On May 10, 2024, China Railway Group issued the first tender notice for 2024 EMUs. The scope of the tender includes: 350 km per hour Fuxing intelligent EMU (8 groups), number 132; 350 km per hour Fuxing intelligent alpine EMU (8 groups), number 13 groups; 350 km per hour Fuxing intelligent configuration EMU (17 car groups), number 20 groups (10 trains), totaling 165 groups. The initial tender scale has already exceeded the full year of 2023 (164 groups for the whole year of 2023) The number of tenders increased significantly.
1-4M24 National railway investment accelerated, the number of EMU tenders increased dramatically in 24, and demand for railway equipment continued to recover. According to the National Railway Administration, national railway fixed asset investment was +7.5% year over year in '23, 1-4M24 was +10.5% year over year, and investment volume grew at an accelerated pace. Furthermore, 1-3M24 national railway passenger traffic was +28.5% year-on-year. As railway investment increased at an accelerated pace and passenger traffic continued to rise, China Railway Group EMU tenders continued to pick up. The initial tender scale for the “Fuxing” EMU with a speed of 350 kilometers per hour in 24 years reached 165 units, and the tender scale has already exceeded 23 for the whole year (164 groups were tendered for the whole of '23, and 103 for the first time in June '23). Demand for railway equipment is picking up, and we are optimistic about the company's revenue growth in the new EMU car construction business.
Level 5 EMU maintenance has entered a period of explosion, and we are optimistic that maintenance business will increase in 2024. EMU operation requires level 5 repair for 4.8 million kilometers or about 12 years. According to the National Railway Administration, EMU ownership increased 200% in five years from 2011 to 2016, corresponding to the explosion period of level 5 maintenance in about 23. According to the China Railway Group Tendering Network, 361 EMU advanced repair groups were first tendered in 2024, of which 207 were grade 5 repair groups. The scale of the first tender for advanced maintenance surpassed the full year of 2023 (290 advanced repair groups in 2023, of which 108 grade 5 repair groups). From December 2023 to March 2024, the company signed an advanced EMU repair order of 14.78 billion yuan, accounting for 6.6% of 2022 revenue, with a large order amount. Level 5 repairs will replace EMU parts on a large scale, and I am optimistic about the rapid growth of the company's EMU maintenance business.
The executive meeting of the State Council is promoting the upgrading of rail transit equipment and is optimistic about the release of demand for railway equipment renewal.
In March 2024, the executive of the State Council reviewed and approved the “Action Plan to Promote Large-scale Equipment Renewal and Trade-in of Consumer Goods”. The conference stated that fiscal, tax, financial and other policy support should be increased, and transportation equipment renewal and transformation should be promoted in an orderly manner. Furthermore, the State Railway Administration proposed in 2024 that it will improve the renewal subsidy policy in the future to basically eliminate old internal combustion locomotives by 2027.
Encouraged by the policy, the pace of upgrading and replacing railway equipment is expected to accelerate, which is beneficial to the long-term revenue growth of the company's railway equipment business.
We expect the company's revenue in 24-26 to be 2588/285/ 312.8 billion yuan, net profit to mother of 137/154/16.7 billion yuan, corresponding PE to 15X/13X/12X, maintaining a “buy” rating.
Railway fixed asset investment falls short of expectations; overseas business expansion falls short of expectations; development of new industries falls short of expectations; risk of exchange rate fluctuations.