Won the second phase of Beijing Rail Transit Command Center project. We visited the management of China Urban Rail Transit (Zhongcheng Rail) to understand the company's performance in the first half of fiscal year 13 (the end of June) and the company's development prospects. The company won the second phase of the Beijing Rail Transit Command Center project contract, worth 1. 5%. 1.3 billion yuan. According to the management, the project consists of two parts: software application and hardware construction, which account for about 60% and 40% of the contract value respectively. 70% of the revenue from the system's hardware projects was recognized in the first half of FY13. We expect all software application revenue and remaining hardware project revenue to be recognized in the second half of FY13 and the first half of FY14. The project will significantly improve the system design and implementation branch sales of China Urban Rail.
System maintenance services to provide recurrent sources of income. The second phase of the Beijing Rail Transit Command Center project will generate regular maintenance income after the completion of the systematic integration. Taking into account this project, the management expects the total annual system maintenance revenue to reach 60 million yuan. Growing sales of system maintenance services will provide sustained cash inflows and make companies less vulnerable to economic cycles.
The product portfolio of the hardware sales industry is facing changes. In FY12, most of the revenue from hardware sales comes from card reader sales on a total of eight railway lines. However, since there were no card readers sold in the first half of FY13, the main hardware sales came from the second phase of the hardware project of the Beijing Rail Transit Command Center. By 2015, 3-4 new subway lines will be completed in Beijing each year, and we expect the card reader business to still contribute to hardware sales, but system integration projects will account for a larger proportion of hardware sales.
The gross profit margin went down. Changes in the structure of hardware products will affect the company's gross profit margin. The gross margin of the card reader business can reach about 60%, while the hardware gross margin of system integration is only single digits. The change in product structure will lead to a decline in the company's gross profit margin.
We evaluate the contribution of the second phase of the Beijing Rail Transit Command Center project and increase our revenue forecasts for fiscal years 13 and 14 by 7.8% and 5.7%, respectively. However, the gross profit margin is under downward pressure, and our net profit forecasts for fiscal years 13 and 14 are 27.3% and 20.3% to HK $75.4 million and HK $104 million, respectively. We use the price-to-earnings ratio of 10 times for the 14 fiscal year of Zhongcheng Rail as its valuation. We keep the target price at HK $1. 30 and maintain the buy rating