Core views

2024Q3's performance has steadily improved, leading the growth rate of railway equipment revenue in the four major business segments. Among them, EMU revenue surged 87.34%, which led to an increase in profit levels. Looking ahead to 2024 and beyond, the company will simultaneously benefit from new markets and equipment updates. 1) New market: Railway passenger traffic increased 13.8% in the first three quarters of 2024. In order to meet the needs of the Spring Festival travel season, there is still room for EMU tenders at the end of the year. 2) Repair and modification: Repair and modification revenue in the first three quarters was about 30 billion yuan, a significant increase over the previous year; the number of advanced EMU repair tenders continued to exceed expectations, and the proportion of high-value-added level 5 repairs increased significantly, which is expected to drive a further increase in profit levels. 3) Locomotive renewal: With the introduction of new energy locomotives, the phasing out and upgrading of old internal combustion locomotives is expected to gradually begin, laying the foundation for development in the next 3 years.

occurrences

In the first three quarters of 2024, the company achieved revenue of 152.583 billion yuan, +6.67% year over year; net profit to mother of 7.245 billion yuan, +17.77% year over year; net profit after deducting non-return to mother of 5.997 billion yuan, +21.21% year over year. Revenue for the third quarter of 2024 was 62.543 billion yuan, +12.22% year over year; net profit to mother was 3.044 billion yuan, +13.11% year over year; net profit after deducting non-return to mother was 2.637 billion yuan, +11.52% year over year.

Brief review

1. 2024Q3 performance continues to rise steadily, and EMU revenue continues to grow

The company continued its boom in the first half of the year in the third quarter of 2024. Revenue and profit increased steadily in the first three quarters, and the growth rate of railway equipment revenue, which has an advantage in gross margin, remained leading.

By product: ① Railway Equipment's revenue for the first three quarters of 2024 increased 36.69% year-on-year to 717.6 billion yuan, accounting for 47.03% of revenue, ranking as the largest main business, mainly benefiting from rapid growth in the train and bus business. Among them, EMU revenue increased 87.34% year on year to 40.575 billion yuan, accounting for 26.59% of revenue, thanks to the rapid expansion of new EMU manufacturing and advanced repair business. Revenue from railway locomotives, railway buses, and railway freight cars changed by -7.36%, +80.35%, and -5.73% respectively, accounting for 9.99%, 3.27%, and 7.18% of revenue, respectively. ② Urban rail and urban infrastructure revenue fell 5.63% year on year to 28.421 billion yuan, accounting for 18.63% of revenue, mainly due to the decline in the company's urban infrastructure revenue due to the sluggish growth rate of urban rail investment. ③ Revenue from new industries fell 10.40% year on year to 50.106 billion yuan, accounting for 32.84% of revenue, mainly due to a decrease in revenue from wind power and energy storage equipment. ④ The revenue of the modern service industry fell 49.03% year on year to 2.291 billion yuan, accounting for 1.50% of revenue, mainly due to a decrease in the scale of logistics and financial leasing businesses.

At the order level, in the first three quarters of 2024, the company's new orders increased slightly by 0.33% year on year to 212.2 billion yuan. Among them, new overseas orders fell 9.04% year on year to 34.2 billion yuan, and new overseas orders accounted for 16.12%. As of 2024H1, the company's overseas revenue accounted for 13.56%. With the gradual delivery of overseas orders, the share of overseas business revenue is expected to increase further.

Profit level: As a leader in rail transit equipment, the company continues to operate steadily over a long period of time, and its profitability is steadily increasing. After the accounting standards were adjusted to the same caliber, the company's comprehensive gross margin increased by 0.91 pct to 21.21% year-on-year in the first three quarters of 2004, which is expected to be mainly due to an increase in the share of the high-margin railway equipment business.

The cost ratio increased by 0.70 pct to 14.90% year on year during the first three quarters of 2024, with the R&D cost rate increasing by 0.78 pct to 6.36% year on year, mainly due to the company increasing R&D investment in products such as new energy locomotives and the CR450 new EMU; the sales cost rate decreased slightly by 0.04 pct to 2.25% year on year, the management cost rate decreased by 0.17 pct to 6.21% year on year, and the financial cost ratio increased 0.12 pct to 0.09% year on year. Net interest rate for the first three quarters of 2024 increased 0.60 pct to 6.21% year on year, net profit margin increased 0.45 pct year on year to 4.75% year on year, and deducted non-net interest rate increased 0.47 pct year on year to 3.93% year on year.

2. New markets: Railway passenger traffic increased by 13.8% in the first three quarters of 2024. At the end of the year, EMU tenders are still expected to be the core equipment in the high-speed rail sector, and overall ownership has increased steadily over the past 10 years. Affected by global public health events in 2020-2022, railway passenger traffic declined significantly, and EMU tendering progress slowed down. Railway passenger traffic recovered significantly in 2023, up 5.3% from 2019; passenger traffic increased 13.8% year-on-year in the first three quarters of 2024 under a high base. Against the backdrop of increased passenger traffic, the number of EMU tenders in 2023 exceeded 300 groups (including centralized power trains), doubling year-on-year growth, and market demand recovered significantly; of these, there were about 164 EMUs with a speed of 350 kilometers per hour, with a year-on-year growth rate of more than 90%.

