Level 5 repair tenders have broken through volumetric breakthroughs, and CRRC's premium repair order amount has exceeded 23 for the whole year. The company announced the signing of the contract on March 4. The total amount of contracts signed between December '23 and March '24 was about 34.89 billion yuan, of which advanced EMU repair contracts reached 14.5 billion yuan, exceeding the annual level of 23. As the operating period of EMUs increased, they began to gradually enter the Level 5 maintenance range. According to RT Rail Transit, there were a total of 360 EMU advanced repair tenders in January this year, with grade 5 repairs accounting for more than half of them, ending the situation where there were basically no grade 5 repair tenders for many years before.
The significant volume of grade 5 repairs means CRRC's maintenance revenue will enter a rapid growth channel.
Advanced repairs have entered the rapid deployment stage, and the CRRC maintenance business is expected to take advantage of the trend. Currently, grade 4 repairs are jointly carried out by China Railway and CRRC. Level 5 repairs require 100% return to the factory for maintenance. CRRC has significantly benefited from the level 5 repair volume. If we calculate the average maintenance cycle of 12 years for grade 5 repairs, we have calculated that the number of grade 5 EMUs in 24-27 reached 191/284/341/443, respectively. CRRC's annual EMU advanced repair order for 24-27 is about 210/258/300/37.7 billion yuan, and the CAGR is about 21.5%.
Considering the possibility that the share of advanced repairs will decrease in the future, CRRC maintenance revenue in China is expected to maintain an average growth rate of more than 10% in the future. Considering the possibility that China Railway Group will further increase its self-repair ratio, we have made a sensitive estimate of the impact of CRRC's Class 4 and 5 repair share on the CAGR of maintenance revenue in 24-27. With CRRC's Class 4 repair share remaining above 30% and Class 5 repair share remaining above 80%, the future growth rate will remain above 10%.
Profit forecasting and investment advice. We expect the company's net profit to be 121/137/15.3 billion yuan in 23-25. Referring to comparable company valuations and the company's historical valuation center, the company's 2024 PE valuation is 15x, corresponding to a reasonable value of 7.16 yuan/share for A shares; considering the AH share premium factor, the reasonable value of H shares is HK$5.20 per share, and a “buy” rating is given.
Risk warning. Market competition increases risks, investment in the rail transit industry falls short of expectations, risks of overseas operations, and risk of exchange rate fluctuations.