CRRC Corp (CRRC) reported 1Q24 results with in-line flat sales growth but a strong net profit growth of 63.9% YoY due to a low base and shifts in sales mix towards higher-margin railway equipment products. In 1Q24, sales of railway equipment, which contributes higher gross margin, accounted for 41.4% of total sales, representing a 54.1% YoY sales growth and expanding the overall gross margin by 3ppts against 1Q23 level. Although China Railway Co. (CRC) has not yet announced the 2024 railway bidding plan, we reckon CRRC will benefit from the solid demand for both new manufacturing and maintenance services for railway equipment. We retain our sales and earnings estimates to derive the unchanged TP of HK$6.53, which implies 48% upside. Retain BUY.
Key Factors for Rating
CRRC's net profits growth outpaced flat sales growth to achieve 63.9% YoY increase mainly due to changes in product mix. In general, railway equipment segment generates the highest gross margin among all segments. In 1Q24, sales from railway equipment increased strongly by 54.1% YoY to account for 41.4% of total sales, mainly attributable to the delivery of EMU units for which the company won bids at the end of 2023. Sales from urban rail transit vehicles and infrastructure, new business, and modern services segments dropped by 24.3%, 19.3% and 13.2% YoY, respectively, which accounted for 17.2%, 37.9% and 3.6% of sales, correspondingly. The sales decline in new business segment in 1Q24 was mainly due to some disruptions in product delivery, while contracts on hand are still sufficient. New business segment contributed 34.4% of sales in 2023 and has become one of CRRC's key strategic focuses, which might become another growth driver in 2024.
CRRC might benefit from the upcoming biddings for new railway equipment manufacturing and maintenance services. According to data from NBS and National Railway Administration, the number of passengers transported totaled 1.014bn in 1Q24, representing a YoY increase of 28.5%. Although CRC has not yet initiated the 2024 procurement process, we expect CRRC will benefit from the upcoming biddings due to strong demand. Also, given that the EMUs start to require advanced level of maintenances after around 6-12 years of operations, we reckon CRRC will benefit from the robust demand for maintenance service from EMUs' aging status and current high utilisation rate.
CRRC will focus more on providing full life cycle services to boost urban railway sales. Although sales from urban railway segment, especially for subway manufacturing, have been declining during recent year due to insufficient local government budgets, CRRC now focuses more on providing system, maintenance and operation services to urban railway system to grab more opportunity.
Key Risks for Rating
Weaker-than-expected railway equipment procurement.
Valuation
We retain our sales and earnings estimates. TP remained unchanged at HK$6.53, implying 48% upside. Retain BUY.