Times Electric's 3Q24 revenue was 5.97 billion yuan (yoy +8.1% /qoq -6.1%); net profit to mother was 0.99 billion yuan (yoy +10.6% /qoq +5.9%). The month-on-month decline in revenue growth was mainly due to factors in the pace of delivery of rail transit electrical equipment and rail construction machinery business, qoq-14.9/ -10.3%. The company's profitability has remained steady. The 1-3Q24 gross profit margin was 29.6%, yoy+1.1pp, thanks to the increase in the share of rail transit business and the increase in gross margin of power semiconductors in the downward cycle. In the future, under policies such as rail transit maintenance and trade-in, tenders for trains, urban rail, locomotives, etc. are expected to increase one after another. As a rail transit leader with a high market share, the company is expected to continue to benefit; shipments of power semiconductors in high voltage and vehicle regulation projects will continue to increase, and it is expected to maintain a good level of profit. Maintain a “buy” rating for A/H shares.

Rail transit: Q3 revenue growth slowed year-on-year due to changes in delivery pace

3Q24's rail transit business revenue was 3.295 billion yuan, up 8.7% year on year. Among them, rail transit electrical equipment/rail construction machinery/communication signal system revenue was +13.4/-41.4/ +27.8% year on year, and some projects were affected by the pace of delivery. Looking forward to follow-up: (1) The company's share in China Railway Group's 1-3Q24 train and locomotive tenders is around 50%, reflecting a strong market position; (2) in terms of urban rail, the company maintains the largest market share of traction conversion systems, and products such as signal systems continue to win bids for many urban projects; (3) with the advent of cycles such as rail transit maintenance and the renewal of old internal combustion locomotives, the company's related business is expected to enter a period of rapid development.

Emerging equipment: The profitability of power semiconductors is relatively stable, and the start-up of the new equipment business is expected to gradually reverse the 3Q24 company's revenue of 2.66 billion yuan, an increase of 14.0% year-on-year. Among them, power semiconductor/ new energy vehicle electric drive/ industrial conversion/ offshore equipment/ sensor revenue was +27.3%/+66.8%/-10.4%/+1.9%/-41.6%. The company's emerging business faced intense price pressure in 2024, putting pressure on growth in some sectors. However, increased investment in rail transit and power grids is expected to drive the rapid growth of the company's power semiconductors. Relying on IDM, technology, and the parent company's advantages in the power generation field, the company continues to expand projects such as the Three Gorges and China Southern Power Grid. The volume of high-voltage power device projects is expected to withstand the price reduction pressure on medium- and low-voltage IGBT products and the depreciation of the Yixing plant to a certain extent. Furthermore, the company's installed photovoltaic and electric drive capacity is at the forefront of the industry, and the gradual increase in shipments is expected to improve the current loss situation.

The target price for A/H shares was raised to HK$64.11/HK$43.83, maintaining the “buy” rating

Considering that rail transit is entering a large-scale maintenance cycle+trade-in + grid investment, we expect 24/25/26E revenue of 25.86/30.82/35.9 billion yuan; net profit to mother of 3.71/4.44/5.13 billion yuan. We expect the net profit of emerging business/rail transit and other 25E assets to be 1.23/3.21 billion yuan, respectively, with 28/17.5x 25E PE (comparable company average of 25.9/15.7x). The premium is mainly due to strong rail trade tenders. Increased profits from the company's power semiconductors and growth in emerging businesses such as electric drives are expected to lead to profit improvements and build an integrated moat. Based on the historical average AH premium rate of 62.9%, A/H shares were given a target price of $64.11/HK$43.83, maintaining the “buy” rating for A/H shares.

Risk warning: The risk of a downturn in the semiconductor cycle, and the risk that demand for new energy vehicles, photovoltaics, etc. will not meet expectations.