Core views

In the first half of 2024, the company's four major business segments led the growth rate of railway equipment revenue. Among them, EMU revenue surged 93.16%, which led to an increase in profit levels. Looking ahead to 2024 and beyond, equipment updates will be an important driving force for the company's business development. Among them, the number of tenders for advanced EMU repairs continued to exceed expectations in 2024, and the share of high-value-added grade 5 repairs increased significantly, which is expected to drive a further increase in profit levels; with the introduction of new energy locomotives, the phasing out and renewal of old internal combustion locomotives is expected to gradually begin, laying the foundation for development in the next 3 years. In the context of central enterprises' market capitalization assessments and equipment renewal policies, the company may continue to benefit from the combined market's focus on high-dividend assets.

occurrences

In the first half of 2024, the company achieved revenue of 90.039 billion yuan, +3.13% YoY; net profit to mother 4.201 billion yuan, +21.40% YoY; net profit after deducting non-attributable net profit of 3.36 billion yuan, +30.08% YoY. Revenue for the second quarter of 2024 was 57.857 billion yuan, +5.34% year over year; net profit to mother was 3.193 billion yuan, +12.21% year over year; net profit after deducting non-return to mother was 2.692 billion yuan, +13.14% year over year.

Brief review

1. The 2024H1 railway equipment growth rate continued to lead. EMU revenue surged 93.16%. The company's revenue and profit increased steadily in the first half of 2024, leading the growth rate of railway equipment revenue, which has a gross margin advantage. 1) By product: ① Railway Equipment 2024H1's revenue increased 46.99% year-on-year to 41.985 billion yuan, and its revenue share increased 13.91 pcts to 46.63%, making it the largest main business, mainly benefiting from the rapid growth of the train and bus business. Among them, EMU revenue increased 93.16% year over year to 26.527 billion yuan, accounting for 29.46% of revenue, thanks to the rapid expansion of new EMU construction and advanced repair business. Revenue from railway locomotives, railway buses, and railway freight cars changed by -14.11%, +108.55%, and +14.56%, respectively, accounting for 9.04%, 2.93%, and 5.20% of revenue, respectively. ② Urban rail and urban infrastructure revenue fell 14.05% year on year to 163.7 0.5 billion yuan, and the revenue share fell 3.63 pct to 18.19%, mainly due to the decline in the company's urban rail project revenue due to the sluggish growth rate of urban rail investment. ③ Revenue from new industries fell 18.47% year on year to 300.4.2 billion yuan, and the revenue share fell 8.84pct to 33.37%, mainly due to a decrease in revenue from wind power and energy storage equipment. ④ The revenue of the modern service industry fell 42.32% year on year to 1.638 billion yuan, and the revenue share fell 1.43 pct to 1.82%, mainly due to a decrease in the scale of logistics and financial leasing business. 2) By market: 2024H1's revenue in mainland China increased 3.99% year over year to 77.835 billion yuan, and its revenue share increased 0.71 pct to 86.44%; overseas revenue fell 2.03% year over year to 122.0.5 billion yuan, accounting for 13.56% of revenue.

At the order level, new orders signed by 202H1 increased by 3.24% year on year to 140.1 billion yuan. Among them, overseas orders fell 3.25% year over year to 29.8 billion yuan, and overseas orders accounted for 21.27%. Currently, the company's overseas revenue accounts for only 13.56%. With the gradual delivery of overseas orders, the share of overseas business revenue is expected to increase steadily.

Profit level: As a leader in rail transit equipment, the company continues to operate steadily over a long period of time, and its profitability is steadily increasing. 2024H1's comprehensive gross margin increased by 1.97 pct to 21.41% year on year (after the accounting standards were adjusted to the same caliber), mainly due to an increase in the share of high-margin railway equipment businesses, combined with an increase in the gross margin of all major businesses. Among them, the gross margin of railway equipment increased by 1.39 pct to 22.71% year on year, the gross margin of urban rail increased by 0.44 pct to 18.05%, and the gross margin of the new industry increased by 2.34 pct to 20.75%; and the gross margin of the modern service industry increased by 7.42 pct to 33.60%, mainly due to business restructuring. During the 2024H1 period, the cost ratio decreased by 0.20 pct to 15.27% year on year (2023H1 was not adjusted). Among them, the sales expense ratio decreased by 1.68 pct to 2.36% year on year, the management cost ratio increased 0.11 pct to 6.48% year on year, and the R&D cost rate increased 0.95 pct to 6.44% year on year. The 2024H1 net sales margin increased 0.92pct year on year to 6.12%, a record high for the same period in history since 2017; net profit margin increased 0.70pct to 4.67% year on year, and deducted non-net interest rate increased 0.77pc t to 3.73% year over year.

