Description of the event

The company disclosed its 2024 three-quarter report. In the first three quarters, we achieved operating income of 0.906 billion yuan, +23.83% year over year; net profit to mother 0.328 billion yuan, +33.98% year over year; net profit without deduction of 0.329 billion yuan, +36.73% year over year. Among them, Q3 achieved revenue of 0.347 billion yuan in a single quarter, +69.16% year over month, +33.62% month on month; net profit to mother 0.138 billion yuan, +94.21% year on year, +53.55% month on month; net profit without return to mother 0.136 billion yuan, +93.90% year on year and +45.85% month on month.

Incident reviews

The Q3 performance exceeded expectations, mainly due to a high increase in orders and increased project acceptance. According to the 2024 mid-year report, the company's order growth rate has been significant since the second quarter. The cumulative number of new orders signed in the first half of the year was about 0.66 billion yuan, an increase of more than 30% over the previous year. Considering the company's revenue recognition period of 3-6 months, the revenue side grew rapidly. On the profit side, gross margin/net margin for 24Q3 was 64.73%/39.7%, respectively, +2.19pct/+3.95pct. On the one hand, the share of high-margin product sales increased, and the LKJ wireless data replacement system, vehicle transfer safety protection system (LSP) and station control system accelerated promotion, the product structure was further optimized, and the overall gross margin continued to grow; on the other hand, through management efficiency improvements, the total cost rate for the four periods was 21.99%, or 5.4pct year on year.

Cash flow is steady, maintaining a high percentage of cash dividends, and the dividend rate TTM is 4.27%. Net cash flow from operating activities for the first three quarters was $0.246 billion, +24.13% year over year. The company announced its profit distribution plan for the first three quarters. The company plans to distribute cash dividends of RMB 2.50 (tax included) for every 10 shares, based on the total share capital (381,274,377 shares) as of September 30, 2024, for a total cash dividend of 95.3186 million yuan (tax included), with a dividend rate of 4.27%.

The three main businesses are train control business, railway security business, and high-speed rail business, covering general railways and high-speed rail. The competitive pattern is good, benefiting from market expansion brought about by stock updates and technological upgrades. (1) Train control business: LKJ wireless data replacement system starts mass installation, optimistic about LKJ20000 product update requirements. According to the company's 2024 interim report, by the end of 2023, the LKJ system was used on 0.0224 million locomotives and 1,546 trains, and the LKJ stock market was about 0.033 million units; by the end of June 2024, the market share of the company's LKJ system products was over 49%. Considering the 8-10 year life cycle of the LKJ system, stock systems have entered the peak replacement period one after another. Since 2023, the company's renewal demand and orders for LKJ2000 and supporting products have maintained a growing trend. (2) Railway security business: The market share of core products 6A products and CMD systems is around 30%, and the market share of LSP systems exceeds 50%. With the accelerated promotion of the LSP system, the increase in the number of 6A and CMD product updates and the increase in demand for technology upgrades, the railway security business is expected to continue to grow. (3) High-speed rail business: DMS systems and EOAS system on-board equipment are standard equipment for EMUs in China. The renewal cycle is usually 10 years. The renewal period has gradually been reached, and the demand for product updates or upgrades has yet to be released. Since 2024, rapid growth in railway passenger traffic has driven the delivery of high-speed rail orders and the renewal of EMU equipment. At the same time, the railway investment growth rate has remained around 10%, and the train control, security products, and high-speed rail sectors are all expected to maintain their growth trend.

Investment advice

Rail transit vehicles are in a new cycle of replacement, and the company's industry pattern is stable, and the products require high stability and maturity, laying the foundation for the company to achieve sustainable and stable profits. The company's net profit for 2024-2026 is expected to be 0.537/0.645/0.769 billion yuan, respectively, up 30.2%/20.3%/19.1% year-on-year, and EPS is 1.41/1.69/2.02 yuan respectively. Corresponding to the company's closing price on October 29, the 2024-2026 PE will be 16.8/13.9/11.7, respectively, and the first coverage will give a “holder-A” rating.

Risk warning

Macroeconomic environment and risk of changes in industry policies: The implementation of national railway and urban rail transit projects largely depends on the overall investment of the China Railway Group and the government in rail transit projects. Relevant influencing factors include China Railway Group and the overall investment plans, approval processes, and bidding arrangements for rail transit systems by China Railway Group and various levels of government in China. In the future, if China Railway Group and government departments change their favorable policies for the industry or change their bidding plans, and policy dividends are reduced, it may adversely affect the company's business development, thus having a significant impact on the company's business conditions and profitability.

There is a risk that performance growth will fall short of expectations due to poor promotion of new products: The rail transit industry is in a stage of rapid technology upgrading and application, and companies in the industry need to continuously improve, design and develop new technologies and products that keep up with technology trends and customer needs. The company has proactively carried out R&D and testing of new products for new projects such as a new train operation control system (LKJ-15S system), intelligent locomotive driving system (STO system), smart station system project, high-speed rail mobile video system (HMVP), and vehicle transfer protection system (LSP system). If the company experiences delays in technology research and development, fails to meet market demand, fails to keep up with technological trends, and R&D results fall short of expectations, etc., the company's profit level and development will be adversely affected.

Risk of bad debt losses on accounts receivable: At the end of 2022, the end of 2023, and the end of the three quarters of 2024, the book value of the company's accounts receivable was 0.702 billion yuan, 0.869 billion yuan, and 0.863 billion yuan, respectively. The amount of accounts receivable is large. As the scale of the company's operations expands, the company's accounts receivable will remain at a high level. If the company cannot maintain efficient management of accounts receivable, any large bad debt loss on accounts receivable will adversely affect the company's financial status and operating results.