Description of the event

The Beijing-Shanghai High Speed Rail released its report for the third quarter of 2024. The company achieved operating income of 11.493 billion yuan, a year-on-year decrease of 0.9%; realized net profit of 3.658 billion yuan, a year-on-year decrease of 3.2%.

Incident comments

The growth rate of passenger demand is slowing down. Air diversion high-speed rail passenger flow: 2024Q3, along with the decline in macro demand, the growth rate of railway passenger traffic across the country slowed. Passenger traffic increased 6.8% year on year, the growth rate fell 3.3 pct month on month, turnover increased 1.0% year on year and fell 4.4% month on month. The average travel distance was about 384.5 kilometers, down 5.5% year on year. We believe that demand for long-distance rail passenger transportation may be diverted by air. In 2023, the Civil Aviation Administration supervised the safety of aviation operations, and the recovery of civil aviation supply was slow; in 2024, the Civil Aviation Administration supervised the efficiency of utilization at times, and aviation supply recovered dramatically. Since routes to North America have not resumed, a large number of wide-body airliners have been launched in the domestic commercial market. Supply for leading routes has been released in large quantities, prices have declined, passenger occupancy rates have increased, and demand for high-speed rail passenger transportation has been diverted. Taking the Beijing-Shanghai route as an example, the average ticket price of 2024Q3 decreased by 40.0% year on year, and passenger traffic increased by 22.1% year on year.

Beijing-Fu-Anhui turned losses into profits, and Beijing-Shanghai high-speed rail growth slowed: 2024Q3, the growth rate of railway passenger demand slowed, the operating revenue of the Beijing-Shanghai High Speed Rail fell 0.9% year on year to 11.493 billion yuan, and operating costs increased 0.7% year on year to 5.794 billion yuan. It is expected that the main line trains of the Beijing-Shanghai High Speed Rail will maintain their operating scale, and the passenger occupancy rate has declined quite clearly. The company's sales expenses, management expenses, and R&D expenses are basically fixed. Financial expenses continued to decline as the balance sheet improved. The company's expenses during the period were 0.639 billion yuan, a decrease of 16.3% over the previous year. With 2024Q3, the Beijing-Shanghai High Speed Rail achieved net profit of 3.658 billion yuan and minority shareholders' profit and loss of 0.015 billion yuan. Considering that the cumulative profit of Jingfu Anhui has not been corrected, and the income tax rate is zero, it is estimated that Jingfu Anhui's profit was 0.043 billion yuan; the total profit of Beijing and Shanghai was 4.951 billion yuan, down 3.7% from 2023Q3 and recovered to 98.3% in 2019Q1. The growth trend is clearly weaker compared to 2024Q2.

The capacity utilization rate has increased, the pattern and prices have been rising steadily, and profits are climbing. In “Natural Location Advantages and Entrusted Transportation Models,” we proposed that the Beijing-Shanghai High Speed Rail is a leading high-speed rail passenger transport company in China. It connects the Beijing-Tianjin-Hebei and Yangtze River Delta economic zones. It inherently has natural location advantages, and at the same time enjoys the network effect of high-speed rail. Long-term growth has benefited from the increase in passenger traffic in the hinterland and radiated regions. Under the entrustment management model, the cost of the Beijing-Shanghai high-speed railway continues to rise rigidly, but cross-line trains contribute relatively stable profits. Main line trains bear limited macroeconomic exposure, the company reduced the number of trains on the main line, and the business model and profit level are expected to be stable. Taking into account: 1) the continuous growth of Beijing-Shanghai high-speed rail cross-line trains; 2) the improvement in the revenue quality of main line trains; 3) the sharp increase in Beijing-Fujian-Anhui cross-line trains, which are about to turn losses into profits; 4) the scale of debt has decreased, and financial expenses are constantly decreasing. We expect the company's net profit from 2024 to 2026 to be 12.84 billion, 14.49 billion, and 16.35 billion, respectively. The PE corresponding to 2024 to 2026 will be 21.6 times, 19.2 times, and 17.0 times, respectively, maintaining a “buy” rating.

Risk warning

1. Macroeconomic fluctuations; 2. Entrusted transportation costs; 3. Parallel line diversion.