Incident: The company released its 2024 mid-year report. 2024H1 achieved revenue of 0.333 billion yuan, a year-on-year increase of 48.53%, and net profit to mother of 0.113 billion yuan, an increase of 85.40% over the previous year. 2024Q2 achieved revenue of 0.126 billion yuan, a year-on-year increase of 34.83%, and net profit to mother of 0.032 billion yuan, a year-on-year decrease of 14.10%.

Comment:

Leading domestic rail transit operation and maintenance equipment supplier and integrated operation and maintenance solution provider, accounting for about 80% of revenue from monitoring products. The company's main customers are railway administration group companies under China Railway Group, local urban rail transit companies, and large enterprises that build their own railways. The company's products are mainly divided into four major series: monitoring product line, operation management product line, signal infrastructure equipment product line, integrated operation and maintenance informatization and operation and maintenance equipment product line. They are suitable for various formats such as national railways (high-speed railways and general speed railways), urban rail transit, and urban rail transit. 2024H1, revenue from the surveillance product line was 0.267 billion yuan, accounting for 80.09% of revenue, accounting for an increase of 11.68 pct; revenue from the operation management product line, signal infrastructure equipment product line, integrated operation and maintenance informatization, and operation and maintenance equipment was 0.013 billion yuan, 0.029 billion yuan, and 0.011 billion yuan respectively, accounting for 3.95%, 8.74%, and 3.36% of revenue, respectively, accounting for -2.06 pct, -4.85 pct, - 2.87pct The company has a good reputation in the China Railway industry. Comprehensive monitoring products have strong advantages in the Henan region and are widely recognized in the rail transit industry.

The gross margin of the main product monitoring product line has increased significantly, and the ability to control expenses has improved.

2024H1, the company's gross margin was 57.58%, up 11.33pct year on year; net margin was 33.94%, up 6.7pct year on year. According to product classification, the gross margin of the company's main product monitoring product line was 60.56%, an increase of 13.08pct over the previous year. By industry, the gross margin of the national railway business was 63.29%, up 11.32% year on year; gross margin of urban rail transit business was 26.66%, down 2.59% year on year. In terms of the period expense ratio, 2024H1, the company's sales expense ratio, management expense ratio, and financial expense ratio were 4.63%, 11.04%, and -0.77%, respectively, -2.76pct, -9.9pct, and -0.18pct compared to the previous year. The company's ability to control expenses has been improved, and cost reduction and efficiency will help release future profits.

Continue to increase investment in R&D, accelerate the application of new products in the market, and enrich the product structure.

2024H1, the company's R&D expenses were 40.997 million yuan, an increase of 0.13% over the previous year, and the R&D expenditure rate was 12.31%. The company has led and participated in the formulation of various product industry standards, making R&D more efficient and targeted, and R&D results more applicable. The company continues to increase investment in intelligent and mobile upgrade research and development of existing products to enhance the core competitiveness of mature products; continues to deeply integrate advanced technologies such as artificial intelligence, cloud platforms, big data, and the Internet of Things with its own industry and the company's various product line products, accelerate the promotion pace of new product market applications, pay close attention to industry market needs, and steadily promote the implementation and transformation of results of line safety and environment control platform projects to form new business growth points.

The rail transit industry continues the high level of investment over the past 10 years. According to information released by China Railway Group, with 2024H1, railways across the country completed fixed asset investment of 337.3 billion yuan, an increase of 10.6% over the previous year, reaching a record high for the same period. According to statistics from the China Urban Rail Transit Association, as of June 30, 2024, 58 cities in mainland China have put into operation 11409.79 kilometers of urban rail transit lines, of which 2024H1 added 194.06 kilometers of urban rail transit lines. 2024H2 is expected to open more than 600 kilometers of urban rail transit lines, and the total length of new urban rail transit lines put into operation throughout the year is expected to exceed 800 kilometers. The State Council's “14th Five-Year” Modern Integrated Transportation System Development Plan proposes that railway operating mileage will be increased by 0.019 million kilometers during the “14th Five-Year Plan” period, of which the operating mileage of high-speed railways will increase by 0.012 million kilometers and the operating mileage of urban rail transit will increase by 3,400 kilometers; with “eight vertical and eight horizontal” high-speed rail main channels as the main framework, connected by high-speed rail regional connections, and complemented by some intercity railways that balance the main line function. Looking at the rail transit industry as a whole, the operating mileage of railways and urban rail transit continues to increase, and the development of the industry continues the high investment trend over the past 10 years. In the future, China's rail transit industry will continue to be built and developed with high quality. Demand for equipment renewal and transformation will gradually be released with the implementation of relevant macroeconomic policies. Overall investment is expected to remain high, the market capacity is huge, and there is still plenty of room for the company's R&D, innovation and continuous development.

Profit forecast and investment advice: The company is a high-tech enterprise that first entered the rail transit industry in China to provide rail transit operation and maintenance equipment and integrated operation and maintenance solutions. The company's comprehensive monitoring products have strong advantages in the Henan region and are widely recognized in the rail transit industry. We expect the company's net profit to be 0.291 billion yuan, 0.373 billion yuan, and 0.46 billion yuan respectively in 2024-2026. The corresponding PE is 12.15X, 9.47X, and 7.68X, respectively, covered for the first time, giving it an “increase in holdings” rating.

Risk warning: New technology research and development falls short of expectations; risk of accounts receivable collection; increased industry competition; risk of industry policy changes.