1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 0.88 billion yuan, a year-on-year increase of 16.2%, and net profit to mother of 20.96 million yuan, a year-on-year decrease of 33.4%, in line with our expectations. Looking at a single quarter, 2Q24's revenue was 0.45 billion yuan, down 1.3% year on year, and net profit to mother was 8.55 million yuan, down 60.0% year on year.

Maintenance revenue is growing rapidly. 1H24's signal system general contracting revenue was 0.77 billion yuan, up 18.4% year on year, with a gross profit margin of 31.8%; maintenance revenue was 0.744 million yuan, up 41.9% year on year, with a gross profit margin of 32.3%; sporadic sales were 0.335 million yuan, down 35.7% year on year, with a gross profit margin of 42.1%.

2Q24 gross margin improved month-on-month. The consolidated gross margin of 1H24/2Q24 was 32.1%/33.4%, respectively -2.4ppt/-0.3ppt, of which 2Q24 gross margin increased 2.8ppt month-on-month. The cost rate for the 1H24 company period was 26.3%, down 5.2 ppt year on year. Among them, the sales/management/R&D/finance expense ratios were -0.4pp/ -1.7pp/ -3.6pp/ +0.5ppt, respectively. The increase in the financial expense ratio was mainly due to an increase in current interest income compared to the same period last year and a decrease in guarantee fees compared to the same period last year. 1H24's net profit margin was 2.4%, a year-on-year decrease of 1.8ppt.

There are plenty of orders in hand. 1H24 had a net operating cash outflow of 0.33 billion yuan, an increase of 0.16 billion yuan over the previous year. The company's notes receivable and accounts receivable at the end of 1H24 were $1.62 billion, an increase of $0.19 billion over the end of 2023.

At the end of 1H24, the company's on-hand orders were 6.54 billion yuan, an increase of 3.43 million yuan over the end of 2023, and remained high.

Development trends

Pay attention to the trend of signal system transformation and maintenance demand release. We estimate that the service life of the urban rail signal system is about 15 years. Around 2010, the construction and commissioning of urban rail lines in China entered the peak period. Currently, some lines have gradually entered the stage of maintenance and renovation requirements. According to the China Urban Rail Transit Association and company announcements, as of 1H24, 58 cities in mainland China have put into operation about 11,410 kilometers of urban rail transit lines. It is estimated that by 2030, 85 rail transit lines in China will enter the signal transformation cycle, with routes of about 2,500 kilometers. Focus on the release of future demand for urban rail signal transformation and maintenance, contributing to the company's revenue and profit growth.

Pay attention to the development trend of new urban railway construction. According to the company's announcement, according to incomplete statistics, by the end of 2023, the Beijing-Tianjin-Hebei, Guangdong-Hong Kong-Macao Greater Bay Area, Yangtze River Delta, Cheng-Chongqing, and mid-Yangtze River urban agglomeration have prepared more than 0.015 million kilometers of urban railway lines, which are expected to gradually be implemented over the next 5 years. Considering the current short-term pressure on new subway construction and the upward trend in urban railway planning, it is recommended to focus on the progress of future construction and commissioning of urban railways. We believe it is expected to contribute new growth momentum to the company.

Profit forecasting and valuation

Maintain an outperforming industry rating. Maintain the 2024/2025 profit forecast of 0.033 billion yuan/0.099 billion yuan.

Currently, the company is trading at 31x 2025 P/E, maintaining a target price of 21.00 yuan, corresponding to 40x 2025 P/E, with 29% upward space.

risks

New project tenders fell short of expectations, downstream customer payments fell short of expectations, and renovation and maintenance requirements fell short of expectations.