In the first half of 2024, operating income decreased 14.00% year over year, and net profit to mother decreased 12.32% year over year. The company achieved revenue of 14.332 billion yuan in the first half of 2024, a year-on-year decrease of 14.00%, and net profit to mother of 1.599 billion yuan, a year-on-year decrease of 12.32%. The year-on-year decline in revenue in the first half of the year was mainly due to 1) the company further focused on its main business, accelerated withdrawal from municipal housing construction business, and revenue from general engineering contracting and other fields decreased significantly year over year; 2) Urban rail was affected by insufficient orders, and subway project construction business volume decreased, and revenue declined. The gross margin/net margin for the same period was 29.36%/13.05%, up 4.40/0.37 pct. The net profit margin growth rate was low. The main reason for the low increase in net profit margin was that companies continued to increase investment in R&D and actively promoted the construction of digital and intelligent equipment manufacturing production lines. R&D expenses increased 15.68% year on year.

Focus on the main line of high-quality development, and achieve steady growth in design integration and equipment manufacturing business revenue. By sector, rail transit control system revenue was 13.111 billion yuan, down 2.52% year on year, and gross margin increased 2.97 percentage points to 31.08%. The year-on-year decline in revenue was mainly due to a 22.73% year-on-year decline in low-profit business system delivery service revenue of 22.73% to 4.226 billion yuan, gross margin of 17.03%, while high gross margin equipment manufacturing/design integration business revenue achieved steady growth. Revenue was 2.907/5.978 billion yuan, up 17.57%/8.54% year on year. The gross margin was 35.60%/38.81%, respectively. In addition, revenue from the general engineering contracting business fell 64.96% year on year to 1.098 billion yuan, and gross margin fell 15.61 percentage points to 7.23%. The large year-on-year decline in revenue was mainly due to the company's insistence on focusing on its main business and striving to withdraw from the municipal housing construction business within three years.

New orders in the overseas sector have achieved relatively good growth. A total of 21.023 billion yuan of new orders were signed in the first half of the year, a year-on-year decrease of 33.62%. Mainly due to a decrease of 4.601 billion yuan in revenue from general engineering contracting and other fields, a year-on-year decrease of 68.62%. The total amount of new contracts signed for rail transit remained stable, about 16.422 billion yuan, down 3.47% year on year. Among them, the overseas sector was 3.549 billion yuan, an increase of 156.45% year on year. The boom in overseas business was further evident due to the company's business layout and capacity improvement, and successive major projects such as the “three electricity” signal and train operation control system procurement projects of the West China Railway.

Investment advice: The company is a leading enterprise in the field of rail transit control systems in China, actively cultivating low-altitude economic business and expediting withdrawal from municipal housing construction business. At the same time, the national railway fixed asset investment is expected to return to more than 800 billion yuan in the next two years after the “14th Five-Year Plan”. The construction business will maintain a high level of prosperity, and the opening of about 0.011 million kilometers of high-speed rail ten years ago has entered an overhaul period one after another, and the company is expected to fully benefit.

Considering the company's accelerated focus on high-quality business and adjustments to the business structure, we lowered our profit forecast. The company's net profit for 2024-2026 is estimated to be 3.677/4.081/4.534 billion yuan (previous value 3.885/4.25/4.588 billion yuan), corresponding to 15/13/12 times PE, maintaining the “superior to the market” rating.

Risk warning: Domestic substitution progress falls short of expectations; product breakthroughs fall short of expectations; industry competition intensifies.