In May 2024, 165 EMUs with a speed of 350 kilometers per hour were tendered, which has surpassed the whole of 2023, and the growth trend is good. In order to meet the demand for vehicles used in the spring of 2025 in advance, China Railway Group still has room to anticipate EMU tenders by the end of 2024. The number of EMU tenders has increased dramatically, and it is expected that they will gradually be transformed into company order contracts, laying the foundation for the company's performance growth.

3. Repair and modification: 2024Q1-Q3 repair and modification revenue is about 30 billion yuan, and EMU advanced repair orders nearly doubled compared to 2023. The company's railway equipment repair and modification revenue was 34, 31.008, and 33.371 billion yuan respectively in 2021-2023, accounting for 37.4%, 37.28%, and 33.99% of railway equipment business revenue, respectively, and the aftermarket business is becoming more mature. According to the company's investor relations activity records, in the first three quarters of 2024, the maintenance business in the railway equipment sector achieved revenue of about 30 billion yuan, a significant increase over the previous year. Among them, the EMU repair business and high-power locomotive repair business accounted for a relatively high share.

In a single quarter, 2024Q3 maintenance business revenue was lower than 2024Q2.

In March and July 2024, CRRC disclosed the 14.78 billion yuan and 13.68 billion yuan EMU advanced revision orders respectively, reaching a total of 28.46 billion yuan, an increase of 99.3% over the full year of 2023; close to the 2019 high (30.32 billion yuan). The increase in the share of high-value-added businesses such as advanced EMU repair in the repair and modification business helps to simultaneously increase the company's business scale and comprehensive gross profit margin. At the tender level, in August 2024, the China Railway procurement platform issued a tender notice for the second batch of advanced EMU repair procurement projects in 2024, which reached 24, 147, and 302 groups respectively, totaling 473 groups; overall, there was an increase of 31.3% over the first batch of procurement in January 2024 (361 groups), of which grade 5 repair increased 45.9% compared to the first batch of procurement (207 groups) in January 2024. According to China Railway Group's “Railway EMU Operation and Maintenance Regulations”, EMUs operate 4.8 million kilometers or 12 years to carry out grade 5 maintenance. According to data from the Ministry of Transport's “Railway Statistics Bulletin”, the average number of new EMUs added each year from 2013 to 2018 reached 362 new EMUs; if calculated as entering level 5 maintenance according to 12 years of operation, an average of 362 EMUs will be required for grade 5 repair every year from 2025 to 2030, and there is plenty of long-term space.

4. Locomotive renewal: old internal combustion locomotives will be basically phased out in 2027, and the company will fully benefit from the renewal and replacement needs

The Railway Administration emphasized the basic elimination of old internal combustion locomotives in 2027, pointing out the direction for the renewal of rail transit equipment. In December 2023, the National Railway Administration issued the “Administrative Measures on the Elimination and Renewal of Old Railway Internal Combustion Locomotives (Draft for Comments)”. The measures indicate that starting in 2027, old railway internal combustion locomotives that have reached the end of service should be completely withdrawn from the railway transportation market; starting in 2035, old railway internal combustion locomotives should completely withdraw from the railway transportation market.

In March 2024, the director of the National Railway Administration emphasized efforts to basically eliminate old internal combustion locomotives by 2027. At the end of 2023, the number of diesel locomotives was 0.7 0.08 million. Due to the long history of internal combustion locomotives, assuming that the number of internal combustion locomotives over 30 years old is 3000-4,000 (expected to reach half), and the number of locomotives stabilizes, it is expected that an average of more than 1,000 locomotives will need to be renewed every year from now until 2027. As of the 2024 semi-annual report, CRRC's seven representative NEV models have been released globally for the first time, and it is expected that they will gradually meet the demand for renewal and replacement of old internal combustion locomotives.

Investment advice: The company's revenue for 2024-2026 is estimated to be 2,580.611, 275.663, 288.633 billion yuan, and net profit to mother of 135.90, 146.0.4, and 15.445 billion yuan, respectively, with changes of +16.04%, +7.46%, and +5.76%, respectively. The dynamic PE corresponding to 2024-2026 was 17.87, 16.63, and 15.72 times, respectively, maintaining the “buy” rating.

Risk analysis

1) The growth rate of domestic railway and urban rail investment exceeded expectations and declined

Rail transit equipment is widely used in infrastructure construction fields such as railways and urban rail transit. Changes in the country's industrial policies and macroeconomic controls in the field of infrastructure may affect investment plans, thereby affecting downstream demand in the rail transit equipment sector. If the growth rate of investment in the industry declines beyond expectations, it will cause enterprises to face the risk of a decline in business scale.

2) Passenger traffic growth falls short of expectations

With the recovery of railway traffic, especially the increase in high-speed rail passenger traffic, it is expected to drive an increase in EMU tenders, thereby driving an increase in demand for rail transit vehicles. If the increase in passenger traffic falls short of expectations, it will affect the bidding and delivery of vehicles.

3) Investment and construction progress in countries along the “Belt and Road” falls short of expectations. Countries along the “Belt and Road” are increasing their railway and other infrastructure construction efforts, which is expected to drive the overseas business development of China's rail transit construction enterprises and rail transit equipment companies. If its investment and construction progress slows down, it will affect the overseas revenue growth of rail transit equipment companies to a certain extent.