1H23 performance fell short of our expectations
The company announced 1H23 results: revenue/net profit of 166.3/1.82 billion yuan, down 9.5%/5.7% from the previous year. The performance was lower than our expectations, mainly due to insufficient capital, which reduced the number of general engineering contracts and urban rail construction. 2Q23 revenue/net profit attributable to parent was 91.4/1.15 billion yuan, down 20.1%/10.9% year on year.
Revenue from railways and overseas businesses grew steadily, while urban rail and general engineering contracting businesses declined. 1H23's rail/urban rail transit/overseas/engineering general contracting business revenue was 88.7/39.9/5.9/3.13 billion yuan, respectively, +4.9%/-17.8%/+6.6%/-30.2%, respectively. Among them, the decline in urban rail transit revenue was mainly due to the decline in the industry's subway construction demand, fewer new orders signed by the company in the early stages, and the decline in general engineering contract revenue mainly due to the company's strict control of operating risks and delays in the construction period for projects that are slow to be funded.
The rise in gross margin led to an increase in net interest rate. 1H23's gross margin was 25.0%, +1.8ppt year on year. This is mainly due to a year-on-year increase in gross margin in the railway and urban rail transit business. 1H23 The company's expenses rate for the period was 10.9%, +1.5ppt year on year. Among them, sales/management/R&D/financial expenses rates were +0.4/+0.6/+0.4/+0.2ppt, respectively. 1H23's net interest rate was 11.0%, +0.4ppt year on year.
Development trends
Railway investment is booming, and urban express rail construction is speeding up. According to the National Bureau of Statistics, 1-7M23 China's total investment in railway fixed assets was 371.3 billion yuan, up 7.1% year on year, maintaining a growth rate of more than 5% since February this year, a significant increase over the previous three years. Looking ahead, China Railway Group expects China's railway fixed asset investment to reach more than 760 billion yuan this year, corresponding to a year-on-year growth rate of about 7%, the highest investment amount in the past three years. We believe that the rise in railway investment since this year is expected to boost the company's railway business growth. In terms of urban rail transit, according to RT Rail Transit, 1H23 rail transit has added 606 kilometers of new lines, including 449 kilometers of urban railways, which is the first time in recent years that the new urban railway commencement mileage is significantly higher than that of other urban rail transit. We believe this reflects the acceleration of urban express rail construction. In the future, with the continuous development of the metropolitan area, it is expected to support the new growth of urban rail transit.
The number of new railway orders is growing rapidly, and the company has sufficient orders on hand. 1H23 signed new orders of 31.67 billion yuan, up 10.5% year on year. Of these, new railway orders were 9.78 billion yuan, up 30.2% year on year, rapid growth, 5.85 billion yuan for urban rail, down 9.6% year on year, 1.38 billion yuan new overseas orders, up 2390.1% year on year, and 14.67 billion yuan in general engineering contracts, up 0.22% year on year. By the end of 1H23, the company had orders of 152.26 billion yuan, an increase of 5.7% over the previous year.
Profit forecasting and valuation
Maintain outperforming industry ratings. Keep the profit forecast unchanged. Currently, A shares are traded at 14.5x/14.1x2023e/24e P/E, and H shares are traded at 6.1x/5.8x 2023e/24e P/E. The target price of A/H remains unchanged at 5.9/HK$3.33. A shares correspond to 16.2x/15.8x 2023e/24e P/E, H shares 7.7x/7.3x 2023e/24e P/E, 12%/27% upward space.
risks
Downstream tenders fell short of expectations, and project repayment fell short of expectations.