The Daqin Line is one of the most important energy channels in China. It undertakes the important task of “transporting coal from west to east”, and is an important part of the construction of China's energy security system. The Daqin Line is China's first heavy-duty railway. According to the company's 2023 annual report, the company has sent 620 million tons of coal, accounting for 22.5% of the country's railway coal delivery volume. The company relies on coal resources in the Jinbei, Datong regions, the Zhungeer mining area in Ordos, and the Baoxi route in Mengxi, and currently manages 9 major transportation routes and 8 branch lines.

Increased demand for coal is compounded by increased concentration of production areas, which is beneficial to core energy mainlines. Beginning with the last round of coal supply-side structural reforms, the clearance of coal production capacity in some provinces has led to a gap in local coal supply. Along with continued growth in demand and the withdrawal of backward production capacity, the transfer volume of the gap has continued to widen. The concentration of coal production in Jinshan-Shaan-Mongolia continues to increase, and the Daqin Railway, as the core channel for coal launch in Jinshan-Shaanxi, and Mongolia, continues to benefit from this trend.

Drawing on Canada's national railway experience, we can't wait to see the transformation of rail transport into logistics. Reviewing the development history of Canadian Railways, it can be seen that the factors driving the growth of its performance include freight rates, traffic volume, and diversified value-added logistics services. In line with China Railway Group's recent logistics transformation initiatives, we believe that China's railway transportation transformation logistics can effectively open up profit margins for traditional railway transport enterprises in the future. Benchmarking Canadian Railways, the transformation from a transportation company to a diversified logistics company can bring new expectations for the company's growth.

Investment analysis: We expect the company's net profit to be 115.32, 117.85, and 12.276 billion yuan respectively in 2024-2026, with earnings per share of 0.66 yuan/share, 0.67 yuan/share, and 0.70 yuan/share, respectively. Based on the above profit forecast, the PE corresponding to the current market value is 11x, 11x, and 10x, respectively. Combining the carbon neutrality experience of developed countries and the characteristics of China's energy endowments, we believe that coal will remain the cornerstone of China's energy structure for the next few years. At the same time, along with the increase in coal production capacity concentration in Jinshan and Shaanxi, the central value of coal transportation volume on core energy main lines is expected to remain stable for the next few years in the context of “logistics cost reduction” and “transportation energy saving and emission reduction”. We believe that the sustainability of the coal consumption circuit and the long-term duration of coal transportation main line assets should be reflected in the valuation system of the Daqin Railway. According to FCFF's valuation, the company's reasonable market value is about 204.723 billion yuan. It is estimated that the company's target price is 11.9 yuan. Corresponding to the closing price on June 5, 2024, there is room for an increase of about 67.6%. For the first time, it covered a “buy” rating.

Risk warning: Drastic changes in the energy structure; production safety accidents; tariff policy adjustments; depletion of coal sources in major sources.