Incident: The company released its 2024 mid-year report. 24H1 achieved revenue of 0.461 billion yuan, +10.48% year over year; net profit to mother 26.57 million yuan, +1.92% year over year; net profit after deduction of 24 million yuan to mother, -0.63% year over year.

Among them, Q2 achieved revenue of 0.288 billion yuan, +18.90% year-on-year; net profit to mother was 0.033 billion yuan, which was the same as the previous year.

The command and dispatch business is under pressure. New product breakthroughs have boosted IoT revenue and may reduce the number of new construction mileage in 24 years, and the command and dispatch business is under pressure. 24H1, command and dispatch revenue was 0.252 billion yuan, -8.59% year-on-year, and gross margin was +1.23pp year-on-year. The company's core business command and dispatch revenue is under pressure. We believe the main reason is that the number of new railway mileage built in 2024 may decrease. According to China Railway Group's plan, more than 1000 kilometers of new lines will be put into operation in 2024, and a total of 979.6 kilometers of lines will be opened in the first half of the year. Meanwhile, 3,637 kilometers of new lines will be put into operation throughout 2023, of which 2,776 kilometers of new high-speed rail will be opened.

New product breakthroughs have led to a high increase in online animal revenue. Smart application revenue was 0.119 billion yuan, +45.74% YoY, gross margin +1.22pp; industry IoT application revenue was 0.082 billion yuan, +61.95% YoY, gross margin +10.10pp. According to the company's announcement, in August '24, the company's railway integrated video surveillance system (core, regional node) and (access node) obtained the “Railway Product Certification Certificate” issued by China Railway Inspection and Certification Center Co., Ltd. The company has achieved certification breakthroughs in the field of railway IoT applications and is expected to continue to contribute to revenue growth.

Q2 gross margin increased by 2 pct. High R&D expenses and pressurized performance released the company's 24Q2 gross margin of 44.55%, +2pct year-on-year, mainly due to new product breakthroughs and cost reduction and efficiency.

On the cost side, the 24Q2 company's sales expenses ratio was 11.35%, the same as the previous year; the management expenses ratio was 9.47%, down 2.4 pcts year on year; and the R&D expenses rate was 11.42%, up 3.96 pcts year on year. The increase in R&D reserves for new products and new projects has led to a significant increase in R&D expenses in the short term. 24Q2's R&D expenses increased 82% year-on-year.

Overall railway investment exceeded expectations. The company's on-hand orders were +14% on the investment side. From January to July '24, the national railway fixed asset investment was 410.2 billion yuan, an increase of 10.5% over the previous year. On the policy side, the central government co-ordinates the financing of about 300 billion ultra-long-term special treasury bonds to support equipment renewal and trade-in. As of 24H1, the company's on-hand orders exceeded 0.8 billion yuan, +14% over the same period, a record high for the same period.

Focus on 5G-R catalysis from the second half of '24 to 2025

In October '23, the Ministry of Industry and Information Technology approved the test frequency for railway next-generation mobile communication systems (5G-R) based on 5G technology to China Railway Group. According to the company's annual report for the year 23, the company closely followed China Railway Group's 5G-R work deployment and improved the development of 5G-R related products. All products have passed the static test review of China Railway Group's 5G-R system. The company is the core beneficiary of 5G-R construction, focusing on the official frequency distribution and 5G-R test progress in the second half of the year.

Profit forecasting and valuation

We expect the company's net profit to be 0.1, 0.13, and 0.18 billion yuan respectively in 24-26, +53%, +29%, and +39%, corresponding to 24-26 PE of 34, 26, and 19 times, respectively, maintaining a “buy” rating.

Risk warning

Railway investment fell short of expectations; 5G-R construction fell short of expectations; industry competition intensified.