Incident: The signing ceremony for the capital increase of Zhuzhou CRRC Times Semiconductor Co., Ltd. was held on April 26. 25 strategic investors, including Zhuzhou Guochuang, SAIC Motor Group, Chengdu Rail Transit, and National Integrated Circuit Industry Investment Fund Phase II, increased the capital of Times Semiconductor by more than 4.3 billion yuan. After the capital increase, Times Electric changed its shareholding ratio to 77.78%. It is still the direct controlling shareholder of Times Semiconductor.
Comment: In October 2022, CRRC Era reviewed and approved CRRC Era's semiconductor medium- and low-voltage device industrialization construction project, with a total investment of about 11.119 billion yuan. The purpose of this capital increase is to address the capital requirements for CRRC Era's semiconductor fixed investment and business development. Benefiting from strong demand in markets such as new energy vehicles and new energy power generation, China has become one of the most important application and consumer markets for power semiconductors in the world. This capital increase will not only meet capital requirements, but also help deepen industrial cooperation. It is expected that the company's emerging equipment business will benefit significantly.
Company basic introduction: Rail transit equipment is the cornerstone business, and the emerging equipment business contributes to growth. Era Electric's business mainly consists of rail transit equipment and emerging equipment. Among them, the rail transit equipment business includes rail transit electrical equipment, rail construction machinery, communication signal systems, etc., forming a “device+system+complete machine” industrial structure. Emerging equipment includes power semiconductor devices, industrial conversion products, electric drive systems for new energy vehicles, sensor devices, offshore equipment, etc. In terms of development, the rail transit equipment business has built up the company's basic market, while the emerging equipment business has become the main driving force for revenue growth. In 2018-2023, the company's total revenue increased from 15.658 billion yuan to 21.799 billion yuan, with a compound growth rate of 6.84%. Among them, rail transit equipment revenue remained stable. The year-on-year growth rate decline in 2020-2021 was mainly due to the reduction in downstream capital expenditure due to the pandemic. Gradual recovery from 2022 to 2023, achieving revenue of 21.909 billion yuan in 23, an increase of 2% over the previous year. In 2018-2023, revenue from emerging equipment grew 1,756 billion yuan to 8.732 billion yuan, with a compound growth rate of 37.83%. Starting in 2021, this part of the business growth clearly entered the fast track. The year-on-year growth rates in 21-23 were 35.315, 100.09%, and 69.64%, respectively. There are two main reasons. On the one hand, in the rail transit and power grid industries, which have a high market share, the company achieved batch delivery of orders. On the other hand, new energy vehicle power modules made breakthroughs and achieved leapfrog development.
In terms of profit, the company's profit growth rate has remained above 20% in the past two years. Net profit to mother reached 3.106 billion yuan in 2023, a year-on-year growth rate of 21.51%, mainly contributed by revenue growth and gross margin increase in the emerging equipment business. The company's overall gross margin in 2023 was 33.86%. Among them, the gross margins of rail transit business and emerging equipment business were 37.88% and 28.19% respectively, up 2.10 pcts and 2.48 pcts year-on-year respectively.
Long logic:
1. Rail transit business: Benefiting from overseas expansion of the incremental market+recovery of domestic railway capital expenditure and maintenance and equipment replacement in the stock market
In the incremental market, domestic railway fixed asset investment is recovering after the epidemic, with a year-on-year increase of 9.9% in the first quarter. There was a 9.9% year-on-year increase in Q1 in '24. As passenger traffic continues to recover, China Railway Group profits improve, and railway fixed asset investment is expected to continue to recover. Countries along the Belt and Road are in strong demand for infrastructure, and the potential market space for rail transit is large. China's rail transit industry has a certain advantage and is expected to benefit from this.
In the stock market, 1) In terms of maintenance, China's EMU maintenance includes level 5, level 1 and 2 repair, level 3 to 5 maintenance, level 3 to 5 repair, and level 3 and 4 repairs focus more on wear and tear parts maintenance. Level 5 repairs generally need to be sent back to the manufacturing plant. Disassembly and maintenance of basic structural parts, main electrical parts, internal equipment and facilities has been added to level 3 and 4 repairs. Level 5 repair period is generally 12 years. Considering that China's EMUs are often transported over long distances and with high intensity, we will also consider calculating the 10-year maintenance cycle. According to the median calculation, an average of nearly 400 trains will enter Level 5 repair in 24-26 years. 2) In terms of renewal and replacement, on February 28, the China Railway Administration indicated that it is striving to achieve basic elimination of old internal combustion engines by 2027. China Railway Group's 23 statistical bulletin shows that the country has 22,400 locomotives, including 0.78 million internal combustion locomotives, accounting for 34.7%; 14,600 electric locomotives, accounting for 65.3%. According to the National Railway Administration's goals, there is clear room for growth in the internal combustion engine replacement market.
The company is bound by CRRC Group as an upstream OEM and is expected to benefit deeply from the expansion of new markets and the renewal and replacement of the stock market
2. Emerging equipment business: Seizing new energy market opportunities. In recent years, due to the booming development of new energy, the company's power semiconductors and NEV electric drive systems have all achieved remarkable growth rates. In 2021-2023, their combined revenue growth rates were 70.59% and 104.61%, respectively.
In terms of power semiconductors, the company's products include bipolar devices, IGBTs, and silicon carbide, etc., which can be used in rail transit, power transmission and distribution, new energy vehicles, photovoltaic inverters, etc. The company's high-voltage IGBTs have an advantage. In 2023, the delivery of IGBT modules ranked first in the market in rail transit and power grids. Medium- and low-voltage IGBT modules are mainly used in fields such as new energy vehicles and wind and solar storage. Although the company entered the market late, it quickly opened up the market by relying on the technical advantages it has accumulated in the high voltage field. In 2023, the company entered the top three in the industry for passenger car power modules, with a market share of 12.5%.
In terms of electric drives for new energy vehicles, the company achieved relatively rapid growth with technology accumulation in the field of rail transit traction conversion and supporting capabilities based on IGBT. In 2023, the company installed more than 248,000 sets of electric drive systems for new energy vehicles throughout the year. The installed capacity ranking and market share grew rapidly, and the domestic market ranking entered the top six in the industry.
The company is the leading IGBT module in China. It has technical advantages and rich industrial chain resources. We believe that the company's emerging equipment business is expected to continue to grow rapidly.
Profit forecast and investment advice: We expect the company to achieve net profit of 36.39, 42.81, and 4.923 billion yuan in 24-26, corresponding to a PE of 19/16/14X in 24-26. We are optimistic about the growth of the company's emerging equipment industry and the stability of the rail transit business, and maintain a “highly recommended” rating.
Risk warning: Overseas market development falls short of expectations, risk of losing core technical personnel, geopolitical risk, etc.