Key points of investment

The growth rate of net profit returned to mother in the third quarter was positive, focusing on the main business, and profitability continued to improve

According to the company's 2024 three-quarter report, the first three quarters of 2024 achieved operating income of 20.8 billion yuan, a year-on-year decrease of 15.5%, and net profit to mother of 2.36 billion yuan, a year-on-year decrease of 8.1%. After deducting net profit of non-return to mother of 2.27 billion yuan, a year-on-year decrease of 7.5%. The Q3 2024 quarter achieved revenue of 6.56 billion yuan, a year-on-year decrease of 17.9%. Net profit to mother was 0.76 billion yuan, an increase of 2.3% year-on-year, and net profit after deducting non-return net profit of 0.71 billion yuan, a year-on-year decrease of 3.9%. The company continues to focus on its main business, control the scale of the engineering business, and accelerate its withdrawal from the municipal housing construction business. Revenue is under pressure in the short term, but the business structure was optimized, and the net profit growth rate returned to the mother in the third quarter was corrected. The medium to long term is optimistic that the company will benefit from rail transit signal system updates and the low-altitude economy.

Profitability continues to increase: gross profit margin of 30.06% for the first three quarters of 2024, +4.73PCT year on year, net profit margin 13.08%, +1.1 PCT year on year. Q3 gross profit margin of 31.6% in a single quarter, +5.48PCT year on year, net profit margin 13.15%, +2.61 PCT year on year.

Expense control: The rate for the first three quarters of 2024 was 15%, +3.23PCT. Among them, sales rate, management rate, finance rate, and R&D rate were 2.62%, 7%, -0.26%, and 5.55%, respectively, +0.38PCT, +1.09PCT, +0.56PCT, and +1.15PCT, respectively.

Rail transit control system leading revenue structure optimization, reduced volume of new contracts and excellent quality

The revenue structure was optimized, and rail transit control systems accounted for 91% of revenue in the first three quarters: the company's main business included 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 were the core business. In the first three quarters of 2024, rail transit control systems and general engineering contracts accounted for 90.6% and 9.2% of revenue. According to the terminal market, railway revenue in the first three quarters was 12.03 billion yuan, +2.2% year on year; urban rail revenue was 5.05 billion yuan, -12.28% year over year; and overseas business revenue was 1.77 billion yuan, +65.9% year over year.

The volume of new contracts signed was reduced and the quality was excellent: In the first three quarters of 2024, the total amount of new contracts signed by the company was 29.13 billion yuan, or -42.76% compared with the same period last year. Among them, the railway sector signed a new contract amount of 14.627 billion yuan, +1.1%; the urban rail sector was 4.87 billion yuan, or -48.7%; the overseas business sector was 3.911 billion yuan, +95.4% year over year; and general engineering contracting and other fields were 5.718 billion yuan, -77.05% year over year.

The rail traffic control system is gradually entering a stage of equal emphasis on construction and upgrading. Leading companies prioritize benefiting from the 0.011 million-kilometer high-speed rail that was opened and operated ten years ago and have entered a major renovation period one after another, with a total market capacity of about 27.5 billion yuan or more. Assuming that the high-speed rail mileage, which began the renewal 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. The company's domestic market share in the high-speed rail sector exceeds 60%, and the domestic market share in the urban rail sector is about 40%. It is expected to fully benefit from rail transit renewal and replacement.

Profit forecasting and valuation

The company's net profit for 2024-2026 is estimated to be 3.43, 3.92, and 4.45 billion yuan, respectively, or -1.4%, +14.2%, and +13.7% compared to the same period. The corresponding PE is 19, 17, and 15 times, respectively, maintaining 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