) (220) (283) (250) (250) (250) (250) (250) (250)

Disposal of Business, net of cash sold 17 623 10,854 (93) (80) 2,383 - - - - -

Acquisition of business, net of cash required (116) (50) (1,994) (78) (4) - - - - - -

Increase (Decrease) in other non-current assets (2) (52) 23 43 21 - - - - - -

Cash Flow from Investing Activities (879) (213) 8,427 (347) (343) 2,133 (250) (250) (250) (250) (250)

Funds From Financing Activities

Capital increase/(decrease) including non current assets 35 15 (3,208) 12 47

Changes in other current financial assets 15 7 3 (10) - - - - - - -

Issuance of long-term debt 500 - - - - - - - - - -

Repayment of bonds and notes issued (26) (780) (1,875) (453) (272) (378) (294) (650)

Change in current and non current borrowings 332 471 (688) 33 7 - - - - - -

Changes in obligation under finance lease (38) (39) (46) (45) (27) - - - - - -

Dividends paid (267) (10) (12) (11) (60) (58) (58) (58) (58) (58) (58)

Cash Flow from Financing Activities 551 (336) (5,826) (474) (305) (436) (352) (708) (58) (58) (58)

Alstom Income Statement for Years Ending 31st MarchAmt in mill and € 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

Revenue 5,726 6,163 6,881 7,306 7,951 8,249 8,559 8,879 9,212 9,558 9,916

COGS (4,804) (5,195) (5,814) (6,171) (6,686) (6,929) (7,189) (7,459) (7,738) (8,029) (8,330)

Selling Expenses (204) (199) (191) (187) (204) (212) (220) (229) (240) (251) (262)

Administrative Expenses (328) (297) (345) (352) (359) (372) (387) (404) (422) (441) (461)

Research & Development (122) (136) (165) (175) (188) (287) (298) (309) (321) (333) (345)

Other Income/Expenes (106) (939) (592) (63) (133) (165) (172) (179) (187) (195) (204)

Earnings Before Interest and Taxes EBIT 162 (603) (226) 358 381 284 292 300 305 310 315

Financial Income 64 109 73 11 7 - - - - - -

Financial Expense (223) (246) (348) (138) (98) (77) (44) (44) (44) (44) (44)

Pre-tax Income 3 (740) (501) 231 290 207 249 256 261 266 271

Income Tax Charge 94 8 (597) (76) (73) (71) (73) (75) (76) (77) (79)

Share in Net income of equity accounted investments 70 (64) 30 82 216 73 73 146 73 73 73

Net profit from Continuing Operations 167 (796) (1,068) 237 433 209 249 327 258 262 265

Net profit from Discontinued Operations 399 113 4,079 66 52 52 52 52 52 52 52

Net Profit 566 (683) 3,011 303 485 261 301 379 310 314 317


Figure 21

Alstom Cash Flow Statement for Years Ending 31st MarchAmt in mill and € 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E

Assets

Current Assets

Inventories 2,977 821 834 916 1,146 1,433 1,791 2,238 2,798 3,497 4,372

Construction contracts in progress, assets 3,967 2,554 2,356 2,834 2,675 2,675 2,675 2,675 2,675 2,675 2,675

Trade receivables 4,483 1,470 1,613 1,693 1,589 1,653 1,719 1,787 1,859 1,933 2,011

Other current operating assets 3,203 1,957 1,118 1,365 1,328 1,328 1,328 1,328 1,328 1,328 1,328

Market securities and other financial assets 18 61 22 8 8 8 8 8 8 8 8

Cash and cash equivalents 2,320 1,599 1,961 1,563 1,231 3,053 2,597 1,811 1,552 1,201 725

Assets held for sale 293 21,415 41 10 2,390 - - - - - -

Total Current Assets 17,261 29,877 7,945 8,389 10,367 10,149 10,118 9,848 10,220 10,642 11,118

Goodwill 5,281 688 1,366 1,513 1,422 1,422 1,422 1,422 1,422 1,422 1,422

Intangible asset 2,054 444 387 395 410 410 410 410 410 410 410

Property, plant, equipment 3,032 656 655 749 831 880 874 818 712 559 357

Investment in associates and JVs 620 327 2,588 2,755 533 533 533 533 533 533 533

Non-consolidated Investments - 36 38 55 58 58 58 58 58 58 58

Other non-current assets 533 473 401 316 277 277 277 277 277 277 277

Deferred taxes 1,647 732 242 189 224 224 224 224 224 224 224

Total Assets 30,428 33,233 13,622 14,361 14,122 13,953 13,916 13,590 13,856 14,125 14,399

Liabilities & Shareholders Equity

Current provisions 1,191 1,031 208 250 313 313 313 313 313 313 313

Current borrowings 1,267 1,947 639 416 525 147 147 147 147 147 147

Current obligations under finance leases 47 51 47 28 18 18 18 18 18 18 18

Construction contracts in progress, liabilities 8,458 3,455 3,659 4,486 4,147 4,147 4,147 4,147 4,147 4,147 4,147

Trade payables 3,886 917 1,133 1,029 1,346 1,359 1,373 1,387 1,401 1,415 1,429

Other current operating liabilities 3,671 2,492 1,481 1,674 1,555 1,555 1,555 1,495 1,495 1,495 1,495

Current Liabilities 18,520 9,893 7,167 7,883 7,904 7,539 7,553 7,507 7,521 7,535 7,549

Non-current provisions 710 283 655 614 530 530 530 530 530 530 530

Accrued pension and other employee benefits 1,526 461 487 526 468 468 468 468 468 468 468

Non-current borrowings 4,009 2,847 1,538 1,362 952 952 658 58 58 58 58

Non-current obligations under finance leases 398 341 280 233 212 212 212 212 212 212 212

Deferred taxes 176 11 52 23 22 22 22 22 22 22 22

Total Liabilities 25,339 13,836 10,179 10,641 10,088 9,723 9,443 8,797 8,811 8,825 8,839

Liabilities held for sale - 15,173 115 7 7 - - - - -

Equity attributable to the equity holders of the parent 5,004 4,134 3,279 3,661 3,966 4,166 4,405 4,721 4,969 5,220 5,476

Non controlling interests 85 90 49 52 61 64 68 73 76 80 84

Total Shareholders' Equity 5,089 4,224 3,328 3,713 4,027 4,230 4,472 4,793 5,045 5,301 5,560

Total Liabilities & Shareholders Equity 30,428 33,233 13,622 14,361 14,122 13,953 13,916 13,590 13,856 14,125 14,399


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