The first advanced repair contract in '24 was impressive. CRRC announced the signing of contracts between December '23 and March '24, with the EMU tender repair+equipment renewal policy. CRRC announced contracts signed between December 23 and March '24, including 14.78 billion yuan EMU advanced repair contracts, 11.17 billion yuan EMU sales contracts, 6.11 billion yuan city rail vehicle sales and maintenance contracts, 620 million yuan locomotive sales contracts, and contracts for energy storage equipment, wind power equipment, auto parts, etc., with a total amount of 34.89 billion yuan. Among them, the amount of the advanced repair contract exceeded the sum of 70.1 billion yuan and the amount of the advanced repair contract announced by the company twice from October '22 to October '23. We expect the company's return EPS in 23-25 to be 0.43/0.47/0.48 yuan, respectively, and the corresponding PE is 16.1/14.7/14.2 times. Comparatively, the average PE value of the company in 24 years was 13.9 times. Considering that the company is a global leader in rail transit equipment and has fully benefited from the recovery in EMU tenders and increased demand for maintenance and renewal under the equipment renewal policy, H shares are discounted by about 35% in the past 3 years. We gave the company 18/11.7 times PE for 24-year A/H shares, corresponding to a target price of 8.46 yuan/5.50 HKD, maintaining a “buy” rating.
Investment in railway fixed assets increased, and the recovery in passenger traffic volume in 2023 brought about a recovery in EMU tenders. In 2023, China's railway fixed asset investment reached 764.5 billion yuan, an increase of 7.5% over the previous year; in 2023, China's railway passenger traffic gradually recovered, and the annual passenger traffic volume was 3.685 billion yuan, an increase of 128.8% over the previous year.
During the epidemic, passenger traffic in China dropped significantly, leading to a low EMU usage rate, and EMU procurement was drastically reduced. The restoration of passenger traffic exceeding expectations in 2023 led to a recovery in EMU tenders. In 2023, China Railway Group tendered a total of 164 350-kilometer EMUs. In comparison, China Railway Group only purchased 29.5 and 92 350-kilometer EMUs in 2021 and 2022. The recovery in EMU tenders is expected to drive the company's new EMU business revenue growth.
The intensive period of advanced repairs has arrived. In January 24, China Railway Group issued its first tender notice for advanced train, which accounted for 57%. In January 24, China Railway Group issued the first tender notice for advanced EMU repair. A total of 361 groups were tendered, of which 207 were grade 5 repair groups, accounting for 57%. The advanced repair of EMUs has reached an intensive period. From 2012 to 2015, China's railway train ownership grew rapidly, CAGR = 30.6%. China's EMU level 5 repair cycle is 480 ± 100,000 kilometers or 12 years, so China's EMUs are expected to enter a critical stage of advanced maintenance and renewal in 2024-2025.
The railway department has implemented a policy to promote large-scale equipment renewal. Internal combustion locomotive upgrades are expected to increase performance. On March 1, 2024, the State Council executive reviewed and approved the “Action Plan to Promote Large-scale Equipment Renewal and Consumer Goods Trade-In”. The conference stated that transportation equipment renewal and transformation should be promoted in an orderly manner. In order to implement specific actions to promote large-scale equipment upgrades, the National Railway Administration stated on February 28, 2024 that it will strive to basically eliminate old internal combustion locomotives by 2027. According to China Railway Group's 2023 statistical bulletin, the number of locomotives owned by China Railway Group is 21,400, of which 0.73 million are internal combustion locomotives, accounting for 34.0%; policy incentives and support are expected to accelerate the pace of rail transit equipment upgrading and promote long-term steady revenue growth in CRRC's railway equipment business.
Risk warning: Railway fixed asset investment falls short of expectations, overseas business development falls short of expectations