Investment event: Company discloses 2023 annual report. In 2023, the company achieved operating income of 234.262 billion yuan, a year-on-year increase of 5.08%; realized net profit of 11.712 billion yuan, an increase of 0.50% over the previous year; realized deducted non-net profit of 9.106 billion yuan, an increase of 14.24% over the previous year.

The recovery in railway passenger traffic exceeded expectations, and the railway equipment business grew steadily. In 2023, the National Railway completed the number of passengers sent 3.68 billion, an increase of 128.8% over the previous year, an increase of 2.97% over 2019, a record high; the annual railway fixed asset investment reached 764.5 billion yuan, an increase of 7.5% over the previous year. Railways sent 484 million passengers during the 2024 Spring Festival travel season, an increase of 39% over the previous year, and an increase of 18.8% over 2019. The recovery in railway passenger traffic exceeded expectations, and the company's annual performance grew steadily. Among them, the railway equipment business and overseas business achieved relatively rapid growth. In 2023, the company signed new orders of 298.6 billion yuan, +6.99% year-on-year, of which overseas orders amounted to 58.4 billion yuan, +14.73% year-on-year. In 2023, the company's railway equipment business revenue was 98.191 billion yuan, +18.05% year-on-year, mainly due to a sharp increase in EMU and bus business revenue. Among them, EMU revenue was 41,829 billion yuan, +43.38% year on year; bus revenue was 9.699 billion yuan, +55.68% year over year. In 2023, the company continued to further promote the “going global” of the entire industry chain, and the Yawan High Speed Rail successfully carried passengers; the Hungarian Railway high-speed train project was officially signed, achieving a major breakthrough in China's first high-speed rail export to Europe; rail transit vehicle deliveries in export cities increased, and overseas business achieved revenue of 27.733 billion yuan throughout the year, +13.75% over the same period last year.

Gross margin has been rising steadily, and emphasis is placed on R&D investment to create a new dual-track industry pattern. The company's gross margin/net margin in 2023 was 22.27%/6.22%, +1.04pct/-0.22pct year-on-year. The company's rail transit equipment and new industrial businesses all achieved an increase in gross margin, including gross profit margin of 25.27% of railway equipment, +0.77pct; gross profit margin of urban rail and urban infrastructure 21.29%, +0.56pct; gross profit margin of new industry 19.14%, +1.51 pct year on year; and modern service gross margin of 23.53%, -2.20 pct year on year. The slight decrease in net interest rate was mainly due to factors such as an increase in some expenses such as product quality assurance reserves and an increase in the calculation of various types of impairment losses. In 2023, the company's sales/management/ financial expense ratio was 3.92%/5.96%/-0.09%, +0.46pct/-0.05pct/+0.06pct year-on-year. In 2023, the company made every effort to carry out key core technology research and achievement transformation and application work, promote various R&D projects such as rail transit, wind power, etc., and continue to increase R&D investment to drive the development of the dual track of rail transit equipment+clean energy equipment. The annual R&D expenditure was 14.364 billion yuan, accounting for 6.13% of revenue, or +0.24pct compared to the previous year.

The recovery in railway equipment is expected to drive resilient performance. 1) With railway passenger flow recovering beyond expectations, demand for new high-speed rail EMUs increased. 164 new high-speed rail EMUs were tendered in 2023. If current vehicle distribution density is maintained, the average annual demand for EMUs will exceed 200 in the future. 2) The Central Committee on Finance and Economics proposed large-scale equipment upgrades and reduction of logistics costs for the whole society. On the one hand, it is expected to accelerate the transformation of old internal combustion locomotives and drive demand for locomotives and trucks; on the other hand, the huge stock of railway vehicles requires renewal and maintenance. Some Harmony models have entered the overhaul period for 6 years, and maintenance requirements postponed due to the epidemic are expected to be gradually released. The first 323 tenders for advanced repairs in '24 exceeded expectations. By model, locomotives and EMUs account for more than 70% of the company's railway equipment business and are highly profitable; by type, maintenance accounts for nearly 40% of the railway equipment business, and the gross margin is high and stable. The equipment update+railway passenger and cargo volume+overhaul cycle boosts the railway equipment boom. As a global leader in rail transit equipment, the company's performance flexibility is expected to be unleashed.

Profit forecast and investment advice: The company is expected to achieve net profit of 14.157 billion yuan, 16.691 billion yuan, and 19.688 billion yuan respectively in 2024-2026, corresponding EPS of 0.49, 0.58, and 0.69 yuan, and corresponding PE of 14 times, 12 times, and 10 times, maintaining the recommended rating.

Risk warning: Risk of investment in fixed assets falling short of expectations, risk of new product expansion falling short of expectations, risk of increased market competition, etc., risk of overseas market expansion falling short of expectations.