As we are raising our PT to Rmb12.73 based on higher earningsestimates. The new PT implies 30% upside from the currentshare price.

Upside potential from passenger trains: Although passenger trains contributedonly 12% of DQR’s revenue in 2016, we think a meaningful price hike would stillbe positive for the bottom line. Our base-case assumption of 10% price hikes forregular train tickets for 2018-19 is consistent with that for GSR, which can benefitmore with ~26% revenue exposure to long-distance train services. We see evenstronger earnings upside of 6% in 2018 for DQR in our bull-case scenario byassuming 30% price increases in passenger train tickets.

Cargo demand to remain stable: After the significant 21% rebound in traffic in2017, we are conservatively estimating 2-3% volume growth in 2018-19. Given the15% pricing flexibility granted by the government, we are assuming only a minor2% increase in ASP for coal transportation in 2018.

Benefits from industry reform: Following a slew of reform initiatives since 2H17,we believe China’s railway industry reform process will accelerate in 2018. As oneof the two public railway operators in China, DQR should benefit from furtherpricing reforms in both passenger and cargo services. Moreover, it is likely to seea higher dividend payout ratio as required for other major SOEs (e.g., Shenhua,Shanghai Auto).

Raising earnings and PT: We have fine-tuned our model by factoring in 2017traffic performance and the potential 10% price hike in passenger train services in2018-19, We have raised our earnings forecasts by 9% and 12% 2018 and 2019,respectively, 6% and 12% above consensus estimates. We are also raising ourDCF-based PT to Rmb12.73, implying 30% upside potential.

Valuation: The shares are trading at 9.8x 2018e P/E, significantly below US peers(19.2x 2018e P/E) and its historical mean (14.7x P/E ), making the valuationattractive.

Key risks: 1) Delay or failure in ticket price hikes; 2) demand weakness led bymacro headwinds; 2) a significant shift toward new energies; and 3) higher-thanexpectedvolume diversion.

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