2. New market: The number of tenders for the 2024H1 EMU with a speed of 350 kilometers per hour exceeded the whole of 2023, providing the driving force for the company's performance. EMUs are the core equipment in the high-speed rail sector, and overall ownership has increased steadily over the past 10 years. Affected by global public health events in 2020-2022, railway passenger traffic declined significantly, and EMU tendering progress slowed down. Railway passenger traffic recovered significantly in 2023, up 5.3% from 2019; 2024H1 passenger traffic increased 18.4% year over year under a high base. Against the backdrop of increased passenger traffic, the number of EMU tenders in 2023 exceeded 300 groups (including centralized power trains), doubling year-on-year growth, and market demand recovered significantly; of these, there were about 164 EMUs with a speed of 350 kilometers per hour, with a year-on-year growth rate of more than 90%. The 2024 H1, 350 km per hour EMU was tendered for 165 groups. It has surpassed the whole of 2023, and the growth trend is good. The number of EMU tenders has increased dramatically, and it is expected that they will gradually be transformed into company order contracts, laying the foundation for the company's performance growth.

3. Advanced EMU maintenance: Since 2024, orders have nearly doubled compared to the full year of 2023. The share of grade 5 repairs has gradually increased. The company's railway equipment repair and modification revenue from 2021 to 2023 was 3.4, 3.1008, and 3.3371 million yuan respectively, accounting for 37.49%, 37.28%, and 33.99% of railway equipment business revenue, respectively, and the aftermarket business is becoming more mature. In March and July 2024, CRRC disclosed the 14.78 billion yuan and 13.68 billion yuan EMU advanced revision lists respectively, reaching a total of 28.46 billion yuan, an increase of 99.3% over the full year of 2023; close to the 2019 high (30.32 billion yuan). The increase in the share of high-value-added businesses such as advanced EMU repair in the repair and modification business helps to simultaneously increase the company's business scale and comprehensive gross profit margin. At the tender level, in August 2024, the China Railway procurement platform issued a tender notice for the second batch of advanced EMU repair procurement projects in 2024, which reached 24, 147, and 302 groups respectively, totaling 473 groups; overall, there was an increase of 31.3% over the first batch of procurement in January 2024 (361 groups), of which level 5 repairs increased 45.9% compared to the first batch of procurement (207 groups) in January 2024. According to China Railway Group's “Railway EMU Operation and Maintenance Regulations”, EMUs operate 4.8 million kilometers or 12 years to carry out grade 5 maintenance. According to data from the Ministry of Transport's “Railway Statistics Bulletin”, the average number of new EMUs added each year from 2013 to 2018 reached 362 new EMUs; if calculated as entering level 5 maintenance according to 12 years of operation, an average of 362 EMUs will be required for grade 5 repair each year from 2025 to 2030, and there is plenty of long-term space.

4. Locomotive renewal: Old internal combustion locomotives will be basically phased out in 2027. The company will fully benefit from the need for renewal and replacement. The Railway Administration emphasizes the basic elimination of old internal combustion locomotives in 2027, pointing out the direction for rail transit equipment renewal. In December 2023, the National Railway Administration issued the “Administrative Measures on the Elimination and Renewal of Old Railway Internal Combustion Locomotives (Draft for Comments)”. The measures indicate that starting in 2027, old railway internal combustion locomotives that have reached the end of service should be completely withdrawn from the railway transportation market; starting in 2035, old railway internal combustion locomotives should completely withdraw from the railway transportation market.

In March 2024, the director of the National Railway Administration emphasized efforts to basically eliminate old internal combustion locomotives by 2027. At the end of 2023, the number of diesel locomotives was 0.7 0.08 million. Due to the long history of internal combustion locomotives, assuming that the number of internal combustion locomotives over 30 years old is 3000-4,000 (expected to reach half), and the number of locomotives stabilizes, it is expected that an average of more than 1,000 locomotives will need to be renewed every year from now until 2027. As of the 2024 semi-annual report, CRRC's seven representative NEV models have been released globally for the first time, and it is expected that they will gradually meet the demand for renewal and replacement of old internal combustion locomotives.

Investment advice: The company's revenue for 2024-2026 is estimated to be 2,580.611, 275.663, 288.633 billion yuan, and net profit to mother of 135.90, 146.04, and 15.445 billion yuan, respectively, with changes of +16.04%, +7.46%, and +5.76%, respectively. The dynamic PE corresponding to 2024-2026 was 15.73, 14.64, and 13.84 times, respectively, maintaining the “buy” rating.