VAYUE.com

Update. The FY12/08A results is in line with market consensus. Sales increased 113.6% YoY to RMB861.7m with net profit up 49.3% YoY to RMB149.2m. The gross margin dropped 4.1 pcp YoY to 39.0% while the net margin was down 7.5 pcp YoY to 17.3%. The margin drop was mainly affected by: 1) increase in stock based compensation expenses (RMB20.3m vs FY12/07A: RMB3.4m), 2) amortization costs arising from its BJM acquisition, 3) higher effective tax rate (11.3% vs FY12/07A: nil) and 4) margin drop in its Petrochemical and Engineering and Maintenance Services segments. Sales in Petrochemical sector increased 37.8% YoY to RMB389.5m with a gross margin drop of 3.6 pcp YoY to 40.3%; and engineering and maintenance services income increased 85.2% YoY to RMB67.4m with a gross margin drop of 3.9 pcp YoY to 70.6%. The acquisition of BJM in 2008 contributed around RMB230m revenue and RMB50m-60m net profit, which led to a significant growth of sales in railway sector. The system sales in railway sector increased 458.2% YoY to RMB284.7m with net profit margin increase of 0.3 pcp YoY to 41.0%; and sales of railway rolling stock equipment increased 259.6% YoY to RMB120.1m with a gross margin up 7.2 pcp YoY to 15.2%. The company will keep a dividend payout of 20%+ going forward.

Outlook. The management guided that they currently have RMB980m order on hand and expect to secure RMB1,300m for 2009 with 60% order from railway sector. In 2009, the company would tap into the upstream petrochemical pipeline safety control business and take further M&A focusing on urban railway related company. The management guided a 30%+ growth for the bottom line for FY12/09F.

View and valuation. CAG is an interesting play in our view. The company’s products have exposure in the railway and petrochemical sectors, some of the fastest and arguably most defensive sectors currently. The guidance of 30%+ bottom line growth for FY12/09F is reasonable in our view given that the company’s railway interlocking system products are typically installed towards the back end of the construction cycle. We expect the company’s breakout year to be in FY12/10F when more of the company’s railway products would be installed on the railway projects currently under construction and it gains some traction in the petrochemical pipeline segment. The counter is currently trading at 8.9x FY12/09F and 6.8x FY12/10F P/E based on market consensus. Niche plays have rallied recently and we think that this could be a laggard given its sector positioning. We have a Trading BUY call on the counter though we would suggest investors to observe how the counter opens trade today. We think that the company’s margin drop may spook investors and the stock may open lower, potentially giving investors a better entry point.