Key points of investment

The world's leading rail transit equipment company is once again dancing against the backdrop of a recovery in railway fixed asset investment.

CRRC is a leading global rail transit equipment company. It has formed a business layout with railway equipment as the core, and urban rail and new industries are flourishing. In 2023, the company's revenue was 234.262 billion yuan, +5.08% year-on-year, net profit of 9.106 billion yuan after deducting non-attributable net profit, or +14.24% year-on-year, reversing the difficult situation. By business, railway equipment steadily contributes to the basic revenue market, and new industries are growing rapidly. In 2023, the railway equipment business contributed 42% of revenue and 48% of gross profit, the new industry contributed 34% of revenue and 30% of gross profit, the urban rail and urban infrastructure business contributed 22% of revenue and 20% gross profit, and the modern service business contributed 2% of revenue and 2% gross profit.

Railway equipment: The recovery in EMU tenders was compounded by the release of demand for advanced repairs, and profit flexibility was gradually realized.

CRRC is a global leader in the field of railway equipment. The company's railway equipment business can be divided into four major sectors: 1) EMU: Railway fixed asset investment recovered in the short term, EMU tenders were repaired simultaneously, and the 2024-2025 average tenders are expected to reach 270 groups. Looking at the medium to long term, the first batch of EMUs put into operation is close to the upper limit of design life, and the modification and renewal of existing trains supports long-term development; 2) Railway equipment maintenance: Advanced EMU repair has clear regulations and guidelines. 2024-2026 is CRH380 series grade 5 repair and CR400 series level 4 The time point of concentrated release of demand. The demand space for EMU 4/5 repair is expected to reach 656/525 and 566/807 groups in 2024 and 2025, and elastic growth is expected to be realized; 3) Locomotives: large-scale equipment updates clearly guide electric locomotives to replace old internal combustion locomotives, and the annual replacement volume is expected to reach 683 units, and continuous optimization of the holding structure consolidates the basic market of the company's locomotive business; 4) Passenger/truck business is highly linked to capacity demand, and passenger car/truck demand is expected to reach a new record high in 2023. Move ahead.

New industry: The business layout is broad and blossoming, and we are optimistic that the synergy effect will gradually expand in the medium to long term.

CRRC's new industries include wind power equipment, power semiconductors, new materials, mechatronic systems, and new energy buses, with outstanding synergy effects. Sun Company Shidai Electric extended to the field of electric drive systems for new energy vehicles on the basis of EMU traction and conversion systems, opening up room for growth; Sun Company Shidai's new wind power blades had the second largest share of the national market in 2021, building a high technical barrier to CRRC's wind power equipment business in China. The business layout is broad, uncomplicated and closely linked, and the synergy effects brought about by medium- to long-term business complementarity are expected to gradually expand.

Urban rail and urban infrastructure: Urban rail investment is under pressure in the short term, and long-term planning revives the demand for urban rail construction.

Since 2020, the pace of urban rail construction in China has slowed slightly. It is mainly due to policy guidelines to prevent and control hidden debts of local governments. Against the backdrop of weakening demand, the gross margin of the company's urban rail business bucked the trend, rising from 19% in 2020 to 21% in 2023, and the quality of operations continued to improve. The return of urban rail passenger traffic has brought about a recovery in local government profits. Medium- to long-term construction plans are clear, and future urban rail construction is expected to reverse the difficult situation.

Profit Forecasts and Investment Ratings:

The recovery in EMU tenders and the release of demand for advanced repairs supported the reversal of the railway equipment business difficulties. The strong growth trend of the new industry remained unchanged. Short-term pressure on urban rail construction but medium- to long-term demand was clearly improving. The company's net profit for 2024-2026 is expected to be 13.8/15.3/16.2 billion yuan, respectively. The current stock price corresponds to dynamic PE of 14/13/12 times, respectively. The first coverage gave a “buy” rating.

Risk warning: Railway investment falls short of expectations, competition in the wind power industry intensifies, and urban rail construction falls short of expectations.