The core line of the general railway era, high-speed rail diversion impacted profits. The Guangzhou-Shenzhen Intercity Railway was built in 1911. After reform and opening up, it went through many rounds of renovation and upgrading, and became the country's first quasi-high-speed railway with four parallel lines and passenger and cargo lines. It was an early star line in the Chinese railway industry. The Guangshen Railway Company is a product of China's railway reform. It was listed in the US and Hong Kong in 1996, entered the A-share market in 2006, and expanded its routes and transportation business through the merger and acquisition of the southernmost section of the Beijing-Guangzhou Railway. The company also operates routes and transportation services. It has complete lines, land, stations, vehicles and human resources, and operates both passenger and cargo trains. Amid the wave of high-speed rail replacing general railways, high-speed rail passenger transportation absorbs new demand and erodes the scale of general rail passenger traffic. The Guangzhou-Shenzhen Railway is a tragic player. Passenger traffic at its general railway stations has stagnated, passenger traffic on its general railway lines continues to decline, and profitability and scale continue to decline. In this context, the Guangzhou-Shenzhen Railway is seeking business transformation. General railway vehicles depreciate and exit at an accelerated pace, the share of asset-light operations has increased, and profitability has bottomed out.
Transforming railway operations and connecting station lines to high-speed rail networks
In the context of high-speed rail networks one after another, on the one hand, the Guangzhou-Shenzhen Railway is affected by continuous diversion, and on the other hand, it has ushered in new opportunities for transformation.
Beginning in 2011, the company provided commissioned operation services for high-speed rail lines in Guangdong Province. Beginning in 2017, the company operated cross-line trains and high-speed rail trains. After decades of layout, the asset-light operation business brought opportunities to the company. Passenger traffic at stations under the Guangzhou-Shenzhen Railway continues to decline, but revenue from intercity trains, direct trains, and long-distance trains continues to grow; unit prices for each train surpassed 2019; equipment leasing and service fees increased dramatically after 2017; all of these indicate that the company has leased external lines and launched more and more high-speed rail trains across lines. The Guangzhou-Shenzhen Railway provides proxy operation services for high-speed rail lines in Guangdong Province. With the completion of high-speed rail lines, it is expected that road network clearing and transportation service charges will continue to increase. Considering the distribution of benefits within the railway system, the short-term profit contribution of related businesses is limited. Stations and lines owned by the Guangzhou-Shenzhen Railway have gradually stopped, and high-speed rail trains have been added one after another. Around 2027, the company's station line renovation and upgrading will be completed. We believe that the high-speed rail operation business of the Guangzhou-Shenzhen Railway will soon usher in new opportunities.
Hong Kong is connected to the high-speed rail network, and cross-Hong Kong trains expand flexibility
There is no explicit regulation on the allocation of resources for high-speed rail trains. Since the Guangzhou-Shenzhen-Hong Kong High Speed Rail and the Beijing-Shanghai High Speed Rail also implement a contract transportation management model, the cross-Hong Kong high-speed rail trains handled by the Guangzhou-Shenzhen Railway are cross-line trains. These high-speed rail trains are currently the most important revenue and profit growth point for the Guangzhou-Shenzhen Railway. As Hong Kong is connected to China's high-speed rail network, the policy of two inspections in one place provides great convenience for cross-Hong Kong travel. Long-term changes in cross-Hong Kong passenger transport have taken place, the trend of Hong Kong's integration into China's unified market has taken shape, and the Guangzhou-Shenzhen Railway's cross-Hong Kong high-speed rail trains will benefit from this. The Guangzhou-Shenzhen-Hong Kong High Speed Rail uses the principle of “segmented billing, separate pricing, and total acceptance”. For cross-Hong Kong high-speed rail trains, the passenger occupancy level of the domestic section determines the marginal profit contribution of the Guangzhou-Shenzhen Railway cross-Hong Kong high-speed rail trains. Since the density of Guangzhou-Shenzhen-Hong Kong high-speed rail trains is comparable to that of the Beijing-Shanghai high-speed rail, passenger ticket prices are 40% higher than that of the Beijing-Shanghai high-speed rail. The cross-Hong Kong high-speed rail train is probably the cross-line train with the highest potential yield in China. As production capacity in the domestic section of the Guangzhou-Shenzhen-Hong Kong High Speed Rail is saturated and passenger occupancy rates continue to improve, the Guangzhou-Shenzhen Railway's existing trains will reap marginal profits from it. If the number of cross-Hong Kong high-speed rail trains increases and cross-line trains increase, profits will also be skewed towards the Guangzhou-Shenzhen Railway.
From resource products to operators, reshaping business and valuation
In the era of general railways, the Guangzhou-Shenzhen Railway flourished, and was the most notable railway star. When a technological revolution appeared in the railway industry, high-speed rail quickly replaced general railways. The lines and trains of the Guangzhou-Shenzhen Railway were diverted by high-speed rail, and profitability and scale continued to decline. Facing the technological revolution, the company actively or passively sought a new direction. After ten years of ups and downs, it transformed from a resource product to an operator, and ushered in a new generation of revaluation. We expect the company's attributable profit for 2024-2026 to be 1.4 billion, 1.6 billion, and 1.8 billion, respectively, and the corresponding PE is 17 times, 15 times, and 13 times, respectively. We are optimistic about the cyclical growth of the company's high-speed rail operation business and maintain a “buy” rating.
Risk warning
1. Macroeconomic fluctuations; 2. Parallel line diversion; 3. Transformation is lower than expected; 4. Profit assumptions are unfounded or fall short of expectations.