Initiate coverage with a BUY rating at fair value estimate of S$0.63. We believe that the rail industry in the PRC has yet to reach its maturity and the Group is still poise to benefit from the Chinese Government‘s commitment and plans to further develop PRC’s rail industry in the coming years.
The PRC Stimulus Plan. The Chinese Government’s US$ 586 billion economic stimulus plan is to cover ten (10) areas, including low-income housing, electricity, water, rural infrastructure and projects aimed at environmental protection and technological innovation. According to the Chinese Government, main bulk of the spending would be channeled into infrastructure developments and approximately RMB 1.70 trillion of it will be spent on rail projects, which excludes the injection of approximately RMB 400 billion of investment into the development of PRC’s underground and light rail in the mega cities.
Strong exposure to rail transport development in PRC. The Group has been able to not only reap benefits from the rail transport developments in PRC through their Aluminium Alloy Division, but also reap profits from the construction of metro trains through their Sino-foreign joint venture, NPRT. On 4 July 2008, NPRT expanded downstream into train car repair and maintenance through their joint venture with Nanjing Metro Industrial Group Co. Limited.
Declining raw material costs. The prices of aluminium and crude oil have declined substantially since their highs in 2008. Hence, we believe that the Group will be able to better manage their margins as compared to 2008.
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