Event: The company released its 2023 annual report. The company achieved operating income of 12.4 billion yuan in the first half of '23, an increase of 30.4% over the previous year; realized net profit of 680 million yuan, which turned a loss into a profit over the same period last year (loss of 770 million yuan); realized net profit of 660 million yuan after deducting non-attributable net profit of 660 million yuan, turning a loss into a profit over the same period last year (loss of 780 million yuan). In the second quarter of 2023, the company achieved revenue of 6.23 billion yuan, up 38.8% year on year, and 1.4% month on month; realized net profit of 270 million yuan, turning loss into profit from the same period last year (loss of 370 million yuan), down 33% from the previous year; achieved net profit of 260 million yuan after deducting non-return net profit of 260 million yuan, turning loss into profit from the same period last year (loss of 370 million yuan), down 35% from the same period last year.

Passenger traffic has recovered relatively slowly, and the opening of new routes has boosted the company's passenger transportation revenue. The number of passengers sent by the company in the first half of '23 was about 26.41 million, up 99% year on year, and recovered to 61% of the same period in '19. Among them, the number of passengers sent by intercity trains and other trains was about 10.42 million and 15.66 million, respectively, up 112% and 88% year on year, and recovered to 51% and 71% in the same period in '19. The number of direct bus passengers sent was 330,000 (business suspended in 2022), returning to 27% of the same period in '19. In July 2023, the number of passengers sent by the company was about 6.69 million, recovering to 80% of the same period in '19. Among them, the number of passengers sent by intercity trains, direct trains, and other trains recovered to 64%, 45%, and 96% of the same period in '19, respectively; in July 2023, the number of passengers sent by national railways increased 15% over the same period in '19. Overall, demand for the company's passenger transport business is recovering well, but the overall pace of recovery is slow. The main reason is that other newly built high-speed railways/intercity railways in the Greater Bay Area have caused some degree of diversion from the company's original business. The company's unit passenger revenue for the first half of '23 was about 0.70 yuan/passenger kilometer, down 4% from the same period in '22 and up 116% over the same period in '19, mainly because the company has added some additional cross-line EMUs since '21, and the unit fare is relatively high. Overall, the company's passenger transportation revenue for the first half of '23 was about 5.32 billion yuan, an increase of 70% over the same period in '22 and an increase of 31% over the same period in '19.

Road network liquidation and railway operation service businesses resumed rapidly. In the first half of '23, the company achieved road network clearing business revenue of 2.08 billion yuan, an increase of 27% over the same period in '22 and 1% over the same period in '19; completed revenue from railway operation services was 1.94 billion yuan, up 2% over the same period in '22, and 11% over the same period in '19. The main reason was that demand in the railway passenger transport market continued to rise and demand for related services increased.

Production and operation resumed, and the gross margin of the main business was corrected. In the first half of 2023, the company's main operating costs were about RMB 10.8 billion, an increase of 8.2% over the previous year. Among them, maintenance costs, material and utility consumption, and passenger service fees increased by 50.2%, 20.2%, and 12.6%, respectively. Overall, the company's main business gross margin for the first half of '23 was about 8.0%, a positive change from the same period in '22 (-10.3%) and a decrease of 4.2 pct over the same period in '19.

Investment suggestions: The company will open new long-distance EMU trains to contribute to increased profits; Guangzhou Railway Station and Guangzhou East Railway Station will be converted into high-speed rail stations in the future, and the company is expected to continue to open additional cross-line trains and continue to contribute to increased performance. We maintained the company's 23-25 net profit forecasts of $1.48 billion, $1.70 billion, and $1.87 billion, respectively, and maintained the “increase in holdings” ratings for the company's A and H shares.

Risk warning: The economic downturn has led to a decline in passenger freight demand; passenger traffic on self-operated railway lines has declined sharply; new cross-line trains have fallen short of expectations; the increase in road network clearing revenue and railway operation service revenue has fallen short of expectations.