Description of the event

Daqin Railway released its report for the third quarter of 2023. The company achieved operating income of 20.356 billion yuan, an increase of 2.6% over the previous year, an increase of 3.8% over 2019; and realized imputed net profit of 3,574 billion yuan, an increase of 2.3% over the previous year, a decrease of 11.7% compared to 2019.

Incident comments

Freight traffic fluctuated at a high level, and passenger traffic returned to normal: 2023Q3, railway passenger traffic showed a restorative growth trend. China's railways sent a total of 1,163 million passengers, an increase of 96.7% over the previous year, an increase of 12.5% over 2019. In terms of freight, in order to guarantee the transportation of key materials such as coal and grain, railways sent a total of 1,239 million tons of goods, a slight increase of 0.8% over the previous year.

In 2023H1, the Daqin Railway completed the number of passengers sent 19.17 million, an increase of about 92.9% over the previous year. The passenger transport business of the company is expected to maintain a recovery trend in 2023Q3. 2023Q3 railway freight traffic fluctuated at a high level. The company's core line, the Daqin Line, achieved a freight volume of 110 million tons, a decrease of 2.1% over the previous year. Due to the resumption of passenger transport business and slight fluctuations in freight business, 2023Q3 achieved revenue of 20.356 billion yuan, an increase of 2.6% over the previous year and an increase of 3.8% over 2019.

Operating costs rose rigidly, and holding line profits increased: 2023Q3, the operating costs of Daqin Railway rose 3.2% year on year to 15.634 billion yuan, benefiting from the increase in deposit interest. The company's period expenses fell 16.6% year on year to 226 million yuan, and the company achieved attributable net profit of 3,574 billion yuan, up 2.3% year on year, down 11.7% from 2019. Labor costs are the biggest cost of the Daqin Railway. Although the number of employees on the Daqin Railway has declined in the past few years, per capita remuneration has risen rigidly. The compound annual increase in per capita remuneration over the past three years was about 6%. Labor costs in 2022 increased by 2.5 billion yuan compared to 2019, so the company's operating income was higher than the same period in 2019, but profit was lower than the same period in 2019. In addition to the main lines, the company participated in core coal transportation lines such as the Shuohuang Railway and the Tanggang Railway. The production capacity utilization rate of related railway lines was low. In the context of energy insurance and supply, freight traffic increased dramatically, increasing profits, and minority shareholders' equity increased 24.7% over the same period in 2019.

High dividends, low valuations, and high demand for coal: In “Long-term reverse assets, stable compound income”, we emphasized that China is mainly self-sufficient in coal, yet regional imbalances have brought demand for long-distance transportation. Taking advantage of the advantages of different modes of transportation, we have built a “West-East Coal Transport” + “North to South Coal Transport” transportation channel. With the four “West-East Coal Transportation” channels, the Daqin Railway naturally has the advantage of low cost, and traffic volume is expected to remain high for a long time. The factors that suppress the long-term returns of the Daqin Railway are expected to be reversed: 1) Along with epitaxial and endogenous investment, the Daqin Railway has built a transportation network integrating evacuation, and inefficient investment is expected to decrease; 2) Railway freight prices are subject to policy supervision and have the characteristics of countercyclical regulation. Along with rising labor costs and huge losses for China Railway Group, the possibility of national railway freight price adjustments is increasing. At this stage, freight prices on the Daqin Railway are still subject to policy control. Considering that the utilization rate of production capacity is high, if market-based freight reforms are implemented in the future, profits may have upward momentum. Considering the boom in downstream coal demand, we expect the volume of the Daqin Railway to remain high. The estimated net profit attributable to 2025 is 125.1, 130.5 and 13.21 billion yuan respectively, corresponding to PE 8.7, 8.4, and 8.3 times, respectively. The company's cash dividends in the past few years have been about 0.48 yuan/share. The characteristics of high dividends and undervaluation are prominent, maintaining a “buy” rating.

Risk warning

1. Reinvestment risk; 2. Freight rate adjustment risk; 3. Labor cost risk.