Citi On Global Railway Equipment And Bombardier

May 4, 2015

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Citi analysts Paul Gong and Stephen Trent commented on Chinese train makers possibly seeking a controlling interest in Bombardier, Inc. (TSE: BBD.B).

According to a recent Reuters report, a deal with Csr Corp Ltd (HKG: 1766) / China CNR Corp Ltd (HKG: 6199) could result in political opposition in Canada, however, the analysts thought that “if it eventually happens, it should be positive for rolling-stock industry margins due to reduced competition.”

Gong noted the industry has undergone consolidation for the past 30 years with only a handful of key players remaining.

“Despite the broad consolidation trend, we see many barriers to such a deal concluding, including political opposition in Canada, and competing bids from other train makers in Germany, France and Japan. Previously, Chinese companies have considered a few acquisitions in Europe including a UK signaling company and an Italian company, but eventually strong competition from European and Japanese companies stopped those from happening,” the analysts wrote.

If, however, CSR/CNR took a stake in Bombardier, it would reduce CSR/CNR’s P/E multiple by approximately 10 percent to approximately 21x level, if done solely in cash, according to the analysts.

With Bombardier trading at 9x 2015E P/E, compared to 23x for CSR/CNR H-shares and 61x for the A-shares, a deal may help release some enterprise value for Bombardier “since it’s trading at a discount to capital goods peers,” Gong noted.

The Chinese train manufacturers might also “gain improved access to the European market for their high-speed trains, something which Japanese train makers sought for decades before they finally penetrated the UK market,” while Bombardier might gain access for selling metro signaling systems in China.

Gong felt that shares of CSR/CNR, ahead of the completion of their merger, were overvalued and concluded that “it’s still not worth [it] to own CSR/CNR, though the potential Bombardier acquisition represents an upside risk.”

Bombardier recently traded at $2.41, down 0.82 percent.