2023 and 1Q24 results fell short of our and market expectations

The company announced its 2023 results: revenue of 81.02 billion yuan, +6.9% year on year; net profit to mother of 11.93 billion yuan, +6.6% year over year, lower than our and market expectations. Passenger transportation costs and employee costs slightly exceeded expectations, which were the main reasons why the performance fell short of expectations.

1Q24 achieved revenue of 18.27 billion yuan, or -7.9% year on year; realized net profit of 3.05 billion yuan, -16.6% year over year, lower than market expectations. Weak coal traffic volume (1Q24 traffic volume of the Daqin Line fell 6.0% year on year) was the main reason.

Development trends

Railway traffic on the 1Q24 Daqin Line showed slight weakness. According to the National Bureau of Statistics, 1Q24 raw coal production was about 1.11 billion tons, -4.1%; according to the China Coal Market Network, the 1Q24 railway sent 710 million tons of coal, +1.8% year on year; total railway traffic of key state-owned coal mines totaled 316 million tons, +3.8% year over year.

The Daqin Railway announced that the Daqin Line completed a total cargo volume of 98.24 million tons in the first quarter, -6.0% year-on-year.

The company announced that the total dividend amount for 2023 was 6.93 billion yuan, with a dividend ratio of 58.1%. The dividend amount is slightly lower than the 2018-2022 dividend amount (71-7.3 billion yuan). Considering that as of April 26, 2024, Daqin Bonds still has a balance of 14.737 billion yuan, the company plans to keep the total cash dividend distribution unchanged. Ultimately, the amount of cash dividends per share will be adjusted based on the profit distribution total share capital on the share registration date. Based on the company's latest share capital and announced cash dividends, the company's current dividend rate is about 5.3%. If we consider all debt-for-equity conversions, we estimate the company's dividend rate of about 4.8%.

Profit forecasting and valuation

Due to costs slightly exceeding our expectations and the decline in traffic volume, we lowered the company's profit in 2024/25 by 17.1%/15.3% to 11.11 billion yuan/11.36 billion yuan, corresponding to a year-on-year growth rate of -6.9%/2.3%.

Based on the profit reduction but considering the steady dividend, we lowered our target price by 9.3% to 7.89 yuan/share, corresponding to a 2024/25 price-earnings ratio of 12.5x/12.1x, and the current stock price corresponding to 2024/25 P/E is 11.8x/11.5x. Maintaining an outperforming industry rating, the target price has 6.0% upside compared to the current stock price.

risks

Staff costs exceeded expectations, and the traffic volume of the Daqin Line fell short of expectations.