Interim earnings fell short of expectations; the pandemic has repeatedly affected business

In the first half of the year, Tielong Logistics achieved revenue of 9.1 billion yuan (+3.2% year-on-year) and net profit of 210 million yuan (-19.8% year-on-year), and profit fell short of our expectations (250 million yuan). In the first half of the year, railway special boxes, railway freight and port logistics, supply chain, and real estate businesses accounted for 43%, 42%, 12%, and 3% respectively. Among them, the gross profit of railway special containers increased 61% year on year, and demand for leased logistics benefited from the high level of manufacturing; the gross profit of railway freight and port logistics fell 27% year on year, mainly due to two outbreaks in Bayuquan, major port supply restructuring, and initial operating losses of cold chain logistics parks. Considering the repeated impact of the pandemic on the business, we lowered net profit attributable to the mother by 15.9%/6.3%/1.4% for 2021/22/23 to 3.6/42/450 million yuan, and lowered the target price by 12.9% to 5.45 yuan (based on 1.1x 2021 PB). Maintain an “increase in holdings.”

The volume and price of special boxes have risen sharply, benefiting from the high boom in the manufacturing industry

The company's business with the best growth momentum in the first half of the year was railway special packing. In the first half of the year, the company's special box delivery volume increased 7.1% year on year, revenue and gross profit of the special box business increased 29.5% and 61.4% year on year, and gross margin increased 4.1pp to 20.7%. The main types of the company's special container business are dry bulk containers (accounting for 72% of holdings and 85% of shipments in 2020). The main types of products are coal, sulfur, phosphate fertilizer, cement, clinker, etc. In the first half of the year, the value added of industries above the national scale increased 15.9% year-on-year, with an average increase of 7.0% over the two years (National Bureau of Statistics). The high manufacturing boom boosted demand for commodity transportation. In the context of “transit to rail” and “decentralization”, the volume and price of the company's special box business rose sharply.

The epidemic dragged down the freight volume of the Shaba Line. The cold chain logistics base lost initial operating losses in the first half of the year. The company's railway freight and port logistics business revenue increased 1% year on year, but gross profit decreased 27% year on year, and gross margin fell 5.3 pp to 13.8% year on year. In the first half of the year, the number of people arriving by the Shaba Railway fell 12% year-on-year, mainly due to two outbreaks in the Bayugang area, fluctuations in commodity prices, and sharp increases in sea freight charges, which diverted some supplies to Hong Kong. The Dalian Cold Chain Logistics Park initially generated losses, and its subsidiary Tielong Cold Chain recorded a loss of about 35 million yuan in the first half of the year. Supply chain business revenue increased 1.7% year over year in the first half of the year, but gross profit decreased 13.2% year over year, and gross margin decreased by 0.1pp to 0.7%. Due to the impact of the epidemic and the market, sales of the company's existing properties slowed, and real estate revenue and gross profit fell 30% and 42% year-on-year in the first half of the year.

The target price was lowered to 5.45 yuan to maintain the “increase in holdings” rating

Considering the repeated impact of the pandemic on short-term business, but in the long run, the company's profitability is expected to recover after the pandemic is over. We adjusted the valuation base from 19x 2021PE (railway industry weighted PE by market value) to 1.1x2021PB (railway industry weighted PB by market value). We expect the company's ROE for 2021/2022 to be 5.6%/6.1%. Based on 1.1x 2021PB and BPS of 4.95 yuan, the estimated target price is 5.45 yuan. Looking ahead to the long term, we are still optimistic about the development prospects of the railway special box industry and maintain the “increase in holdings” rating.

Risk warning: The development of special boxes fell short of expectations, the rental rate of cold chain logistics parks was low, and the Shaba Line fell short of expectations.