It covered China Express for the first time and gave it a “buy” rating. Based on A/H shares 18/9 times PE, the company was given an A/H target share price of 7.56 yuan/4.12 HKD. The company is the world's leading provider of rail transit control system solutions, and the domestic rail/urban rail communication signal system market share is the top. While demand for new rail transit is stable, the renewal and transformation of the communication signal system is expected to increase the company's performance, and overseas business and the low-altitude economy are expected to open up the company's long-term growth curve.

While new demand in the railway industry remains steady, leading communication signal systems continue to benefit from a steady increase in fixed asset investment/construction mileage and passenger traffic. We expect railway investment and construction to maintain a high boom until 2028. The company's railway communication signal system market share exceeds 60%, fully benefiting from the high prosperity of the industry. In terms of upgrading and transformation, the high-speed rail communication signal system has not yet begun large-scale upgrades, but it is estimated that more than 0.011 million kilometers of lines need to be updated urgently. It is expected that it will gradually begin in 25. The revenue from China Tonghao high-speed rail control system renewal is expected to reach 1.925/3.85/5.775 billion yuan in 25-27.

After the construction of urban rail construction has stabilized, it has entered the renewal cycle. The company's leading position in the industry has stabilized and urban rail construction has entered a period of steady development. We expect the new lines to be put into operation in 24-25 to be the same as in 2023, and the standard amount of the national urban rail communication signal system will remain stable in '24. Subsequent debt increases are expected to speed up the pace of urban rail construction. In terms of updates, we expect the CAGR of the urban rail communication signal system renewal market to reach 17.1% in 25-28. Tonghao has a stable position as a leader in the urban rail control system industry and is expected to continue to benefit.

The company's core technology is leading the world, and the ocean/low-altitude economy brings new opportunities for development. The company has many industry-leading technologies and a complete innovation system, and the leading core technology has stabilized its leading position. The company's overseas orders continued to increase, and the CAGR for new overseas orders in 2020-2023 was 36%. Low-altitude communication technology is an important part of the low-altitude economy. The company's central and state-owned enterprise background has resource advantages. It is expected to vigorously expand into low-altitude control based on track control systems, and has cooperated with many local governments.

How we differ from the market view

The market is concerned that new demand for railway communication signal systems may be affected by the decline in new railway traffic mileage. We are counting the high-speed rail opening mileage of the planned project so far, and believe that the new demand for high-speed rail-side communication signal systems will still be guaranteed by 2028. Furthermore, we believe that after the rapid advancement of the vehicle end and rear market in 2024, communication signal system updates are expected to gradually begin in 2025 and enter a normal pace of updates relatively soon.

Profit forecasting and valuation

We expect the company's 24-26 EPS to be 0.35/0.42/0.44 yuan respectively, which is comparable to the average PE value of 14.90 times the company's 25-year iFind's consistent expectation. Considering that the company is expected to benefit from the upgrading of high-speed rail communication signal systems, we gave the company 18 times PE in 25-26 compared to comparable companies' performance; H shares were discounted by about 50% in the past year. We gave the company a 25-year H share 9 times PE, and A/H corresponding target price of 7.56 yuan/4.12 HKD.

Risk warning: Railway infrastructure investment falls short of expectations; the pace of renewal falls short of expectations; overseas market development is blocked.