1H24 results were slightly lower than our expectations

The company announced 1H24 results: revenue of 14.25 billion yuan, a year-on-year decrease of 14.3%; net profit to mother of 1.6 billion yuan, a year-on-year decrease of 12.3%. The performance was slightly lower than our expectations, mainly due to the decline in urban rail and engineering general contracting revenue. Looking at a single quarter, 2Q24's revenue was 7.74 billion yuan, down 15.3% year on year, and net profit to mother was 0.99 billion yuan, down 13.2% year on year.

Revenue from railways and overseas increased year on year, while general contracting revenue from urban rail and engineering declined year on year. 1H24's railway revenue was 9.04 billion yuan, up 1.9% year on year, mainly due to the increase in the growth rate of new orders signed in the early period, and overseas business revenue of 0.61 billion yuan, up 3.2% year on year. The main reason is that the company continues to advance the progress of projects such as the Nosu section of the Hungarian project, the Mexico project, and the Thailand double track project. 1H24's urban rail revenue was 3.47 billion yuan, down 13.1% year on year, mainly due to a decline in industry sentiment and a decrease in early orders; general engineering contract revenue of 1.1 billion yuan, a year-on-year decrease of 65.0%, mainly due to the company's strategic adjustments and accelerated withdrawal from municipal housing construction.

Marginal improvement in profit margins. The consolidated gross margin of 1H24/2Q24 was 29.4%/31.0%, up 4.4ppt/4.2ppt, respectively, mainly due to a decrease in the share of general contracting revenue for projects with low gross margin. The cost rate for the 1H24 company period was 14.0%, an increase of 3.0ppt over the previous year. 1H24/2Q24 The company's net profit margin was 11.2%/12.8%, up 0.3ppt/0.3ppt year-on-year.

Operating cash inflows were higher year over year. The net cash flow from 1H24's operating activities was 2.97 billion yuan, an increase of 3.84 billion yuan over the previous year, mainly due to a significant increase in the Group's new deposits into finance companies. As of the end of 1H24, the company's notes and accounts receivable were 23.56 billion yuan, a year-on-year decrease of 1.34 billion yuan; contract liabilities were 7.89 billion yuan, an increase of 0.27 billion yuan over the previous year.

Development trends

Pay attention to the start of the replacement of the railway signal system. We estimate that the service life span of railway signal systems is about 10-15 years. Around 2010, China's high-speed railways entered a relatively rapid peak of construction and production. Currently, some lines have entered the replacement demand stage one after another. We believe that the release of replacement demand is expected to help the downstream demand boom in railway signal systems and focus on the railway signal system replacement process; at the same time, considering that the company has a high market share in the high-speed rail signal system field, we believe that the launch and release of railway signal system replacement demand is expected to help the company grow revenue and profit.

Profit forecasting and valuation

Maintain an outperforming industry rating. Considering weak demand for urban rail and the company's strategic adjustment and withdrawal from municipal housing construction, the 2024/2025 profit forecast was lowered by 7%/5% to 3.35 billion yuan/3.55 billion yuan. The company currently trades A shares at 16x/15x 24e/25e P/E and H shares at 8x/8x 24e/25e P/E. Maintain the target price of HK$5.60/HK$3.06 for A/H shares, 18x/17x 24e/25e P/E for A shares, 9x/8x24e/25e P/E for H shares, and 9%/7% upside for A/H shares, respectively.

risks

The railway project implementation process fell short of expectations, and the overseas project implementation process fell short of expectations.