1H24 performance exceeded our expectations

The company announced 1H24 results: revenue of 10.28 billion yuan, up 20.0% year on year; net profit to mother of 1.51 billion yuan, up 30.6% year on year, exceeding our expectations, mainly due to rapid growth in rail transit equipment.

Looking at a single quarter, 2Q24's revenue was 6.36 billion yuan, up 15.9% year on year, and net profit to mother was 0.94 billion yuan, up 30.6% year on year.

The rail transit equipment business is booming, and the growth rate structure of the emerging equipment business is fragmented. 1H24's rail transit equipment business revenue was 6.14 billion yuan, up 30.9% year on year. Among them, revenue from rail transit electrical equipment/rail construction machinery/communication signals/other rail transit equipment was +27.3%/+15.6%/+131.5%/52.5%, respectively. We think it is mainly due to the increase in EMU and maintenance tenders and communication signal business, and the company's rail transit equipment business revenue growth rate. 1H24's revenue from the emerging equipment business was 4.09 billion yuan, up 9.2% year on year. Among them, revenue from power semiconductor devices/electric drive systems/industrial conversion/offshore equipment/sensor components was +26.6%/-3.6%/+18.6%/-47.0%, respectively. We believe it is mainly due to the different downstream demand conditions and corresponding business revenue growth differentiation.

Profit margins increased year over year, and net cash flow inflows increased year over year. 1H24's consolidated gross margin was 27.8%, up 0.5ppt year on year. The cost rate for the 1H24 company period was 14.6%, a year-on-year decrease of 0.2ppt. 1H24's net profit margin was 14.7%, an increase of 1.2ppt over the previous year. The net cash flow from 1H24's operating activities was 0.67 billion yuan, an increase of 1.14 billion yuan over the previous year.

Development trends

The rail transit equipment business is booming. As railway passenger traffic continues to improve, 1H24 China Railway tenders 165 sets of 350 kilometers per hour, which is higher than the full level of last year; at the same time, two EMU advanced maintenance tenders were held in January and August this year, totaling about 833 groups, including 509 grade 5 repair groups. We believe this reflects the gradual release of demand for higher-level EMU maintenance as the service life of active EMUs increases. We believe this is expected to support the company's recent growth in performance; we will continue to monitor future tenders.

Follow the progress of the new IGBT production line being put into operation. 1H24's power semiconductor device revenue was 1.75 billion yuan, up 26.6% year on year, and the growth rate was relatively fast. According to the company's announcement, the Yixing Phase 3 project is progressing steadily. It is expected to be put into operation in the second half of 2024, and production capacity for medium and low voltage devices will continue to increase. We recommend paying attention to the upward trend in the company's product sales revenue and the impact of the compounding of depreciation costs on profit growth after the company's subsequent new production line is put into operation, and also pay attention to the progress of downstream demand tenders.

Profit forecasting and valuation

Maintain outperforming industry ratings. The 2024/2025 profit forecast was raised 4%/4% to 3.7 billion yuan/4.04 billion yuan, taking into account the release of demand for EMUs and advanced repairs and the new IGBT production line to be put into operation. Currently trading at 10.8x/9.8x 2024/2025 P/E. Maintain the target price of HK$36.54, corresponding to 12.6x/11.5x 2024/2025 P/E, with 17% upside.

risks

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