Description of the event
The company released its semi-annual report for 2023. 2023H1 achieved total operating income of 16.666 billion yuan, -9.34% year-on-year; net profit of 1,824 billion yuan, -5.70% year-on-year. Based on this calculation, 23Q2 achieved total operating income of 9.163 billion yuan, -19.92% year-on-year; net profit of 1,146 million yuan, -10.90% year-on-year.
Incident comments
Short-term acceptance has declined due to the pace of the project, but the profit side has improved significantly. In the first half of the year, the company's general engineering contracting business and system delivery service business revenue decreased by 30.17% and 22.79% year-on-year, mainly due to the company's strict control of business risks. Due to the slow disbursement of funds for some projects and delays in construction periods, the construction revenue for the current phase decreased compared to the same period last year, leading to a year-on-year decline in total revenue; however, in the first half of the year, the share of the company's rail transit control system business revenue increased to 80.7%, with gross margin reaching 28.11%, driving the overall gross margin to 25%. Looking at Q2 alone, gross margin increased by 4.1 pct to 26.82% year on year; net profit margin reached 14.57%. Under a year-on-year decline in revenue and relatively rigid expenses, it reached a relatively good level in recent years. Looking back, by the end of the first half of 2023, the company had orders of 152,275 billion yuan. The number of orders on hand was full, and subsequent inspections were worry-free. Moreover, with the expansion of the company's revenue scale, profitability is expected to maintain a good level.
New orders continue to grow, and market share remains high. In the first half of 2023, the company signed a total of 31,672 billion yuan of new contracts, +10.49%, of which: the railway sector was 9.776 billion yuan, +30.15%; the urban rail sector was 5.852 billion yuan, or -9.57%; the overseas sector was 1,384 billion yuan, +2390.11%; general engineering contracting and other fields were 14.661 billion yuan, +0.22% year on year, maintaining an overall growth trend. In terms of the core high-speed rail weak current system integration business, the company opened bids for 5 projects nationwide in the first half of the year, and the company undertook 4 of them, with a market share of 81%; in the field of urban rail signal system integration, the company successively acquired 4 projects, with a market share of 42%, continuing to top the list. Looking back, railway investment is expected to accelerate and drive the company's orders in the railway sector to continue to grow steadily; the total number of tenders for the urban rail sector is expected to remain unchanged throughout the year, and the company's orders will continue to increase; in the overseas market, this year is the 10th anniversary of the Belt and Road, and overseas orders are also expected to continue to grow.
The demand for updates and replacements is gradually increasing, and the incremental process may be more flexible. Since the summer travel season, the country's passenger demand and the number of daily trains have remained high, and the response on the demand side is relatively good. However, there are not many high-speed railways running at a speed of 350 kilometers per hour in the country. At the same time, the improvement in China Railway Group's profit is also expected to drive capital expenditure. On July 17, the “Survey and Design Tender Notice for the Daxi High-speed Railway Acceleration Renovation Project” was officially released, and preliminary work such as possible research and preliminary design was officially launched. Following the Guiguang High Speed Rail, the Daxi High Speed Rail is another high-speed railway line with an operating speed of 250 kilometers per hour. It is expected to speed up to 300 kilometers. The project clearly indicates that the train control system will be upgraded to CTCS-3 level. In mid-August, the winning candidate for engineering survey and design landed, and the pace gradually accelerated. The company provides core train control technology and equipment for more than 95% of China's high-speed railways that have already been opened and operated; it accounts for about 40% of the domestic urban rail transit control system market share, and companies in the stock replacement and maintenance market are expected to fully benefit. Furthermore, the construction cycle of the updated and replaced line is shorter, the pace of delivery and acceptance is faster, profitability may be better, and performance flexibility is greater.
Maintain a “buy” rating. We expect the company's net profit to be 40.5 billion yuan and 4.59 billion yuan in 2023-24, corresponding to PE 13.8 and 12.2 times, respectively. Maintain a “buy” rating.
Risk warning
1. Investment in fixed assets falls short of expectations;
2. The risk of increased market competition.