Core ideas:

1. Event

The company released its annual report in 2019. In 2019, the company achieved operating income of 3.398 billion yuan, down 0.5% from the same period last year, and its net profit was 650 million yuan, successfully turning losses into profits. Diluted earnings per share is 0.65 yuan per share.

2. Our analysis and judgment

(1) focus on the main business, optimize the product structure, and realize the simultaneous rise of volume and price in the door system.

In 2019, the total operating income was 3.398 billion yuan, of which the rail transit equipment business achieved revenue of 2.677 billion yuan, an increase of 28.0% over 2018. Rail transit equipment is mainly for the sales of vehicle door systems, with an income of 2.318 billion yuan (YoY+30.2%) in 2019, accounting for 68.2% of the company's total income, and is currently the main source of revenue for the company.

The door system business actively expands the EMU market while maintaining the market share of the urban rail market. As the core product of the company, the door system of urban rail vehicles has maintained more than 50% of the domestic market for more than ten years. On the other hand, the company, as the main participant in the R & D and trial production of China's standard EMU door system, grabbed the market opportunity, successfully entered 400km/h high-speed car and 250km/h standard moving platform in 2019, and won a large share of batch orders for 160km/h centralized EMU. In 2019, the company sold 65484 sets of door systems, an increase of 23.4% over the same period last year.

The change of product structure increases the average unit price of the door system. The average unit price of the company door system in 2019 was 35400 yuan, an increase of 5.5% over 2018. Since 2014, the unit price of the company's door system has continued to increase, mainly due to the optimization of product structure. At present, the price of subway door is 1.8-24,000 yuan per unit, and the price of bullet train is 45,000-50,000 yuan per unit. Since the company obtained the CRCC certification for all models of Harmony in 2013, the sales of moving doors have continued to grow, leading to an increase in the average unit price of the product.

(2) steady growth of maintenance business, which may become a bright spot in future development.

In 2019, the company's accessories business achieved revenue of 268 million yuan, an increase of 12.7% over the same period last year. The company's accessories are mainly used for the repair and modification of urban rail vehicles. The growth rate of the business remained at 80 per cent in 2016-2017. Although business growth slowed in 2018, it returned to the growth path in 2019. We believe that with the steady growth of the total amount of domestic rail transit equipment and the continuous increase of the market share of the company's products in urban rail and high-speed rail, the future growth of maintenance business has a strong certainty.

The company's connector and built-in business achieved revenue of 5872 yuan and 31.35 million yuan respectively, an increase of 32.2% and 133.3% over the same period last year. The overall sales of connectors were 20386 sets, an increase of 25.7% over the same period last year, mainly due to the qualification of suppliers of Tangshan Rolling Stock works and Changchun bus Factory, with a significant increase in orders; 28 columns of interior decoration were completed and remained relatively stable.

(3) to resolve the crisis, travel light, and improve profits and operating conditions; in 2019, the company achieved a comprehensive gross profit margin of 34.6%, an increase of 5.1pcts compared with the same period last year. The overall gross profit margin of the rail transit equipment business is 39.1%, an increase of 2.0pcts over 2018. Among them, the gross profit margin of door system, connector and interior decoration was 39.1%, 34.2% and 30.4% respectively, which increased by 3.2pcts, 2.7pcts and 21.7 pcts respectively compared with 2018. The gross profit margin of accessories business was 40.6%, down 40.6% from the same period last year. The gross profit margin of consumer electronics is-35.8%, which is a drag on the company's earnings to some extent. Considering that consumer electronics has been successfully spun off, it is expected that there is still room for improvement in the overall gross profit margin in 2020.

Properly resolve the Longxin crisis, light to return to the main business. As the actual controller of Longxin science and technology illegally borrowed and guaranteed in the name of Longxin science and technology without authorization, and affected by the illegal guarantee, the production and operation of Longxin science and technology came to a standstill, the company set aside a large estimated debt and provision for bad debts of 1.067 billion yuan in 2018, as well as a goodwill impairment of 2.271 billion yuan. In order to prevent further expansion of losses and solve the Longxin crisis, the company transferred 100% equity of Longxin Science and Technology to Nanjing Zijin Guanjie Private Enterprise Relief and Development Fund at a price of 400 million yuan, which was successfully completed in October 2019. As the Longxin crisis has been successfully resolved, the company focuses on the original main business and is expected to return to the growth channel.

The cash flow situation has greatly improved compared with the same period last year, and the financial situation has been greatly optimized. The net cash flow generated by the company's operating activities in 2019 was 406 million yuan, an increase of 737 million yuan over 2018, of which Longxin Technology decreased the net outflow of 544 million yuan, while other units increased the net inflow of 192 million yuan, mainly due to a large increase in sales rebates compared with the same period last year. In addition, with the divestiture of Longxin Technology, accounts payable fell sharply compared with the same period last year, and the overall asset-liability ratio fell to 43.9% from 63.2% in 2018. The current ratio and quick ratio were 2.01 and 1.59 respectively, which were 0.41 and 0.31 higher than those in 2018.

3. Investment advice

As the company strips off its lossmaking assets and returns to its main business, the company's operating conditions will gradually improve and its performance will be repaired. As the domestic urban rail transit investment will maintain a rapid growth rate, as a sub-sector of the industry leader, the company's future order growth has a strong certainty. The company has continued to grow in the field of high-speed rail since 2014, leading to the optimization of product structure. We believe that the company's share of high-speed rail will also increase in the future compared with the same period last year with the advance of the tendering of Tiezhong Fuxing. We expect the company to achieve a net profit of 4.77 yuan and 560 million yuan per share in 2020 and 2021 respectively, corresponding to 0.48 yuan per share and 0.56 yuan per share. The closing price on April 2 corresponds to PE 14.7x and 12.5x, maintaining the "recommended" rating.

4. Risk hint

The risk that the railway investment is less than expected, the EMU bidding is less than expected, and the urban rail construction is not as expected.