中鐵建 (CRCC) vs 中鐵 (CRE) from citibank report

* Market appears to be positive on China's railway sector development and even
the most conservative investors agreed on the favorable macro outlook in the
next 3 years.

* China Railway (CRE) is the direct comparable to CRCC given their similarity in
business, scale, margin and growth profile. They are treated as "twin
brothers" under Ministry of Railway (MOR) and evenly share almost all of the
railway construction market in China.

* However, CRCC's PLA background looks to differentiate from CRE. After the
management roadshow, most investors believed CRCC's management is better than
CRE's in terms of execution capability, transparency, quality and vision.

* Both CRCC and CRE are typical SOEs under MOR, which is one of the least open
and most bureaucratic ministries in China. Also both listcos are products of
one time restructuring. From capital market perspective, management capability
is the key to differentiate whether the listcos can deliver growth, margin
expansion and return commitment on ongoing basis. It appears that CRCC is
perceived by the market as most likely to be able to deliver.

* Despite similar top-line and margin on domestic railway construction business
as compared to CRE, CRCC demonstrated better project management, execution
capability and technical skills as witnessed by its dominance in complex and
high profile projects like Qinghai-Tibet railway, Daqin railway and
Beijing-Shanghai Highspeed Railway...

* On like-for-like comparison, CRCC has better profit margin than CRE in the
core domestic railway construction business, indicating its relatively higher
operating efficiency and better cost control...

* CRCC's distinctive advantages in overseas business also presents higher
growth potential on fatter margins with more defensive nature to weather any
potential slowdown in the domestic market.

* On balance sheet, CRCC is in much better financial position than CRE given its
net cash position as compared to CRE's more than 200% gearing...

* At 28.7x 2008E P/E on high end of the price range, CRCC still offers over 27%
discount to CRE's valuation. Meantime, various technical factors may drive
the aftermarket performance of CRCC. I will not be surprised to see tens of
call warrants and other structure products (accumulators) to trigger hedging
buy into the shares. Potenial inclusion of key indices like HSCEI and MSCI
will also drive passive investors to chase the stock in secondary trading.

* On CRE, high valuation is partly driven by its scarcity premium given its
unique position to represent the railway sector in China. Following its
"twin-brother" CRCC listing, I would expect this scarcity premium to
narrow gradually. Meantime, CRE's A-share will see lock-up of 1,403mn non-tradable
shares to expire today...technically I would see more downside on CRE.

* Conclusion: CRCC's better management quality and execution capability may
sustain its premium to CRE over the long term. For long funds, I would suggest
a switching from CRE to CRCC and for hedge funds, long CRCC, short CRE.