Based on rail transit control systems, focusing on research and development, good management companies are based on rail transit control system business. The railway business accounts for a relatively high proportion. Currently, it still accounts for more than 60%, and its share of total revenue is stable between 45% and 50%, which is higher than that of urban rail transit (accounting for about 20% of total revenue). Since 2021, the company's net profit margin and gross margin have shown a gradual improvement trend, and R&D expenses have shown an upward trend in recent years, reflecting that the company takes technology research and development as the core and promotes the continuous development of the overall business through technological innovation. As of 2023H1, the company has 3,901 authorized registered patents in China, including 1902 authorized invention patents. In addition, the company attaches importance to shareholder returns and maintains a high dividend ratio of around 50% for a long time. The company's shareholders are expected to obtain stable revenue sharing from the company for a long time.
Demand for new construction is stable, and renewal and replacement ushered in new opportunities for development
Currently, the railway market has recovered. Thanks to the promotion of domestic railway construction plans and steady growth in infrastructure demand, railway investment is expected to return to 800 billion dollars. Urban rail projects under construction can be studied and approved, and investment is rising steadily. The project promotes construction and the 14th Five-Year Plan guarantees the implementation of investment.
Meanwhile, rail transit related policies have continued to be released since this year, compounding the increasing scale of existing railway trains and subway cars, or the need to upgrade and replace catalytic rail transit equipment. Overall, the medium- to long-term demand in the railway construction market remains stable. At the same time, as the number of railway trains and subway cars in stock increases, and railways and urban rail gradually enter the renewal and replacement cycle, the entire signal system will gradually be replaced in 2024; in the medium to long term, after years of investment, the stock of high-speed rail and urban rail equipment is large, and the demand for renewal and replacement is expected to be stable for a long time.
Comprehensive technology, complete qualifications, leading bid share in the industry
The company has comprehensive technical coverage. High-speed rail train operation control technology breaks overseas monopolies, and has outstanding technical advantages. China Tonghao has independently developed China's high-speed rail train control system (CTCS-3, CTCS-2), China's high-speed rail autonomous train control system (CTCS-3+ATO), and has taken the lead in the formulation of CTCS China train operation control system standards and core technology research and development. It has outstanding competitive advantages in the CTCS series system industry. It has outstanding competitive advantages in the CTCS series system industry. The fully autonomous TRANAVI CBTC system independently developed by the company has won bids for several projects and has been assembled on Shanghai Rail Transit Line 17. Hohhot Urban Rail Transit Line 2 Phase I Project, etc. The multi-dimensional advantage allows the company to show a prominent position in terms of winning bid shares, with winning bid shares close to or above 50% each year.
Ongoing orders have reached a new high, and long-term overseas expansion is worry-free
The scale of new orders signed by the company remained high. From January to September 2023, the total number of new contracts signed by the company was 50.883 billion yuan, an increase of 12.01% over the previous year. As of 2023H1, the company's on-hand orders reached a new high of 152.275 billion yuan. Based on the company's 2022 revenue of 40 billion dollars, current orders can provide a strong guarantee for the company's revenue performance for at least the next 3 years. In terms of overseas expansion, the company signed new orders of 2,002 billion yuan in the first three quarters of 2023, an increase of 1014.95% over the previous year, and overseas revenue of 1,067 billion yuan, an increase of about 13% over the previous year, and its share of revenue continued to rise to 4.3%. In the future, the company will continue to rely on key regions and countries along the “Belt and Road” to work in both directions in the existing line transformation market and the new line construction market, use the core advantages of train control systems to drive “four power” professional contracting, explore municipal and information technology businesses, and further enhance the level of overseas business contracting. With the development of overseas markets, the share of overseas revenue is expected to increase, and overseas business is expected to contribute significant revenue.
We expect the company to achieve net profit of 3.91 billion yuan and 4.45 billion yuan respectively in 2024-2025, corresponding to PE 15 and 13 times, respectively, giving it a “buy” rating.
Risk warning
1. Risk of downstream demand falling short of expectations; 2. Risk of overseas market expansion falling short of expectations; 3. Risk that profit forecasting assumptions are unfounded or fall short of expectations