Incident: Tunnel Co., Ltd. released financial results for 2024Q2.

Operating conditions: 2024H1 achieved revenue of 28.034 billion yuan/ +1.69%, net profit of 0.786 billion yuan/ +0.78%, operating cash flow of -3.764 billion yuan/-0.598 billion yuan for the same period last year.

Revenue growth in the Shanghai region has been steady, and gross margin has increased significantly. By business, the construction industry, design services, operation business, and digital information business achieved revenue of 24.427 billion/ +2.63%, 0.716 billion/ +4.01%, 1.197 billion/ -5.18%, and 0.205 billion/ +26.77% respectively; by region, Shanghai's revenue was 20.115 billion/ +12.55%, and revenue from outside the province was 7.754 billion/ -18.80%, of which the gross profit margin of the Shanghai region's business 16.30% /+5.80pct, a significant increase.

Municipal and energy engineering orders have increased, and the order structure has been optimized. 24H1 has signed a total of 46.125 billion yuan/ +9.08% of new construction, design and operation business orders, including 7.273 billion yuan/ +53.88% for energy engineering, 12.186 billion yuan/ +38.09% for municipal engineering, 7.775 billion yuan/ -8.41% for rail transit, and 5.807 billion/ -28.43% for housing construction. 24H1 successively won bids for key projects such as the “Fenghua Nanshan Xinchuangyuan and Surrounding Infrastructure Construction Project” (7.193 billion yuan), the “Wuxi-Yixing Urban Rail Transit Project Construction General Contract” (3.563 billion yuan), and the Singapore Metro Cross Island Line Phase II CR203 project (2.87 billion yuan).

The cost rate for the period was 10.44% /-0.12pct, and the cost declined steadily. The 2024H1 company's sales/management/R&D/finance expense rates were 0.01% /+0.01pct, 3.17% /-0.26pct, 4.36% /+0.41pct, and 2.90% /-0.28pct, respectively.

Gross margin is growing steadily, and changes in investment income projects affect net profit. The company's 24H1 gross profit margin was 14.94%/+3.22%, and net profit to mother was 0.786 billion yuan/ +0.78%. Net profit to mother was mainly affected by the year-on-year investment of -1.22 billion yuan.

Dividends: The 2024H1 dividend payout rate is 40.02%, and the payout rate has remained high in recent years.

Investment advice: The company's order structure continues to be optimized, energy and municipal services have been upgraded, and the dependence on housing construction has weakened. The company's main tunnel engineering business has outstanding advantages. The technical advantages of oversized tunnels and cross-river tunnels are obvious. Relying on the company's main business to provide customers with value-added services throughout the life cycle, it is expected that it will continue to expand in Shanghai and beyond. The overall estimated net profit for 2024-2026 is 3.227/3.517/3.849 billion yuan, corresponding to 6.00/5.51/5.03x PE, giving it a “recommended” rating.

Risk warning: orders fall short of expectations, cash return falls short of expectations, investment returns fall short of expectations