A high-quality state-owned enterprise in the field of high-barrier urban rail design. The steady growth and resilience of its peers have surpassed that of its peers, and the investment value of high dividends and high ROE is outstanding. The subway design is a local state-owned enterprise design enterprise controlled by Guangzhou Metro Group. The actual controller is the Guangzhou State-owned Assets Administration Commission. The company's core business is rail transit survey and design, with a full industry chain layout. The business scope covers surveying and design, planning and consulting, general engineering contracting, etc. in the fields of rail transit, municipal administration, construction, etc. It is one of the enterprises with the strongest comprehensive design strength in the field of urban rail transit design in China. It is the first company with leading survey and design qualifications and rich experience in projects with a long history. It is the first major urban rail design company listed on A-shares. The company's business strategy is steady. Revenue and net profit to mother achieved positive annual growth in 2016 to 2023. The CAGR for the period was 12.76% and 17.11%, respectively. Revenue and net profit to mother in 2023 were 2.573 billion yuan (yoy +3.92%) and 0.432 billion yuan (yoy +8.01%), respectively. Since 2021, infrastructure and real estate investment have been under pressure. The company's revenue and performance growth performance is higher than the sector level, and the operation is resilient, maintaining a steady year-on-year growth trend. The company has strong confidence in future development and issued an equity incentive plan (draft). The 2024-2026 non-performance assessment target will maintain a year-on-year growth rate of about 10%, and the ROE will not be less than 19% each year. Since listing in 2020, the average dividend rate has been 50.67%, and the long-term return on investment advantage is obvious.

The per capita output value of technology leaders in the industry is impressive, and controlling shareholders have effectively empowered project resources. The company's main urban rail design business is more comprehensive and complex. The company has strong technical strength. Over the past 30 years, it has undertaken design consulting, overall design turnkey and design general contracting services for more than 100 rail transit projects, and has taken the lead in mastering advanced technologies in rail transit fields such as line network planning, passenger flow simulation, full-life cycle building information model design, green energy efficiency, prefabricated buildings and smart subways. The company's per capita income generation is generally on the rise. Between 2016 and 2023, it increased from 0.982 million yuan/year to 1.2307 million yuan/year, far higher than the average in the planning and design, housing design, transportation design, and water conservancy design sectors. Guangzhou Metro Group, the controlling shareholder of the company, is a large state-owned enterprise wholly owned by the Guangzhou Municipal Government. It mainly engages in rail transit development, construction and operation. The total investment amount completed in 2020 to 2023 was over 78 billion yuan, compared to 86.098 billion yuan in 2023. Metro Design is the only design listed entity under the Group. It has a clear resource advantage in project order acceptance. In the 2017-2023 customer structure, business revenue from Guangzhou Metro Group accounted for more than 20% of the company's total revenue for the year, and shareholders effectively empowered project resources.

Diversified horizontal and vertical expansion, emerging businesses create long-term perspectives, and active layout outside the province and overseas.

Focusing on the core rail transit design business, the company actively lays out design services in other related majors, such as subway superstructures, municipal administration, landscape, etc., and expands the industrial chain layout to smart subway operation, contract energy management, and digital design. In the field of contract energy management, the “key technology for efficient air conditioning systems for urban rail transit” independently developed by the company has reached the leading international level and has been successfully applied to the energy-saving transformation of existing subway lines. The energy saving rate can reach more than 40%, entering the operating side market, and is expected to further improve the company's cash flow and profitability performance. In emerging fields, the company is deeply deploying smart rail transit, and its key technology-related achievements have been promoted and applied in rail transit line construction in many cities in China. In the field of low-altitude economy, the company actively reserves talents and technology, continues to create new business growth points, continuously improves its comprehensive strength, and further strengthens its business contracting competitiveness to help the company's long-term performance grow. The company is based in Guangzhou, and its development outside the province and overseas has seen results. The business outside the province accounts for about 30% of revenue, and the overseas business is progressing steadily.

Urban rail construction space tends to be steady, construction demand in key regions is improving, and the existing rail transit market is creating update/operation needs. Over the past ten years, China's urban rail construction has moved from rapid development to a steady state. The CAGR of urban rail transit operating mileage reached 15.12% in 2013-2023. The scale of urban rail investment continued to increase in 2013-2020, showing a downward trend in 2021-2023. The total amount of urban rail investment in 2023 was 521.43 billion yuan. By the end of 2023, the total length of the planned construction routes being implemented was 6118.62 kilometers. According to statistics, the total investment amount that can be studied and approved for the construction plan is 4.08 trillion yuan, which guarantees the scale of urban rail investment in the next few years. The rail transit construction plans for cities in key regions such as Guangdong, Hong Kong, Macao, and the Yangtze River Delta are clear, and construction demand continues to improve. By the end of 2023, there were 338 urban rail transit operating lines in China, with an operating mileage of 0.0112 million kilometers. The design service life and service life of the facilities and equipment systems that have been in operation for more than 15 years are close to the end of the period. Lines of 10 years or more will also enter the equipment renewal cycle one after another. Combined with the policy drive of the “Large-scale Transportation Equipment Renewal Action Plan”, it is expected to create a stock market for large-scale existing line transformation, energy management, and equipment updates, and simultaneously drive design requirements for renovation projects.

Investment advice: The company is a leading enterprise in the field of urban rail transit design. It has strong technical strength, sufficient shareholder empowerment, remarkable customer resource advantages, steady growth in performance, clear competitive patterns in high-barrier business, and the company's profitability and per capita revenue generation rank among the top in the design sector. High ROE and high dividends highlight the advantages of management governance and shareholder return. The company develops its business horizontally and vertically around urban rail transit design, explores business potential in emerging fields, and is based in Guangzhou, covering the whole country and overseas. At present, domestic urban rail transit construction plans are progressing steadily, and infrastructure demand from overseas developing countries is being released. As a leader in high-quality urban rail transit design, the company is expected to benefit as a priority. We are optimistic about the company's continued growth and shareholder returns in 2024-2026. We expect the company to achieve operating income of 2.852 billion yuan, 3.126 billion yuan, and 3.428 billion yuan respectively, up 10.8%, 9.6%, and 9.7% year on year; net profit to mother is 0.483 billion yuan, 0.535 billion yuan, and 579 million yuan, up 11.88%, 10.74% and 8.21% year on year; EPS is 1.18 billion yuan, At 1.31 and 1.42 yuan, PE was 11.7 times, 10.5 times, and 9.7 times, respectively. Compared with comparable design consulting companies, the company's PE has a clear advantage, giving the company a “buy-A” rating. In 2024, PE was 16 times higher, corresponding to a target price of 18.9 yuan for 6 months.

Risk warning: macroeconomic fluctuations; deterioration of local finance and repayment risks; policy implementation falls short of expectations; new business development falls short of expectations; market development falls short of expectations; industry competition intensifies; profit forecasts fall short of expectations.