The main railway transportation industry is developing steadily, and the high dividend ratio highlights the allocation value. The company's core business is railway freight and passenger transport business. In 2022, freight revenue recorded 60.75 billion yuan, accounting for 80.2% of operating income; passenger transport revenue recorded 4.07 billion yuan, accounting for 5.4% of operating income. Since its listing, the company's operating income has basically maintained a steady upward trend. The company mainly transports thermal coal, and mainly undertakes coal export tasks in provinces and regions such as Jin, Mongolia, and Shaanxi. The company's cargo delivery volume and coal delivery volume continue to occupy an important position in the national railway freight market.

In the three sectors of ports, highways, and railways, the Daqin Railway has maintained an industry-leading position in net operating cash all year round. The net operating cash of Daqin Railway in 2022 was 16.10 billion yuan, ranking first among companies in the above three sectors; furthermore, in 2022, the company's dividend ratio reached 7.2%, ranking third among companies in the above three sectors. We believe that although the company has not issued a clear future shareholder return plan, based on the company's stable dividend performance since listing, it will continue to have a high dividend ratio in the future. Therefore, in the current declining interest rate cycle, the company's stable dividends and higher dividend rates have more allocation value.

The advantages of coal sources are expected to drive the operation of the Daqin Line at a high level, and volume prices are expected to show a steady upward trend in terms of traffic volume: 1) Among fossil energy, China still has the resource endowment characteristics of “rich coal, lack of oil and gas”. Currently, China's main energy source is still coal. Furthermore, China's coal resources are unevenly divided. Production is mainly concentrated in Shanxi, western Inner Mongolia, and Shaanxi (known as the “Three West” regions), creating a supply and demand pattern of “north-south coal, west-east coal”. The misalignment between coal sources and consumption regions creates demand for coal transportation. According to the development strategy layout of the National Energy Administration, the focus of domestic coal production is shifting in an orderly manner to the central and western regions. In 2022, the cumulative output of the three provinces of Shanxi, Shaanxi and Inner Mongolia accounted for 72.0% of total coal production. We believe that as the concentration of coal resources in the main supply areas of the Daqin Railway continues to increase, the main customers of the superposition company are large coal production and marketing enterprises, and they maintain long-term and stable cooperative relationships with the company, the advantages of coal sources are expected to continue to drive the coal traffic volume of the Daqin Railway to maintain a high level of operation.

2) Comparing the five main coal transportation routes, we believe that there is a certain misalignment between the coal sources and transportation terminals of the main routes, so other major routes have less influence on the diversion of the Daqin Line.

3) On the policy side, various policies such as “transit rail” are expected to continue to promote the competitiveness and market share of railway freight in China's integrated transportation system, while there is still plenty of room for “transit rail” within the Daqin Railway business area. We believe that as the policy continues to advance, the company's traffic volume is expected to increase further.

In terms of freight rates: In terms of freight rates, China's railway industry implements a transportation management system with a high degree of concentration and unified command, and the pricing model uses government pricing or government guidance prices. Currently, the company's main product, coal, is subject to the No. 4 freight rate, of which the base price is 16.3 yuan/ton, and the base price 2 is 0.105 yuan/ton/kilometer. Since electricity surcharges are incorporated into the unified freight rate of China Railway, the 15% increase limit on the base price has not been fully implemented, so the company still has the possibility of raising the freight rate.

Investment advice

We forecast that the company's revenue for the year 23-25 will be 82.2 billion yuan, 85 billion yuan and 87.3 billion yuan respectively, with year-on-year increases of 8.5%, 3.4% and 2.8%, respectively. Among them, the freight business contributed 65.3 billion yuan, 66.6 billion yuan and 67.8 billion yuan respectively, with year-on-year increases of 7.4%, 2.1% and 1.8%. Due to the strong rigidity of the company's overall cost structure, gross margin increased markedly compared to the period between 2020 and 2022 after the upward recovery of revenue. In 23-25, it was 21.8%, 22.0%, and 22.2%, respectively. In 23-25, the company's net profit was 12.9 billion yuan, 13.4 billion yuan and 137 billion yuan respectively, up 15.7%, 3.2%, and 2.8% from the previous year. The corresponding EPS was 0.84 yuan, 0.87 yuan and 0.89 yuan. The price-earnings ratio corresponding to the current price was 9x, 8x, and 8x, covering the “buy” rating for the first time.

Risk warning

The macroeconomy fell short of expectations; major changes in the energy structure; major changes in the “transit rail” policy; and the impact of the diversion of competitive routes increased.