CRCC and CRG’s net profit in 1Q16 rose 12%/10%, in line with forecasts

　　CRG’s 1Q16 net profit came in at Rmb2,274m, up 10% yoy and accounting for17%/18% of our and the market’s full-year forecasts. CRCC realized net profitof Rmb2,572m, up 12% yoy and representing 19% of both DBe andconsensus. Both companies’ results are largely in line with expectations.

　　Flat top lines missed; margins rose slightly

　　In 1Q16, both CRG and CRCC recorded stable revenue of Rmb124bn andRmb116bn, missing expectations. CRG attributed this to: 1) voluntary businesscontraction in logistics and trading (Rmb3bn sales cut from 1Q15); 2) inactiverevenue recognition of subsidiaries due to potential downside from VAT reformin 2H16; and 3) construction halt of a BT project in Chongqing. Blended GPMsof CRG/CRCC improved slightly to 8.2%/8.1% but were below our estimates.

　　Thanks to doubled non-operating income, CRG’s NPM rose by 0.1ppt to 1.8%(vs. DBe of 2.1%). CRCC recorded in-line 0.2ppt net margin expansion, sincethe 39% drop in interest expenses (on more capitalized interest and lowerfinancing cost) and lower-than-expected asset impairment loss fully offsetlower net non-operating income.

　　1Q16 orders mainly driven by rail business; strong momentum may continue

　　CRG and CRCC recorded 21% and 16% yoy growth in 1Q16 new contracts toRmb189bn and Rmb179bn, respectively. Strong railway order growthindicated an active railway bidding market in 1Q16 (+93%/+46% yoy forCRG/CRCC). We believe this was mainly due to concentrated railway projectstarts in 4Q15 that started the bidding process early this year. Meanwhile, newproperty development orders benefited from the favorable market situation,and the logistics and trading businesses also witnessed rebounds for bothcompanies. CRG achieved new orders for PPP projects of Rmb65bn in 1Q16(vs. full-year target of Rmb150bn). During CRG’s results teleconference,management indicated continued solid new order growth in April, in line withCCC’s comments. We believe strong momentum may continue on: 1) moreassured funding support (distribution of Rmb1trn special construction fund in1H16 vs. nil in 1H15); 2) better local government fiscal situation (acceleratedissuance of local government replacement bonds and higher revenue fromland sales); and 3) acceleration of promotion of PPP projects.

　　Relatively stable cash flow and balance sheet

　　In 1Q16, CRCC saw net operating cash outflow expansion to Rmb10.9bn (vs. -Rmb1.8bn in 1Q15), while CRG’s OCF declined to -Rmb2.4bn from -Rmb4.6bnin 1Q15. Both have deleveraged from the end-March 2015 level, but CRCC wasmore aggressive in fundraising during 1Q16 (21ppt rise in net gearing ratio vs.

　　4ppt for CRG).

　　Buy CRCC and Hold CRG on valuation grounds; CCC is top pick

　　We prefer CRCC to CRG on valuation grounds. CCC is our top pick, given itsattractive valuation (2016E PE: 7x, 15%/22% discount to CRCC/CRG) andexcellent risk management. Key risks mainly related to government spending.