Hollysys Automation Technologies Ltd:More positive news;rais
A potential source of positive surprise in the coming years, in our view
Full-year procurement may well exceed expectations; Buy
1) Stronger-than-expected IA demand: China's overall IA demand, despitetougher comps, further accelerated to 17% YoY in 4Q17 (vs. 15% YoY in 3Q and11-12% in 1H), pointing to potential upside for HOLI's PA segment.
We have highlighted upside potential from the new 160km/h push-pull trainmodel (a new member of the CEMU family) after our field trip to China in October(see our trip takeaways). Recent newsflow and our conversations with industryparticipants suggest the progress is ahead of expectation and the upside potentialmay be bigger than our expectation. We estimate a full replacement of the 25Tmodel (with this new push-pull model) will require a total investment of Rmb50bn over a period as short as five years, yielding meaningful upside potential to bothCRRC and Zhuzhou CRRC. We reiterate Buy on both stocks with Zhuzhou beingour preferred pick.
Over the weekend, CRC posted the tender for 75sets of China Standard EMUs(350km/h), which together with the upcoming tender of 104standard sets of350km/h CEMUs (reported by Caixin and confirmed by CRRC), would bring thisyear's total EMU procurement to 427standard sets (see Figure 1). This wouldwell exceed the 350-400standard sets guided by CRRC for this year. After amuted 2016, EMU procurement now finally returns back to 400 sets level. Theaccelerating EMU procurement also reinforces our bullish view on the sector'smulti-year recovery towards 2020. We reiterate Buy on Zhuzhou CRRC and CRRCH.Better-than-expected EMU procurement may also bring upside potential toHollysys' train-borne rail signaling business (i.e. ATP). Within China's broad railequipment space, Zhuzhou CRRC and Hollysys are our top picks.
2) Encouraging progress in FA: Leveraging on HOLI's superior data acquisition/integration capabilities and accumulated database/experience for variousverticals, we expect HOLI to launch a monetizable flagship product soon.
What is this 160km/h push-pull train model?
3) Positive mix change in EMU procurement: We expect EMU deliveries this yearto be largely for the 350km/h CEMU model. ATP pricing for this model is 2x thatof the 250km/h model, which accounted for almost all the EMUs procured anddelivered in HOLI's FY17.
A push-pull train has locomotives at both ends so there is always one locomotivepushing and one locomotive pulling, with one designed as a powered car(propulsive unit) and the other an unpowered control car. According to local mediaCaixin, the first batch of trains (produced by CRRC) already sent to Chongqingfor trial run is a 7-carriage model that has one powered locomotive and oneunpowered control locomotive, and will likely be the standard configuration forsuch model. The 160km/h push-pull model is reportedly deployed to replace oldtrain models (i.e. 25T and 25G) that are currently running on ordinary-speedrailway lines.
Our FY18 earnings forecast of USD110 (non-GAAP NP) is already at the highend of management's guidance and tops the Street, but given the above positivedevelopments, we see further upside potential. Along with the FA breakthroughand considering the better outlook for FA (vs. PA), we expect HOLI's valuationdiscount to global IA peers to narrow. We raise our TP to USD30.
美高梅集团， Possible reasons for CRC launching this train model
One apparent benefit of deploying this model is efficiency improvement. Unlikethe existing old models, the propulsive locomotive does not need to be removedfrom the train at termini because the push-pull train can be driven from eachend. It is an intermediate step between normal locomotive-hauled operation andfull multiple-unit operation, which is a cost-effective way for CRC to improveoperational efficiency. Moreover, our recent checks with industry participantssuggest that the launch of this model could be an important part of CRC's biggerplan to hike passenger tariffs for ordinary-speed railway lines - by offering betterride quality through new fleet, CRC now has one more reason to raise tariffs, apartfrom the fact that passenger tariffs have been kept unchanged for more than 20years in China. This also explains why CRC has prioritized the development of thismodel immediately after the successful launch of its 350km/h CEMU model.