Key points of investment

Rail transit control system leader, revenue structure optimization, expected to benefit from railway signal system renewal and replacement

China Tonghao is the world's leading provider of rail transit control systems, with product and service capabilities for the entire industry chain. Revenue structure optimization: The company's main business includes rail transit control systems and general engineering contracting, accounting for 78.9% and 20.7% of revenue in 2023, respectively. High-margin rail transit control systems are the core business. The company continued to strengthen the control of general engineering contracting business, and its revenue share fell to 20.69% (year-on-year -5.99PCT). In the first half of 2024, the revenue of the three major terminal markets of railways, urban rail, and overseas accounted for 69%, 26%, and 5% of total rail transit control systems, respectively. Profitability has been steadily increasing: The share of high gross margin and high rail transit control system business continues to increase, and the company's gross profit margin and net interest rate have steadily increased. The number of new contracts signed was reduced, and the number of orders in hand was sufficient: the share of the rail transit sector increased from 54% in the same period in 2023 to 78%. By the end of the first half of 2024, the company had 122.387 billion yuan of orders in hand. The rail transit control system is gradually entering a stage of equal emphasis on construction and upgrading: after three to five years, the share of railway orders is expected to increase from about 30% to more than 40%. In the urban rail market, the share of renewal orders will increase from 20% to 25%.

Demand for new construction still has room for development in the long term. Renewals and replacements are expected to increase in volume, and leaders will benefit first

Railways: According to the Five-Year Action Plan to Accelerate the Construction of a Strong Transportation Country (2023-2027), the operating mileage of national railways will reach 0.17 million km by 2027, including 0.053 million km of high-speed rail and 0.117 million km of general speed railways.

The market capacity of newly built railway control systems is estimated to be over 32.5 billion yuan between 2024 and 2027; the market capacity of newly built railway control systems is estimated to be over 79 billion yuan in 2028-2035. Renewal and transformation: The 0.011 million-kilometer high-speed rail, which was opened and operated ten years ago, has entered a major renovation period, with a total market capacity of about 27.5 billion yuan. Assuming that the high-speed rail mileage that began the upgrade cycle in '24 remains above 2000 kilometers, it is estimated that the market capacity for high-speed rail renewal and upgrading will be more than 5 billion yuan per year.

Urban rail: It is estimated that in 2024 and 2025, the country's urban rail operating mileage will increase by 7.8% and 7.5% year-on-year, adding 870 and 905 kilometers, respectively. The operating mileage of urban rail will reach 0.013 million kilometers in 2025.

Overseas: International influence continues to increase, and new orders are increasing. Overseas revenue accounted for 4.25% in the first half of 2024, a record high; new overseas contracts reached 3.5 billion yuan, an increase of 156% over the previous year.

Based on advantages such as core technology, qualifications, full industry chain coverage, case reserves, etc., the company has a stable leading position in the domestic rail transit control system market. The domestic market share in the high-speed rail sector exceeds 60%, providing core train control technology and equipment for more than 95% of China's high-speed railways that have already been opened and operated, and the domestic market share in the urban rail sector is about 40%.

Profit forecasting and valuation

The company's net profit for 2024-2026 is estimated to be 3.58, 4.02, and 4.55 billion yuan, respectively, up 3.1%, 12.3%, and 13.1% year-on-year. The corresponding PE is 16, 14, and 13 times, respectively, covered for the first time, giving it a “buy” rating.

Risk warning

High-speed rail renewal progress falls short of expectations, urban rail construction investment falls short of expectations, and industry competition intensifies