Matters:

The company announced its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 10.284 billion yuan, an increase of 19.99%; net profit attributable to shareholders of listed companies was 1.507 billion yuan, an increase of 30.56% over the previous year.

Ping An's point of view:

The core business grew significantly, highlighting performance resilience: 2024H1, the company achieved revenue of 10.284 billion yuan (+19.99% YoY), net profit of 1.507 billion yuan (+30.56% YoY), and net profit of 1.159 billion yuan (+24.77% YoY) after deducting net income from mother (+24.77% YoY), mainly due to rapid growth in the rail transit sector and steady development of the emerging equipment business. 2024H1, the company's overall gross margin and net margin were 27.84% (-3.24pct YoY) and 15.57% (+1.70pct YoY), respectively. On the cost side, the 2024H1 period expense ratio was 14.62% (-3.94pct YoY), of which the sales expense ratio, management expense ratio, financial expense ratio, and R&D expense ratio were 1.98% (-4.11pct YoY), 4.21% (-0.29pct YoY), -0.76% (+0.72pct YoY), and 9.19% (-0.26pct YoY), respectively. In the 2024Q2 quarter, the company achieved revenue of 6.359 billion yuan (+15.94% YoY, +62.03% QoQ) and realized net profit of 0.939 billion yuan (+30.63% YoY, +65.50% QoQ). The gross margin and net margin for the Q2 single quarter were 23.99% (-6.34pct YoY, -10.07pct QoQ) and 16.10% (+2.59pct YoY, +1.39pct QoQ) ). Looking at the revenue structure, 2024H1 achieved revenue of 6.139 billion yuan (+30.87% YoY) of which rail transit electrical equipment achieved revenue of 4.947 billion yuan (+27.33% YoY), rail construction machinery achieved revenue of 0.557 billion yuan (+15.57% YoY), communication signal systems of 0.416 billion yuan (+131.47% YoY), and other rail transit equipment 0.219 billion yuan (+52.23% YoY); the emerging equipment business segment achieved revenue of 4.094 billion yuan (+9.21% YoY), of which power semiconductor devices achieved revenue of 1.747 billion yuan (+26.63% YoY), sensor devices 0.136 billion yuan (-47.01% YoY), new energy vehicle electric drive systems 0.903 billion yuan (+8.23% YoY), industrial conversion 0.903 billion yuan (-3.58% YoY) YoY), offshore equipment 0.405 billion yuan (+18.61% YoY).

China Railway Group's EMU tenders exceeded expectations, and the company led domestic rail transit traction and conversion systems:

As of the first half of 2024, high-speed rail and locomotive traction conversion system products have led the domestic market for many years in a row. In terms of the rail transit industry, with railway passenger traffic rising steadily and reaching record highs, China Railway Group's EMU tenders have exceeded the level of last year, and the company's market share remains stable; the company's serialized new energy locomotive research and development continues to advance, and some models have achieved sample car loading; China Railway Group's EMU advanced repair tenders have increased; at the same time, actively supporting OEMs to explore overseas markets, making gains in overseas markets such as Asia, America, Europe, and Africa; on June 12, 2024, the China Urban Rail Transit Association approved the “China Urban Rail Transit Integrated Urban Rail Transit Development Guidelines” as a rail city Of traffic Sustainable high-quality development indicates the direction. Based on the four core competencies of “technology, market, brand and service”, the company continues to lead the industry with new orders for urban rail traction systems; rail construction machinery and equipment actively promotes the development and promotion of new products such as multi-source power catenary work vehicles, grinding trucks, flaw detection vehicles, etc., and obtains major revisions for new high-end models such as polishing cars and flaw detection vehicles; the market share of main line railway signal products remains stable, and urban rail signal systems have received new orders.

Emerging equipment businesses have taken advantage of breakthroughs and are at the forefront of the industry: 1) Power semiconductors: existing production lines are in full operation, and the Yixing Phase 3 project is progressing steadily. After the project is completed and put into production, it will form a production capacity of 5 million SiC medium- and low-voltage power components per year, which will have a positive impact on the company's future performance; various projects for power grids and rail transport high-voltage devices have been delivered in batches; IGBT7.5 generation chip technology products have been delivered in batches; SiC products have completed 4th generation groove grid chip development, SiC production line transformation completed, and new energy vehicle products are in Ongoing verification phase. 2) New energy passenger vehicle electric drives: Production capacity has increased steadily, and production capacity has repeatedly reached new highs in a single month. Supporting Hezhong and SAIC-GM-Wuling, they have achieved overseas exports of about 0.04 million units. 3) Sensors: Sensor revenue declined in the first half of the year due to the decline in demand growth in the photovoltaic industry and the decline in the unit price of automotive sensor products. 4) Industrial transformation: Products receive new orders in the fields of new energy power generation, metallurgy, mining, ships, air conditioning, etc., and existing products continue to be delivered in batches. In the field of new energy power generation, the delivery process of photovoltaic inverters and wind power converter products has accelerated. As the only state-owned enterprise in the photovoltaic inverter market, the company gave full play to the collaborative advantages of technology, products and the entire industry chain, and was shortlisted for most of the annual collection/framing of central enterprise power generation groups. 5) Offshore equipment: Offshore equipment has received many new orders at home and abroad. The global market share of underwater trenching and cable laying products continues to lead the way. EROV (electric underwater robot) verification and testing have progressed smoothly, and has been well received by many potential customers.

Investment advice: The company has an industrial structure of “device+system+complete machine”. The products mainly include rail transit electrical equipment, rail construction machinery, communication signal systems, etc., mainly rail transit traction and conversion systems. At the same time, the company is also actively developing industries other than rail transit, and is developing business in the fields of power semiconductor devices, industrial conversion products, electric drive systems for new energy vehicles, sensor components, and offshore equipment. With the recovery in motor vehicle and locomotive tenders and system maintenance and replacement demand, the production capacity of medium- and low-voltage devices in subsequent new production lines continues to increase, and the company's business is expected to grow steadily. Based on the company's latest financial reports and industry developments, we raised our profit expectations. We expect net profit to be 3.603 billion yuan (previous value was 3.451 billion yuan), 4.468 billion yuan (previous value was 4.069 billion yuan), and 5.504 billion yuan (previous value was 4.541 billion yuan), corresponding to the closing price of PE on August 23, 22.2X, 17.9X, and 14.6X, respectively. We continue to be optimistic about the company's subsequent development and maintain a “recommended” rating.

Risk warning: 1) Market demand falls short of expectations. The downstream of the company is in fields such as rail transit and new energy vehicles. If downstream investment progress or demand falls short of expectations, the company's supporting products will also be affected. 2) The risk of increased competition in the market. The company's current focus on power semiconductors and other fields is also facing fierce competition from international and domestic competitors. If the competitive environment deteriorates, the company's gross margin may decline. 3) The progress of technology research and development fell short of expectations. The company invests in R&D on a large scale in emerging fields. If the direction of investment deviates or the R&D progress falls short of expectations, it may adversely affect the company's operations and medium- to long-term development.