Incident: China Railway Construction released its 2024 three-quarter report. From January to September '24, the company achieved revenue, net profit to mother, and net profit after deducting non-net profit of 758.13/15.7/14.78 billion yuan respectively, a year-on-year decrease of 6%/19.2%/19.8%. 24Q3 achieved revenue/net profit/net profit after deducting non-net profit of 242/3.79/3.62 billion yuan respectively, a year-on-year decrease of 8.8%/34.3%/34.5%.

Comment:

Higher financial expense ratios eroded profits, and cash flow improved in the third quarter: from January to September '24, the company's gross sales margin/net margin reached 9.2%/2.6%, respectively, a year-on-year decrease of 0.01pct/0.27pct. The rise in expenses during the period, especially financial expenses, eroded the company's profits. From January to September '24, the company's sales/management/finance/R&D expenses rates were 0.6%/2.0%/0.8%/2.0%, respectively, -0.03/+0.01/+0.48/+0.16pct. From January to September '24, the company's net operating cash outflow was 89.02 billion yuan, an increase of 45.84 billion yuan over the same period last year. The company's net operating cash flow for the third quarter was 7.34 billion yuan, a year-on-year decrease of 16.5 billion yuan.

New contracts declined year-on-year, and green environmental orders achieved relatively rapid growth: traditional infrastructure investment contracted due to tight local finances, and the decline in PPP project tenders under the new PPP model, causing the company to sign new contracts under a year-on-year decline. From January to September '24, the company signed new contracts of 1473.4 billion yuan, a year-on-year decrease of 17.5%, and domestic/overseas contracts of 1368.13/105.29 billion yuan, a year-on-year decrease of 18.0%/10.1%. The total number of PPP project tenders declined year-on-year. The amount of new contracts signed by the company for investment and operation projects in January-September '24 was 72.88 billion yuan, a year-on-year decrease of 65.6%, a significant decrease; the company accelerated the pace of green transformation and signed a new green environmental protection project of 125.2 billion yuan during the same period, an increase of 43.1% over the same period.

Actively cultivate and expand new industries, keep up with the progress of financial debt and promote the improvement of financial indicators: China Railway Construction is actively constructing an “8+N” industrial pattern, actively cultivating new businesses such as urban operations, cultural tourism and rehabilitation, information technology and new materials, and promoting the company's high-quality development. As of June 30, '24, the PPP project receivables were 10.5 billion yuan in the company's long-term receivables. The company is continuing to follow up on the amount of debt converted by the local government where the project included in the scope of the financial debt is located, making full use of the debt improvement policy. It is expected that the company's cash flow and other financial indicators will improve as the financial indicators such as the company's cash flow are improved.

Profit forecast and valuation rating: The company's operations continue to be under pressure due to tight local finances and sluggish real estate. We lowered our 24-26 net profit forecast to 23.2/23.4/23.7 billion yuan (down 18%/23%/26%, respectively). The company's cash flow improved in the third quarter, and green environmental orders grew rapidly. As debt conversion progresses, financial indicators such as cash flow are expected to improve, maintaining the “buy” rating for A/H shares.

Risk warning: The growth rate of infrastructure investment fell short of expectations, and the decline in real estate exceeded expectations.