Event: the company released three quarterly reports, the company achieved operating income of 675 million yuan in the first three quarters of 23, + 8.21% year-on-year; net profit of 33 million yuan, + 32.41%; and non-net profit of 30.36 million yuan, + 27.83% of the same period last year. From a single Q3 point of view, the company achieved operating income of 258 million yuan, + 17.27% year-on-year; net profit of 6.93 million yuan, + 30.92%; and deduction of 6.21 million yuan, + 18.07% year-on-year.

Investment in railway fixed assets is steadily rising, and the proportion of informationization is expected to increase, driving the steady growth of the company's performance and steady investment in the railway industry. According to Xinhua News Agency and the State Railway Group, in the first three quarters of 23 years, the country's railways completed a total fixed asset investment of 508.9 billion yuan, YOY + 7.1%, and put into production 1402 km of new lines, including 1276 km of high-speed rail. The National Railway Group expects that the national railway fixed asset investment will exceed 760 billion yuan in 2023.

In September 2023, the National Railway Group issued the Digital Railway Planning, which pointed out that by 2027, the level of railway digitization will be greatly improved, and the key areas will be intelligent; by 2035, the digital transformation will be fully completed, and the degree of intelligence in all fields will be improved in an all-round way. The innovative application of information technology is fully covered, and the value of railway data elements is released in an all-round way.

With tight time and heavy tasks, the scale of 5G-R investment will be obviously concentrated on October 9, when the Ministry of Industry and Information Technology approved the test frequency of the new generation of railway mobile communications (5G-R) based on 5G technology to the State Railway Group, and officially fired the starting gun for railway 5G construction.

Time is tight: the construction of 5G-R network is expected to peak in 4-6 years, and the main investment cycle will be significantly shortened. According to the gradual cessation of production of pre-GSM-R equipment in China's trunking communication network around 2025, "the development status and trend of foreign railway 5G technology" points out that the GSM-R system is expected to be completely phased out around 2030. We judge that the railway 5G-R is expected to continue the construction peak of 4-6 years from 2025, and the main investment cycle will be significantly shortened.

Heavy tasks: GSM-R officially established by the Ministry of Railways in 2000, after more than 20 years, almost complete coverage, 5G-R construction cycle is concentrated, the construction peak investment scale will be obviously concentrated. Data from the Ministry of Communications show that at the end of 2022, the mileage of railways in operation across the country was 155000 km, and 4100 km of new lines were put into production. According to the construction peak of 4-6 years, the investment scale of 5G-R in the construction peak period will be obviously concentrated.

Dispatching communication is the core application of 5G-R. As a leader in the industry, the company has obvious flexibility.

Dispatching communication and train control are expected to upgrade synchronously with network construction, and the flexibility is more obvious. The company is the leader of command and dispatching in the railway field, and the accelerated construction of 5G-R will drive the upgrading and iteration of the company's related modules, products and solutions, which is expected to bring obvious performance flexibility. According to our calculation in "focusing on 0-1 Industry Investment opportunities-2023Q4 Investment Strategy of Communications Industry", the peak period of 5G-R construction is expected to bring 5.9-8.4 times the space. Considering the increase in the value of 5G equipment compared with 2G equipment, the market flexibility is expected to be further enlarged.

Profit forecast and valuation

It is estimated that the 23-25 return net profit is 0.90,1.42 and 181 million yuan, and the current market value (closing price on October 20, 2023) corresponds to 48,31,24 times the PE of 23-25, maintaining the "buy" rating.

Risk hint

Railway investment is not as expected; 5G-R construction is not as expected; competition in the industry is intensified.