Investment advice

The Daqin Railway rose 1.3% in 2024, outperforming the dividend index of 13.2ppt, while significantly outperforming transportation dividend assets (core individual stocks generally rose by more than 40% in 2024). We believe the reasons are: 1) weak fundamentals. The performance of Daqin Railway fell 22.6% in the first three quarters of 2024, which was weaker than other dividend assets; 2) the company's debt-for-equity conversion suppressed stock prices.

However, at this point, we believe that the company's value is outstanding: 1) the fundamentals of the Daqin Railway are expected to improve steadily (coal resource network data shows that traffic volume of the Daqin Line changed year on year in December); 2) debt conversion suppresses stock prices or is nearing the end; 3) In a horizontal comparison, we expect Daqin Railway's 2024/25 dividend rate to be 4.0%/4.7%, which is higher than dividend assets in the transportation sector (average dividend rate of 3.8% in 2025).

rationales

In 2025, we believe that the volume of goods on the Daqin Line is expected to recover steadily, leading to a recovery in profits. 1) Upstream raw coal production in Shanxi in July-November +0.7% vs. 1H24 YoY -13.3%; 1H25 is expected to achieve year-on-year growth at a low base last year; 2) Water has been abundant since 2024, and the share of hydropower increased by 1.1 ppt in January-November, partially squeezing thermal power. The CICC Fengguang Public Environmental Protection Group expects hydropower to remain stable next year, and thermal power is expected to maintain a slight increase. We believe that stable demand for downstream thermal power can guarantee the traffic volume of the Daqin Line. We expect the traffic volume of the Daqin Line to be 0.392/0.421 billion tons in 2024/25, returning to the historical average of Daqin this year.

Financial pressure may gradually ease. On December 25, 2024, the company announced that Daqin Bonds had triggered a conditional redemption clause, and the company decided to exercise the right to early redemption of Daqin Bonds. The company issued 32 billion yuan of convertible bonds in December 2020. As of the end of 2024, the balance of the company's convertible bonds was about 7.7 billion yuan, and the convertible debt-for-equity swaps in 2024 were about 18.7 billion yuan. We believe that the financial pressure on the company's convertible bonds may have decreased after the forced redemption.

The horizontal comparison of dividend rates is attractive. The company announced the 2023-2025 shareholder dividend return plan on April 26, 2024. The cash dividend ratio is not less than 55% of the total net profit returned to mother for the year. Based on our profit forecast and 55% dividend ratio, we expect Daqin Railway's 2024/25 dividend rate to be 4.0%/4.7%, which is higher than the transportation sector dividend assets (average dividend rate of 3.7%/3.8% in 2024/25) 0.3pp/0.9ppt.

Profit forecasting and valuation

As the volume data for the first 11 months of 2024 fell slightly below our expectations, we slightly lowered our 2024 profit by 4.4% to 9.22 billion yuan, but kept the 2025 profit forecast of 10.65 billion yuan unchanged, while introducing a profit of 10.69 billion yuan for the first time in 2026. The company's current stock price is trading at 11.8/11.8x P/E in 2025/2026. We switched our valuation to 2025, and due to the company's steady dividends, we raised our target price by 9.6% to 8.00 yuan, corresponding to 14.1/14.1xp/e in 2025/2026, and 3.9% corresponding to the 2024/25/26 dividend rate of 3.4%/3.9%, with 19.8% upside compared to the current price.

risks

Demand for electricity and coal has declined, and freight rates on the Daqin Line have been adjusted.