Incident: The company disclosed its 2024 three-quarter report. In the first three quarters of 2024, the company achieved revenue of 152.583 billion yuan, up 6.67% year on year; net profit to mother was 7.245 billion yuan, up 17.77% year on year; net profit after deducting non-return to mother was 5.997 billion yuan, up 21.21% year on year.

Railway equipment continues to grow rapidly, and the decline in urban rail and new industries has narrowed. The company's revenue growth in the first three quarters of 24 continued to be driven by railway equipment. The railway equipment business revenue for the first three quarters was 71.765 billion yuan, +36.69% over the same period. The increase was mainly due to automatic train sets and buses. Among them, EMU/bus/locomotive/truck revenue was 405.75/4.992/15.248/10.95 billion yuan, respectively. Urban rail and urban infrastructure business revenue was 28.421 billion yuan, -5.63% year-on-year, mainly due to the decline in urban infrastructure revenue. New industry business revenue was 50.106 billion yuan, -10.40% year over year. The pressure mainly comes from wind power and energy storage equipment. Modern services continued to shrink strategically, with revenue of 2.291 billion yuan, or -49.03% year-on-year. The company signed new orders of 212.2 billion yuan in the first three quarters (including 34.2 billion yuan overseas), a slight increase over the previous year.

Profitability has been rising steadily, and the quality of operations has remained steady. The company's gross margin for the first three quarters was 21.21%, up 0.91 pct year on year; net margin was 6.21%, +0.60 pct year on year. In Q3, the company's net profit margin in a single quarter was 6.33%, +0.09pct/-0.57pct y/y. The company's three expenses are well controlled. The sales expense ratio, management fee rate, and financial expense ratio were 2.25%/6.21%/0.09%, respectively, -1.56pct/-0.17pct/+0.12pct; the R&D expense ratio remained high, increasing 0.78pct to 6.36% year-on-year.

The railway industry continues to thrive, and urban rail is expected to benefit from debt. In the first three quarters of this year, railways across the country completed fixed asset investment of 561.2 billion yuan, an increase of 10.3% over the previous year; 1,820 kilometers of new railway lines were put into operation, including 1,210 kilometers of high-speed rail. In the first three quarters, railways across the country sent 3.33 billion passengers, an increase of 13.5% over the previous year, and reached a record high for the same period. Railway passenger flow continues to recover, advanced EMU repairs have entered the release cycle, and demand for new EMU construction and maintenance is expected to remain high. In terms of urban rail, the Ministry of Finance recently proposed to promote local government debt, which is expected to have a positive impact on urban rail business delivery and repayment.

It is expected that railway locomotive renewal flexibility will gradually be unleashed. Driven by a new round of large-scale equipment updates, the early decommissioning of old internal combustion locomotives boosts locomotive flexibility. The “Measures for the Supervision and Administration of the Elimination and Renewal of Old Railway Internal Combustion Locomotives” issued by the State Railway Administration clearly states that by the end of 2027, all old railway internal combustion locomotives in key regions should be withdrawn from the railway transportation market; alternative applications of new energy locomotives are encouraged. The Ministry of Finance said at a recent press conference that it will vigorously implement the “two new” policies, and the flexibility of renewal is expected to gradually be reflected starting next year. According to China Railway Group's 2023 statistical bulletin, as of 2023, the number of railway locomotives in China was 0.0224 million, of which 7,800 were internal combustion locomotives. According to estimates of the old (30 years or more), the replacement demand for about 2,000 new energy locomotives will be released in the next 3 years according to the 1:2 replacement ratio for new cars before '27. In June of this year, the company released 7 new energy locomotives, which are expected to fully benefit from the locomotive renewal and replacement process.

Investment recommendation: The company is expected to achieve net profit of 14.024 billion yuan, 15.193 billion yuan, and 15.275 billion yuan respectively in 2024-2026, corresponding EPS of 0.49, 0.53, and 0.53 yuan, corresponding to PE of 17 times, 16 times, and 16 times, maintaining the recommended rating.

Risk warning: risk of investment in fixed assets falling short of expectations, risk of new product expansion falling short of expectations, risk of increasing market competition, risk of overseas market expansion falling short of expectations, etc.