Railway digital intelligence investment is expected to increase significantly

The share of China's railway informatization investment in the 13th Five-Year Plan was 6%, far below the international level. According to the Forward-looking Industry Research Institute, the share of fixed asset investment in railway construction increased from 2% during the “11th Five-Year Plan” period to 6% during the “13th Five-Year Plan” period. According to Taitong Technology's prospectus, IT equipment such as signal and safety accounted for 10% and 15% of railway investment in 2014. Japan, Germany, France, etc. were 10% and 15% respectively, while China was only 4%.

We believe that the share of digital and intelligent railway investment is expected to increase markedly during the “14th Five-Year Plan” period. Drivers include: (1) Intelligent railways and digital railways, which are the main future directions. (2) Compared with the “13th Five-Year Plan” period, demand for new lines has decreased markedly, investment amounts are stable, and the share of digital intelligence investment is expected to increase markedly.

Two major directions: scientific and technological innovation + autonomy and control

Technological innovation and autonomy and control are major trends in the railway industry. In terms of scientific and technological innovation, the “14th Five-Year Plan” focuses on the development goals of “smart railways” and aims to promote the application of Beidou, 5G, AI, and big data in the railway industry. In terms of autonomy and control, the “Administrative Measures on the Safety Protection of Railway Critical Information Infrastructure” was officially implemented in February 24, making it clear that railway operators should strengthen the security protection of the railway critical information infrastructure supply chain and prioritize procurement of safe and reliable network products and services.

5G-R accelerates, time is tight and space is large

5G-R is a key part of the digital intelligence of railways. The current dedicated railway network is GSM-R (2G), which is already facing problems such as industrial elimination and insufficient carrying capacity. In October '23, the Ministry of Industry and Information Technology approved the railway 5G private network (5G-R) test band. We judge that railway 5G-R is expected to peak construction in 4-6 years. The main investment cycle will be significantly shortened, and the scale of investment will also be significantly concentrated, which will bring 5.9-8.4 times more flexible space for key applications.

On November 7, the National Railway Innovation Research Institute was inaugurated. The research institute was jointly prepared by the National Railway Administration Equipment Technology Center, Beijing Jiaotong University, and the Chongqing Yongchuan District People's Government. It has a 5G-R mobile communication laboratory, rail transit certification center, rail transit testing center, and a platform for transforming scientific and technological achievements. Ten companies, including ZTE, Hikvision, Shenzhou Digital, and Jiaxun Feihong, signed as the first batch of partners.

According to the company's annual report for the year 23, the company closely followed China Railway Group's 5G-R work deployment and improved the development of 5G-R related products. All products have passed the static test review of China Railway Group's 5G-R system. The establishment of the research institute is expected to gather the forces of all parties to accelerate the implementation of 5G-R applications. According to the plan, the Institute aims to incubate enterprises to achieve an output value of more than 20 billion yuan within 5 years.

Railway Innovation: Fully cooperated with Huawei to promote the 5G/AI/Hongmeng Railway. In November 23, the company signed a “Comprehensive Cooperation Agreement” with Huawei to develop solutions based on technology and equipment such as the Huawei operating system (Hongmeng), servers (Kunpeng, Shengteng), 5G, cloud computing, and large models.

In April '24, according to the company's interaction and Easy Disclosure, the two parties have already implemented projects worth more than 10 million yuan.

In July '24, the company reached a new strategic cooperation agreement with Huawei, marking the upgrading of strategic cooperation between the two sides, comprehensively enhancing the depth and breadth of cooperation, and becoming a reliable and close partner and ally for mutual growth.

In September '24, the company participated in the Huawei Full Connectivity Conference and presented its many innovative solutions and practical cases based on 5G+AI, intelligent analysis of video+AI, multi-dimensional perception, and multi-technology integration.

In October '24, the company and Huawei held the “2024 Special Class for Partners Empowering the Introduction of Huawei Transportation Intelligence Corps Partners to Beijing Jiaxun Feihong Electric Co., Ltd.”

Profit forecasting

The company's net profit for 24-26 is estimated to be 0.08, 0.1, and 0.14 billion yuan, respectively, +20%, +28%, and +33%, corresponding to 24-26 PE of 64, 50, and 38 times, respectively, maintaining a “buy” rating.

Risk warning

Railway investment fell short of expectations; 5G-R construction fell short of expectations; industry competition intensified.