1H24 earnings forecast net profit to mother increased by 30.6% year on year. Super Market expectations are that the company will release 1H24 performance forecast: net profit to mother is expected to be 1.51 billion yuan in the first half of 2024, an increase of 30.6% year on year; after deducting non-net profit of 1.27 billion yuan, an increase of 36.5% year on year. We calculate that for the 2Q24 single quarter, the company expects to achieve net profit of 0.94 billion yuan, a year-on-year increase of 30.6%, after deducting non-net profit of 0.81 billion yuan, an increase of 32.2% over the previous year. The performance forecast exceeds market expectations. We judge that it is mainly due to an increase in railway investment and passenger traffic. The company's rail transit business is benefiting from growth, while emerging businesses such as power semiconductors are developing steadily.

Key points of interest

The passenger traffic boom is expected to support EMU procurement demand. The number of EMU tenders with a speed of 350 kilometers per hour for the first time this year was higher than last year. According to the National Bureau of Statistics, from January to May 2024, China's railway passenger traffic volume was 1.74 billion, with a year-on-year increase of 20.2%. Of these, the railway passenger traffic volume in May was 0.36 billion, an increase of 10.7% over the previous year. We believe that the increase in railway passenger traffic is expected to support the increase in EMU usage and drive EMU procurement demand, and pay attention to subsequent changes in railway passenger traffic. On May 10 this year, China Railway Group held its first EMU tender of the year. The bid was for 165 Fuxing EMUs with a speed of 350 kilometers per hour, which is higher than last year's annual level of 158 trains. We believe this reflects the release of EMU procurement demand as the trend of improving railway passenger traffic continues. We are concerned about the continuation of subsequent tenders and the benefits of the company's business growth.

Continue to strengthen the competitiveness of emerging businesses and pay attention to the release of IGBT production capacity. In terms of business in emerging industries, the company continues to strengthen its competitiveness: 1) New energy passenger vehicle electric drives. The company's sales volume continued to increase in 2023. According to the NE era, the company's installed capacity entered the top six in the industry in 2023, and completed the development of various 70-120kW products. 2) Photovoltaic inverters, 18.6 GW of new domestic orders were signed in 2023, and the ranking rose to the top three. 3) Sensors. The company's domestic autonomous vehicle grade Hall ASIC chips have passed AECQ100 certification, and 39 new production lines have been built, and delivery volume has increased dramatically. 4) Offshore Engineering: In 2023, the company signed a number of new orders in the domestic market, and heavy deep-sea trenching equipment was successfully launched. 5) IGBT:

In 2023, the company had the largest market share in the domestic rail transit and power grid sector, and the market share in the new energy passenger vehicle sector increased rapidly, and the third-generation 1200V SiC MOSFET chip reached the advanced level in China. At the same time, the company continued to promote the third phase of production capacity construction and is scheduled to be put into operation in 2024, focusing on the company's future production capacity release progress and performance growth.

Profit forecasting and valuation

Keep outperforming industry ratings and profit forecasts unchanged. Currently trading at 10.2x/9.4x 2024/2025 P/E. Maintain the target price of HK$36.54, corresponding to 13.1x/12.0x 2024/2025 P/E, with 28% upside.

risks

The continuation of rail transit tenders fell short of expectations, and IGBT volume fell short of expectations.