Key points of investment

Incident: On November 28, Jiaxun Feihong and Huawei signed a “Comprehensive Cooperation Agreement” at the Huawei headquarters in Shenzhen.

The cooperation agreement signed between Jiaxun Feihong and Huawei marks that the two sides will target vertical industries such as railways, urban rail transit, and civil aviation. Based on core key fields such as artificial intelligence, 5G, safety and reliability, etc., they will carry out comprehensive strategic ecological cooperation in technology research and development, market development, and industry co-construction to explore more efficient and intelligent industry solutions, and jointly accelerate smart transportation construction.

Cooperation model: Joining the Huawei ecosystem, the synergy effect is expected to be 1+1＞2. Jiaxun Feihong will join the Huawei ecosystem, deeply bound to the Huawei technology route, and develop safe and reliable products and solutions for vertical industries based on basic information technology and equipment such as operating systems (Hongmeng, Euler), servers (Kunpeng, Shengteng), 5G, cloud computing, and big models. As a leader in railway command and dispatch, Jiaxun Feihong has accumulated rich practical experience and diversified product lines and solutions in the fields of dispatch and command, integrated operation and maintenance, security monitoring, and informatization construction. The advantages of Huawei's digital ecosystem and the deep accumulation of Jiaxun Feihong's vertical industry are expected to produce a synergistic effect of 1+1 greater than 2.

Areas of cooperation: railway+railway+Belt and Road, comprehensive cooperation with Huawei Railway: The intelligent railway market is vast. Intelligent railways are one of the main goals of the State Railway Administration's “14th Five-Year Plan” for Railway Science and Technology Innovation. The core is to achieve the application of technologies such as Beidou satellite navigation, 5G, artificial intelligence, and big data in the railway field. In recent years, domestic railway fixed asset investment has been steady overall, with a structural bias towards railway informatization. According to the Forward-looking Industry Research Institute, China's share of railway informatization investment increased from about 2% during the 11th Five-Year Plan period to around 6% during the 13th Five-Year Plan period. According to Taitong Technology's prospectus, IT equipment accounted for only 4% of China's railway investment in 2014, while Japan, Germany, and France accounted for 10% and 15%, respectively.

The company's railway experience+Huawei's underlying technology have joined the broad market of intelligent railways. Jiaxun Feihong leverages the advantages of Huawei's underlying technology, and technological upgrades are expected to bring about product iteration. At the same time, with Jiaxun Feihong's rich practical experience in the railway field, the two sides are expected to jointly open up a broad market for intelligent railways and implement core technologies such as AI and 5G in the railway field.

② Airline: Empowering traffic scenarios such as urban rail and civil aviation. The agreement was signed by Zhou Xin, vice president of the Huawei Airport and Rail Corps. The cooperation mainly targets vertical industries such as railways, urban rail transit, and civil aviation. The company's dispatch command and emergency communication products and solutions are mature, and it is expected to achieve breakthroughs in the fields of urban rail and civil aviation.

③ “Belt and Road”: Join hands with Huawei to actively participate in the “Belt and Road” railway going overseas. The company and Huawei have long experience in cooperation in the railway field. In the “Belt and Road” project, the company joined hands with its strategic partner Huawei to successfully sign contracts for the BPS railway communication transformation project in Egypt (2018) and the CFM railway integrated dispatch communication system project in Mozambique (2022). The company cooperated with Huawei to deploy a smart railway information system overseas. With the gradual opening and implementation of the “Belt and Road” project, it will bring new performance increases to the company.

The railway 5G private network contributed new flexibility, and the company clearly benefited as a dispatch communication leader. In October '23, the Ministry of Industry and Information Technology approved the test frequency of a new generation railway mobile communication system (5G-R) based on 5G technology to China Railway Group. 5G-R construction time is tight and tasks are heavy. The main investment cycle is expected to be significantly shortened, and the investment scale is expected to significantly concentrate the company as the command and dispatch leader in the railway field. 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 elasticity. We expect the 5G-R iterative upgrade to bring 5.9-8.4 times more space to key application scenarios.

Profit forecasting and valuation

This time, the company signed a comprehensive cooperation agreement with Huawei to take advantage of Huawei's underlying technology, deepen the layout of intelligent railways, empower transportation scenarios such as civil aviation and urban rail, and actively participate in the “Belt and Road” railway going overseas. The company is expected to form a new development pattern of “railway+track+Belt and Road” three-wheel drive. At the same time, the railway 5G private network test band has been obtained, and substantial progress has been made in 5G-R construction. As a scheduling leader, the company is expected to benefit from core benefits. Net profit for 23-25 is estimated at 0.90, 1.42, and 181 million yuan. The current market value (closing price on December 5, 2023) corresponds to 51,33,26 times PE in 23-25, maintaining a “buy” rating.

Risk warning

Railway investment falls short of expectations; 5G-R construction falls short of expectations; industry competition intensifies.