Matters:
China Railway released its 2023 annual report: in 2023, the company achieved revenue of 1.26 trillion yuan, +9.45% year over year; net profit to mother was 33.483 billion yuan, +7.07% year over year.
Commentary:
The operating situation was in line with expectations, and mineral resources contributed 14% to the performance. In 2023, the company achieved revenue of 1.26 trillion yuan, +9.45% year on year; net profit to mother of 33.483 billion yuan, +7.07% year over year; deducted non-net profit of 30.87 billion yuan, +9.3% year over year. On a quarterly basis, Q1-Q4 revenue growth rates were +2.1%, +8.4%, +1.5%, and +24.5%, respectively, while net profit growth rates to mother were +3.8%, +11.1%, -1.5%, and +14.6%, respectively. By business: 1) Infrastructure revenue +10.58% to 1.09 trillion yuan; 2) Design consulting -1.94% YoY to 18.3 billion; 3) Equipment manufacturing +5.95% YoY to 27.4 billion; 4) Real estate development YoY -4.76% to 50.9 billion; 5) Other businesses +8.82% YoY to 79.3 billion, of which resource utilization +11.49% YoY to 8.367 billion, and gross margin reached 59.70%. The main varieties and outputs include: 283,800 tons of copper metal, 0.46 million tons of molybdenum 152,000 tons, 85,000 tons of lead metal, 26,600 tons of zinc metal, and 44 tons of silver metal. The subsidiary China Railway Resources contributed 24.3 billion yuan in revenue and 4.687 billion yuan in net profit to mother, each accounting for 2% and 14% of the company's total.
There was a high increase in orders for highways, urban railways, housing construction, and resource utilization. The total number of new contracts signed by the company in 2023 was $3.10 trillion, +2.20% year-on-year. By business, 1) New engineering construction orders were 2.25 trillion yuan, or +11.4%; of these, railway orders were -35.6% YoY, road orders +29.4% YoY, municipal orders -5.7% YoY, urban rail orders +39.7% YoY, housing construction orders +37.9% YoY, others +8.2% YoY; 2) Design consulting orders of 27.77 billion yuan, -0.4% YoY; 3) Equipment manufacturing, 68.9% YoY; 4) Featured real estate 69.61 billion yuan, -7.4% YoY; 5) Asset management 177.29 billion yuan, -54.6% year on year; 6) resource utilization of 33.44 billion yuan, +41.7% year on year; 7) Financial trade of 90,03 billion yuan, +29.4% year on year; 8) Emerging business of 382.67 billion yuan, +6.0% year on year. The company's cash dividend ratio for 2023 was 15.52%, down 0.3 pct from the previous year.
The profit level is basically stable, and operating cash flow has declined slightly. In 2023, the company's gross margin was +0.14pct to 10.15% year on year, mainly due to the increase in gross margin of infrastructure projects in the main business, +0.44pct to 8.86% year over year. The profit level of resource utilization in other businesses increased significantly. The gross margin was +4.06pct to 59.70% year on year, and real estate development declined, -2.56pct to 14.51% year on year. The rate for the period was +0.07pct to 5.48% year over year, mainly due to an increase in the amount of fee-based interest expenses and due to exchange rate fluctuations. The financial rate was +0.11pct year over year, and sales, management, and R&D rates were relatively stable. Net interest rate was -0.05ct to 2.99% year on year, and profitability declined slightly, mainly due to credit impairment losses of +3.4 billion to 6.1 billion (losses expressed in positive values). The balance ratio was +1.47 to 74.86% year on year, and the net operating cash flow was 38.363 billion yuan, a decrease in inflow of 5.188 billion yuan year over year.
Profit forecasting, valuation and investment ratings: Considering the recovery of real estate and infrastructure construction, we expect the company's EPS to be 1.45 yuan, 1.57 yuan, 1.72 yuan/share in 2024-2026 (original value is 1.55 yuan, 1.72 yuan/share in 2024-2025). The company has excellent operating quality, rich mineral resources, and is expected to enhance performance. Refer to historical valuation levels, and consider the upward expectations of some metals. We will give the company 6x PE in 2024, with a target price of 8.7 yuan/share to maintain a “strong” rating .
Risk warning: Infrastructure investment fell short of expectations, raw material prices fluctuated greatly, and real estate regulation exceeded expectations.