1Q22 performance is lower than we expected.

The company announced its 2021 and 1Q22 results: revenue of 3.525 billion yuan in 2021, an increase of 6% over the same period last year, and net profit of 370 million yuan, a decrease of 13% over the same period last year. 1Q22's revenue was 690 million yuan, down 27% from the same period last year, and its net profit was 26 million yuan, down 79% from the same period last year. The performance was lower than expected, mainly because the epidemic affected the procurement of railway equipment.

The income of rail transit business has declined, and the new energy automobile parts have a high demeanor. In 2021, the company's rail transit business income was 2.653 billion yuan, a decrease of 5.4% over the same period last year. Of this total, the income from door systems and connectors was 2.077 billion yuan, down 11% from the same period last year, and the revenue from accessories and interior decoration was 410 million yuan, an increase of 16% over the same period last year. Benefiting from the boom in the new energy automobile industry, the company's revenue from new energy automobile parts increased by 129% to about 377 million yuan in 2021 compared with the same period last year. In 2021, the company's gross profit margin increased by 0.7ppt to 41% year-on-year, while the proportion of new energy business with low gross margin increased, and the company's comprehensive gross profit margin decreased by 0.9ppt to 35.8% year-on-year in 2021.

The profit margin due to the expense claimed by investors decreased compared with the same period last year. In 2021, the expense rate during the period of the company decreased compared with the same period last year, in which the rate of sales, management and financial expenses decreased 0.2/0.7/0.3ppt, while the rate of R & D expenses increased 0.4ppt compared with the same period last year. The company's non-operating expenditure of 78 million yuan in 2021, mainly for the company to provide for 66 million yuan of investor claims, as of April 29, 2022, the relevant courts have accepted 8 investors' claims against the company, and the case has yet to be heard. The company's net profit margin fell by 2.3ppt to 10.5% in 2021 compared with the same period a year earlier.

Trend of development

The epidemic situation leads to short-term pressure on rail intercourse demand. Since the epidemic in 2020, the railway passenger volume has been greatly reduced, and the income of the National Railway Group has been under pressure, resulting in a lack of investment motivation. The railway work conference at the beginning of 2022 pointed out that 3300 kilometers of new lines are planned to be put into production in 2022, including 1400 kilometers of high-speed railway, which is lower than the actual mileage of production in 2021. The number of bids for the EMU of the National Railway Group in 2021 is relatively small, which will affect the delivery of the short-term epidemic. We expect that the demand growth of the national railway in 2022 is still relatively weak, waiting for the demand to recover gradually after the epidemic.

Profit forecast and valuation

Considering the downward purchasing demand of the National Railway Group, we downgrade the 2022 EPS forecast by 30% to 0.41 yuan, and introduce the 2023 EPS forecast of 0.46 yuan. The company's current share price corresponds to 2022 10.7x/9.4x PE 2023. Taking into account the profit reduction, we cut the target price by 30% to 4.60 yuan, corresponding to 2022 11.3x/10.0x PE 2023, which has 6% upside space. Maintain a neutral rating.

Risk

Bidding for railway equipment is not as expected; investors claim risk.