UBS Group released a research report stating that China Railway (00390.HK) is expected to benefit from stricter cost control and stock-based incentive programs, as well as an increase in the contribution of high-profit resource businesses to drive fundamentals improvement. The bank lowered its earnings forecast for 2024 to 2026 by 5% to 8% to reflect the performance of fiscal year 2023, the performance of the first quarter of fiscal year 2024, and the performance guidance for fiscal year 2024. The bank believes that the market has not fully considered the fundamentals improvement of the company and the increase in profit contribution from resource businesses.

The bank raised the company's target price from 4 yuan to 5.2 yuan and maintained a "buy" rating.

UBS Group states that its analysis shows that the company's fundamentals are better than other tracked state-owned enterprises such as JianShan. This is because China Railway has a higher return on equity, more robust operating cash flow, and higher potential for profit growth. The bank pointed out that China Railway will focus more on return on equity and operating cash flow starting from 2022, and is expected to continue to improve return on equity and operating cash flow by prioritizing cash flow when evaluating the performance of subsidiaries and incorporating payment conditions for new order contracts.

In addition, the bank also believes that the positive stock-based incentive program can further drive company fundamentals improvement. The program requires the company to achieve a minimum annual return on equity of 11.5% and a minimum annual profit growth rate of 11.3% in 2024. (vc/u)

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