Key points of investment

Event: The company released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 1,123 billion yuan, down 1.88% year on year, and net profit to mother of 67.1 million yuan, up 7.67% year on year. After excluding the impact of employee shareholding plans and equity incentive expenses, net profit to mother was 89.53 million yuan, an increase of 29.74% year on year. After excluding the impact of equity incentive fees, the company's overall performance was in line with expectations.

In 24Q1, the company achieved revenue of 172 million yuan, a year-on-year decrease of 1.23%; net profit loss to mother was 6.22 million yuan.

Stable overall development of various businesses, high R&D, high dividends

By business, command and dispatch revenue was 548 million yuan, -6.8% year over year, gross margin increased 4.5 pp year on year; smart application revenue was 311 million yuan, +4.7% year over year; and industry IoT application revenue was 197 million yuan, -1% year over year.

On the cost side, the company's sales expense ratio was 11.08%, +0.53pp; the management expense ratio was 10.36%, +1.5pp, mainly due to the increase in equity incentive expenses; the R&D expense ratio was 12.10%, +1.26pp, mainly due to the company's increased R&D investment. The total R&D investment in 23 years was 175 million yuan, accounting for 15.57% of revenue.

From a dividend perspective, the company is expected to pay 54.34 million yuan in cash dividends (including repurchases) in '23, accounting for about 81% of net profit attributable to mother. The company responds positively to the “Nine Rules of the New Country” initiative, pays dividends at a high rate, and shares operating results.

In 24Q1, railway investment increased 9.9% year on year, and the company's on-hand orders increased 31% year on year. In 2023, the country's total railway fixed asset investment was 764.5 billion yuan, an increase of 7.5% year on year. In 24Q1, the national railway completed fixed asset investment of 124.8 billion yuan, an increase of 9.9% over the previous year. Since the beginning of '24, the central government has promoted a new round of large-scale equipment upgrades, and railways have taken the lead in taking the lead. The director of the State Railway Administration proposed striving to basically eliminate old internal combustion locomotives by 2027, promote intelligent railway transportation organization, dispatch and command, and vigorously develop intelligent train dispatch and marshalling technology. Benefiting from the transformation and upgrading of the railway industry, equipment updates, and technology applications such as 5G-R/AI, the company had ongoing orders of about 840 million yuan by the end of 24Q1, an increase of 31.28% over the previous year.

5G-R is progressing steadily, and the product has passed the static test review

In October '23, the Ministry of Industry and Information Technology approved the test frequency for railway next-generation mobile communication systems (5G-R) based on 5G technology to China Railway Group. The construction of the 5G-R is tight and the tasks are heavy. The main investment cycle is expected to be significantly shortened, and the scale of investment is expected to be significantly concentrated. As a leader in command and dispatch in the railway field, the accelerated construction of 5G-R will drive the upgrading and iteration of the company's related modules, products, and solutions, which is expected to bring obvious performance flexibility. We expect 5G-R iterative upgrades to bring 5.9-8.4 times more space for key application scenarios. According to the company's annual report for the year 23, the company closely follows China Railway Group's 5G-R work deployment and continues to improve the research and development of 5G-R related products. All products have passed the static test review of China Railway Group's 5G-R system.

Promote domestic civil aviation control and develop comprehensive cooperation with Huawei

In the field of civil aviation management, as a fully independent domestic brand command and dispatch supplier in the field of civil aviation, the company established Beijing Jiaxun Intelligent Aviation Technology Co., Ltd. and is committed to becoming a leader in aviation communications. In the field of data security, the company participated in privacy computing on behalf of the manufacturer Wei Wei Information to jointly discuss the application of data security in various scenarios such as transportation, security, and energy. The company and Huawei signed a “Comprehensive Cooperation Agreement”. The two sides will carry out comprehensive strategic ecological cooperation such as technology research and development, market expansion, and industry co-construction for vertical industries such as railways, urban rail transit, and civil aviation, based on core key areas such as artificial intelligence, 5G, safety and reliability.

Profit forecasting and valuation

The company benefited from railway equipment updates, and 24Q1 on-hand orders were +31% year-on-year, laying a solid foundation for business goals throughout the year. In the medium term, the 5G-R test is progressing steadily, and the company's related products have passed the static test review, and it is expected to enjoy the broad market brought by the 5G-R iteration. In addition, the company relied on the technical advantages of railway command and dispatch systems to expand its business into the field of civil aviation management to help develop the low-altitude economy. Considering the impact of equity incentive expenses, we expect the company's net profit to be 1.0, 140, and 190 million yuan respectively in 24-26, +54%, +31%, and +39%, corresponding to 24-26 PE of 35, 27, and 19 times, respectively, maintaining a “buy” rating.

Risk warning

Railway investment fell short of expectations; 5G-R construction fell short of expectations; industry competition intensified.