Investment event: Company discloses 2023 annual report. In 2023, the company achieved operating income of 37.087 billion yuan, a year-on-year decrease of 7.79%; realized net profit of 3.477 billion yuan, a year-on-year decrease of 4.30%; realized deducted non-net profit of 3.266 billion yuan, a year-on-year decrease of 4.41%.

Performance is under pressure, there are sufficient orders on hand, and overseas markets are progressing smoothly. The company's performance declined in 2023 against the backdrop of a weak macroeconomic recovery. The amount of new orders signed throughout the year was 73.121 billion yuan, an increase of 0.15% over the previous year.

Among them, the railway sector was 25.112 billion yuan, up 5.01% year on year; the urban rail sector was 13.180 billion yuan, up 3.91% year on year; the overseas sector was 3.74 billion yuan, up 45.18% year on year; general engineering contracting and other sectors were 31,089 billion yuan, down 8.11% year on year. By the end of 2023, the company had orders of 168.831 billion yuan, an increase of 14.53% over the previous year, which strongly supports the release of future performance. In terms of overseas markets, the company has the advantage of a “trinity” full industry chain of design and development, equipment manufacturing and engineering services, continues to strengthen territorial management, and successfully completed the signing ceremony for the Bangura-Nkaya renovation project in Malawi at the 3rd “Belt and Road” International Cooperation Summit Forum. It has successively received orders from Malaysia, France and other places, and has stabilized the good trend of growth year by year.

The revenue structure is optimized and the profit level is raised. By sector, the company's design integration revenue in 2023 was 11.724 billion yuan, up 20.16% year on year, up 7.35pct to 31.61%; equipment manufacturing revenue was 6.113 billion yuan, up 9.64% year on year, and revenue share increased 2.62 pct to 16.48%; system delivery service revenue was 11.425 billion yuan, down 18.83% year on year; engineering general contracting revenue was 7.674 billion yuan, down 28.48% year on year.

The company's revenue structure was optimized, and the share of design integration (39.68%) and equipment manufacturing (35.63%) sectors with high gross margins increased, leading to a 2.10pct increase in comprehensive gross margin to 25.76%. The company's expense ratio is well controlled. The annual sales/management/finance expense ratio was 2.41%/6.30%/-0.81%, +0.39pct/+0.60pct/-0.22pct, respectively. The company's net interest rate rebounded further to 9.40% in 2023, up 0.36pct year-on-year.

Continued investment in R&D is expected to benefit from equipment updates and intelligent upgrades. The company attaches importance to technological innovation and continues to increase investment in R&D. In 2023, the company spent 1,862 billion yuan on R&D, and the R&D cost rate reached 5.02%.

The company accounts for about 40% of the domestic market share of urban rail transit control systems; in the field of high-speed rail weak current system integration, the company has inherited 11 projects including Lanxiongxin, Xicheng, Yuqian, Xiangjing, and Xishi, with a market share of over 60%, further expanding its leading market advantage; in the field of urban rail transit signal system integration, its subsidiary CASCO and CITC companies are at the forefront of the control system industry. In 2023, China Express won 12 of the 33 urban rail signal control system projects that have been tenders, with a market share of about 37%, and continues to be at the top of the list. During the “14th Five-Year Plan” period, China is expected to add about 23,700 kilometers of railway operating mileage, and the total investment in the railway market is expected to reach 3.5 trillion yuan; the estimated additional operating mileage of urban rail transit is 3,000 kilometers, all of which are basically the same as during the “13th Five-Year Plan” period. Based on the 15-year update cycle, the high-speed rail control system renewal cycle may be launched, driving the growth of new orders. Combined with the demand for signal system upgrades under the trend of urban rail intelligence, the company is expected to fully benefit as a leading signal system manufacturer.

Profit forecast and investment advice: The company is expected to achieve net profit of 3,530 billion yuan, 3.798 billion yuan, and 4.336 billion yuan respectively in 2024-2026, corresponding EPS of 0.33, 0.36, and 0.41 yuan, corresponding to PE of 16 times, 15 times, and 13 times. The recommended rating will be given for the first coverage.

Risk warning: risk of economic recovery falling short of expectations, risk of new product expansion falling short of expectations, risk of rapid iteration of core technology, risk of increased market competition, etc.