1H24 performance exceeded our expectations

The company announced 1H24 results: revenue of 90.04 billion yuan, up 3.1% year on year; net profit to mother of 4.2 billion yuan, up 21.4% year on year, exceeding our expectations, mainly due to the acceleration of the EMU delivery process. Looking at a single quarter, 2Q24's revenue was 57.86 billion yuan, up 5.3% year on year, and net profit to mother was 3.19 billion yuan, up 12.2% year on year.

Railway equipment revenue is growing rapidly, and the revenue structure is changing. 1H24's railway equipment revenue was 41.99 billion yuan, up 47.0% year on year. Among them, EMU revenue was 26.53 billion yuan, up 93.2% year on year, locomotive revenue was 8.12 billion yuan, down 14.3% year on year, bus revenue was 2.63 billion yuan, up 108.6% year on year, truck revenue was 4.68 billion yuan, up 14.6% year on year. 1H24's urban rail and urban infrastructure revenue was 16.38 billion yuan, down 14.1% year on year, mainly due to a decrease in urban rail project revenue; revenue from new industries was 30.04 billion yuan, down 18.5% year on year, mainly due to a decrease in revenue from energy storage wind power equipment; and revenue from modern services was 1.64 billion yuan, down 42.3% year on year, mainly due to a decrease in revenue from logistics and financial leasing businesses in the current period.

Profit margins increased year over year, and net cash flow inflows increased year over year. 1H24's consolidated gross margin was 21.4%, up 2.0ppt year over year. The cost rate for the 1H24 company period was 15.3%, up 1.4ppt year on year, and the net interest rate to mother was 4.7%, up 0.7 ppt year on year. The net cash flow from 1H24's operating activities was 1.85 billion yuan, an increase of 16.63 billion yuan over the previous year, mainly due to the increase in cash received from sales of goods and services compared to the previous year.

Development trends

The number of EMU and advanced repair tenders was released quickly, and the company's follow-up orders and implementation progress were monitored. As railway passenger traffic continues to improve, according to China Railway Group's announcement, 1H24 China Railway tenders 165 sets of 350 kilometers per hour, which is higher than the full year level of last year; at the same time, two advanced EMU repair tenders were held in January and August of this year, totaling about 833 groups, including 509 grade 5 repair groups. We believe this shows that as the service life of active EMUs increases, demand for higher-level EMUs is gradually being released. We believe this is expected to support the company's recent growth in performance. Looking ahead, we believe that as railway passenger traffic continues to increase to support the usage rate of EMUs and the increase in the service life of EMUs, demand for EMUs and advanced maintenance is expected to be further released, thereby benefiting from the increase in the company's revenue and profit.

Profit forecasting and valuation

Maintain outperforming industry ratings. Considering the release of demand for EMU and advanced maintenance tenders this year, the 2024 profit forecast was raised 3% to 13.01 billion yuan, maintaining the 2025 profit forecast. The company currently trades A shares at 18x/17x 24e/25e P/E and H shares at 10x/10x 24e/25e P/E. Considering rising profits and rising EMU demand, the target price for A/H shares was raised 15%/18% to HK$9.10/6.00, A shares correspond to 20x/19x 24e/25e P/E, H shares correspond to 12x/12x 24e/25e P/E, and A/H shares correspond to 12%/14% upward space, respectively.

risks

China Railway Group's tender fell short of expectations; wind power industry tenders fell short of expectations.