Description of the event

Daqin Railway released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved operating income of 81.02 billion yuan, an increase of 6.9% over the previous year; realized net profit of 11.93 billion yuan, an increase of 6.6% over the previous year. In the first quarter of 2024, the company achieved operating income of 18.268 billion yuan, a year-on-year decrease of 7.9%; realized net profit of 3,046 billion yuan, a year-on-year decrease of 16.6%. According to the “Proposal on the 2023 Profit Distribution Plan of Daqin Railway Co., Ltd.”, the company plans to distribute cash dividends of 6.928 billion yuan, with a dividend distribution ratio of 58.08%. The board of directors formulated the “Daqin Railway Co., Ltd. Three-year (2023-2025) Shareholder Dividend Return Plan”, which distributes dividends in cash every year. The cash dividend ratio is not less than 55% of the total net profit returned to mother for the year, which exceeds the dividend ratio from 2010 to 2019. At the same time, if conditions are available, the company can distribute profits in the medium term.

Incident comments

Passenger and cargo returned to normal in 2023, and performance increased year-on-year: In 2023, the passenger and freight operations of the Daqin Railway returned to normal.

The company achieved passenger traffic of 42.84 million passengers, up 111.5% year on year, passenger revenue increased 119.0% year on year to 8.919 billion yuan; the Daqin Line achieved freight volume of 422 million tons, and the company's freight revenue increased 0.8% year on year to 61,238 billion yuan; and the company achieved operating revenue of 81.20 billion yuan, an increase of 6.9% year on year. On the cost side, the depreciation costs of the Daqin Railway were relatively rigid; labor costs continued to rise over a long period of time, and the number of employees in the company decreased by 3.1% year on year, but average remuneration rose 7.6%, and annual labor costs were 21.985 billion yuan; passenger service fees, freight service fees, electricity and fuel, and locomotive leasing fees increased dramatically along with business volume; operating costs increased 6.0% year over year to 64.279 billion yuan. On the cost side, the financial rate, sales rate, management rate, and R&D rate were stable. The total cost for the period was 1,241 billion yuan, a slight increase of 1.4% over the same period in 2022. Since the increase in revenue was greater than the cost, the company achieved net profit of 11.930 billion yuan, an increase of 6.6% over the previous year.

The year-on-year decline in 2024Q1 freight volume dragged down profit performance: 2024Q1. The national railway freight boom declined, and freight volume fell 0.14% year on year 2023Q1. Both supply and demand in the coal market weakened. Production was cut in the upstream “Three West” regions, coal prices declined in the downstream northern seven ports, and 2024Q1 traffic volume fell 6.0% year on year to 98 million tons. 2024Q1 achieved operating income of 18.268 billion yuan, down 7.9% year on year, mainly dragged down by railway freight business; the company's operating costs fell 3.0% year on year to 14.39 billion yuan, benefiting from the increase in deposit interest, the company's expenses fell 47.0% year on year to 121 million yuan, and finally realized net profit of 3,046 billion yuan, a decrease of 16.6% year on year 2023Q1.

High dividends are undervalued, and demand for coal is booming: In “Long-term Reverse Assets, Stable Compound Income”, we emphasized that China is mainly self-sufficient in coal, but regional imbalances bring long-distance transportation requirements. Taking advantage of the advantages of different modes of transportation, we have built a “west coal to east” + “north to south” transportation channel. With the four “West Coal Transport to East” channels, the Daqin Railway naturally has the advantage of low cost, and traffic volume is expected to remain high for a long time. The factors suppressing the long-term returns of the Daqin Railway are expected to be reversed: 1) Along with epitaxial extension and endogenous investment, the Daqin Railway has built a transportation network integrating evacuation, and inefficient investment is expected to decrease; 2) Railway freight prices are regulated by policies and have the characteristics of countercyclical regulation. Along with rising labor costs and huge losses for the China Railway Group, the possibility of national railway freight price adjustments is increasing. At this stage, freight prices on the Daqin Railway are still controlled by policy. Considering that the capacity utilization rate is high, if market-based reforms are implemented in future freight rates, profits may have upward momentum. Considering the high demand for downstream coal, we expect the traffic volume of the Daqin Railway to remain high. The net profit attributable to 2024 to 2026 is 120.8, 123.8, and 13.0 billion yuan respectively, corresponding PE is 10.8, 10.6, and 10.1 times, respectively. The dividend ratio from 2023 to 2025 will not be less than 55%. The undervaluation characteristics of high dividends are prominent, and the “buy” rating is maintained.

Risk warning

1. Reinvestment risk; 2. Freight rate adjustment risk; 3. Labor cost risk.