Incident: The company disclosed its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 14.332 billion yuan, a year-on-year decrease of 14%; net profit to mother was 1.599 billion yuan, a year-on-year decrease of 12.32%; net profit after deducting non-return to mother was 1.56 billion yuan, a year-on-year decrease of 8.99%.

Urban rail and general engineering contracting dragged down performance. The company's railway and overseas business continued to grow in the first half of 2024. Railway revenue revenue was 9.035 billion yuan, +1.88% year over year; gross profit margin was 30.19%, -0.1 pct year on year. Overseas revenue was 0.606 billion yuan, +3.24% year over year; gross profit margin was 33.60%, up 22.92 pcts year over year. The urban rail business was affected by the decline in order volume and the decline in subway project construction business. Revenue declined significantly. Revenue in the first half of the year was 3.47 billion yuan, -13.13% year over year; gross profit margin was 32.96%, +7.15 pct year on year. The 24H1 project general contracting revenue was 1.098 billion yuan, -64.96% year on year; gross profit margin was 7.23%, -3.72 pct year on year. Major companies are further focusing on their main business, speeding up the launch of municipal housing construction services, and the number of engineering projects has been reduced.

Marginal improvement in profitability. 24H1's gross margin was 29.36%, +4.40pct year on year. The main reason was the decline in the share of engineering general contracting business with low gross margin, and the gross margin of urban rail, overseas and other businesses increased markedly. The company's net margin was 13.05%, +0.37pct year-on-year. Q2 gross profit margin in a single quarter was 30.99%, +4.17pct/3.58pct yoy; net profit margin was 14.81%, yoy/month-on-month +0.24pct/3.86pct. 24H1's sales/management/finance rate was 2.52%/6.67%/-0.55%. Compared with +0.46pct/0.85pct/0.31pct, the company continued to increase R&D investment. In the first half of the year, R&D expenses were 0.75 billion yuan, and the R&D cost ratio was +1.37pct.

The railway industry is booming, and the overhaul cycle is expected to begin. From January to July of this year, railways across the country completed fixed asset investment of 410.2 billion yuan, an increase of 10.5% over the previous year, and railway passenger flow continued to recover. The life cycle of high-speed rail transit control systems is generally 10-15 years. Some outdoor equipment systems are affected by environmental factors and the renewal cycle is shorter. China's high-speed railways have entered a major renovation period one after another. While the new construction mileage of general speed railways is expected to gradually increase, they will also focus on continuing to promote channel project renovation around the electrification of existing lines, upgrading standards, and capacity expansion. Demand for new construction and renovation resonated upward, driving the boom in the railway equipment industry. The total number of new contracts signed by 24H1 in the rail transit sector remained stable year on year, accounting for an increase of 24.4 pct to 78.11%. Among them, the railway sector signed a new order of 9.89 billion yuan, an increase of 1.16% over the previous year.

Overseas markets are expanding rapidly. In overseas markets, the results of improving the company's business layout and capacity have been further demonstrated. The company continued to advance the progress of overseas projects such as the Nosu section of the Hungarian project, the Mexican project, and the Thai double track project, and revenue grew steadily in the first half of the year. Benefiting from the release of some of the profits from overseas businesses with high gross margins, overseas gross margin increased dramatically in the first half of the year. 24H1 signed a new overseas order of 3.549 billion yuan, a year-on-year increase of 156.45%. Investment proposal: The company is expected to achieve net profit of 3.53 billion yuan, 3.795 billion yuan, and 4.333 billion yuan respectively in 2024-2026, corresponding EPS of 0.33, 0.36, and 0.41 yuan, corresponding PE of 16 times, 15 times, and 13 times, maintaining the recommended rating.

Risk warning: risk of investment in fixed assets falling short of expectations, risk of new product expansion falling short of expectations, risk of increasing market competition, risk of overseas market expansion falling short of expectations, etc.