In October 2023, the Ministry of Industry and Information Technology approved the 5G-R test frequency to China Railway Group, supported it in carrying out field technology tests for the 5G-R system, and continued to promote the high-quality development of the railway communication industry. China Railway will usher in a new era of 5G. The company is an industry-leading provider of integrated solutions for the entire smart command and dispatch industry chain. It has completed the research and development of 5G-R-based command and dispatch related products and solutions, and has advanced the layout of many core products and solutions that enable the industry to become intelligent and digitally empowered, which is expected to benefit deeply from it.

Deeply cultivate command and dispatch communication systems to help upgrade railway informatization. The company was founded in early 1995 and has now become a comprehensive solution provider for the entire intelligent command and dispatch industry chain, covering more than 10 countries and regions around the world. The company's business includes several major segments: smart platforms, smart security, smart scheduling, smart operation and maintenance, smart connectivity, and smart terminals. The company's command and dispatch products are the main source of revenue for 2022/23H1. Revenue was 587/276 million yuan, up -1.2%/9.1% year on year, respectively. The revenue share of intelligent application products increased. 2022/23H1 revenue was 297/082 million yuan, respectively, up 16.3%/7.9% year on year. The gross margin of the company's products is relatively stable, and the business shows high margin characteristics. In 2022/23H1, the gross profit margin of command and dispatch products was 41.7%/42.8%, and the gross profit margin of IoT application products was 46.7%/45.8%.

The transportation industry is the company's main downstream application industry. 2022/23H1 revenue was 701/313 million yuan respectively, up 11.5%/2.7% year on year, accounting for 61%/75% of revenue.

Railways are being built around informatization, and the share of investment in informatization is expected to increase. In 2022, China's railways completed a total of 710.9 billion yuan in fixed assets, a year-on-year decrease of 5.1%, and actually put into operation 4,100 kilometers of new lines, exceeding the plan by 24.24%. According to the “Outline of the National Integrated Three-dimensional Transportation Network Plan”, China's railway network will reach about 200,000 kilometers by 2035, with an average annual growth of 3,462 kilometers. Urban railways are one of the important grippers for advancing the construction of metropolitan areas. “Opinions on Promoting the Accelerated Development of Urban (Suburban) Railways in Metropolitan Areas” points out that the development of urban (suburban) railways has many benefits in optimizing the functional layout of cities, promoting coordinated development of large, medium, and small towns, and expanding effective investment. In the first half of 2023, 99.83 kilometers of urban express trains were added, an increase of 448.52% over the previous year. The railway informatization process is expected to accelerate. The “14th Five-Year Plan” for Railway Science and Technology Innovation suggests that it is necessary to vigorously promote the deep integration of cutting-edge technologies such as Beidou satellite navigation, 5G, artificial intelligence, big data, Internet of Things, cloud computing, and blockchain with fields such as railway technology and equipment, engineering construction, transportation services, etc., to strengthen the R&D and application of key core technologies for intelligent railways, promote the development of the digital economy in the railway sector, and raise the level of railway intelligence.

5G-R promotes equipment replacement, and the company's deep technical reserves are expected to benefit profoundly. Currently, China's passenger and freight lines usually use a combination of GSM-R wireless scheduling and wired digital scheduling. GSM-R is a communication system based on 2G technology, optimized according to railway needs, and positioned in a dedicated railway network.

GSM-R is no longer able to meet the growing demand for railway communication, so an upgrade to 5G-R is imminent. First, GSM-R is a second-generation mobile communication technology. It is a narrowband communication system. It mainly carries voice services and a small amount of data services. The data rate is low, making it difficult to develop various new services on the existing GSM-R platform. Second, with the transformation of communication technology, GSM-R related equipment, technical support, etc. may end as early as 2030. 5G-R is based on 5G technology and has the characteristics of ultra-high bandwidth, ultra-low latency, and massive connections. The network performance is greatly superior to GSM-R. In terms of network capabilities, 5G-R supports services such as network slicing and edge computing, and can provide service quality assurance for key railway services. In October 2023, the Ministry of Industry and Information Technology approved the 5G-R test frequency to China Railway Group, supported it in carrying out field technology tests for the 5G-R system, and continued to promote the high-quality development of the railway communication industry. China Railway will usher in a new era of 5G. The company has sufficient 5G-R technology reserves, and is expected to gain a first-mover advantage with a leading layout. The company has set up a highly qualified expert R&D team, has a high technical level and rich industry experience, and is continuously expanding the size of the R&D team. As of the end of 2022, it had 388 technicians and 236 registered and accepted patents, including 158 invention patents; 8 proprietary technologies protected by technical secrets that have not applied for patents; and 380 software copyrights. At present, the company has completed the research and development of products and solutions related to command and dispatch based on 5G-R, and has advanced the layout of many core products and solutions to intelligently and digitally empower the industry, making sufficient preparations for the advent of the 5G-R era.

The “Belt and Road” brings new opportunities for high-speed rail to go overseas. As a communication information system service provider, the company participated in all railways using Chinese standards — China-Laos Railway, using international standards, and a full set of Chinese standards — Mozambique CFM Railway South Line LTE-R integrated dispatch communication system project, Africa's first railway using Chinese standards — Aka railway project, West Africa's first urban rail — Abuja city rail project, Kenya's largest railway project since independence — Mongolia railway project, the first “Belt and Road” high-speed railway — Indonesia's Yawan High Speed Rail, West Africa's first special freight line — Guinea Dasheng Railway project. 2023 marks the 10th anniversary of the joint construction of the “Belt and Road” initiative. The “Belt and Road” Summit Forum is of great significance in advancing the “Belt and Road” construction. It will enable China's high-quality joint “Belt and Road” initiative to receive more widespread support and response, bringing more room for development to the company's industry. The company will closely follow market trends, actively seize market opportunities, and work with partners around the “Belt and Road” strategy to actively expand overseas related markets.

Investment suggestion: 5G-R will require a period of repeated testing from testing to large-scale application. There will be procurement demand for experimental testing purposes during this period, but it is expected that 5G-R will not bring a significant increase in performance in the short term to 1-2 years. The company's revenue side is expected to achieve steady growth in the short term. We expect revenue of 11.93/12.91/1,399 billion yuan in 2023/24/25. Considering the increase in the company's management level combined with the scale effect, we expect that there is room for improvement in the company's net interest rate. It is estimated that the company will achieve net profit of 0.81/1.06/139 million yuan in 2023/24/25. Considering that the demand for equipment replacement brought about by 5G-R is highly uncertain, and demand is expected to be released centrally before 2030, which is expected to bring greater flexibility to the company's performance, coverage for the first time, giving it a “highly recommended” rating

Risk warning: The 5G-R advancement process falls short of expectations, the pace of 5G-R equipment replacement has been extended, the tender price of 5G-R equipment falls short of expectations, and the competitive landscape of the industry has changed.