1H22 net profit was higher than our expectations

In the first half of the year, Tielong Logistics achieved revenue of 6.3 billion yuan, a year-on-year decrease of 30.5%; Guimu's net profit was 254 million yuan, an increase of 22.1% over the previous year, and profit was higher than our expectations (221 million yuan); cash flow from operating activities was 452 million yuan, an increase of 238% over the previous year. On a quarterly basis, the company's net profit for 1Q/2Q increased 6.3/42.5% year-on-year. The share of revenue from the special box business with high gross margin increased, while the share of revenue from the supply chain business with low gross margin declined, causing the company's gross margins and net interest rates to increase 2.72 pp/1.75 pp year-on-year to 7.37%/4.06% in the first half of the year. Considering the expansion of the special box business against the trend, we raised net profit to the mother by 16.6%/14.9%/13.8% to 4,48/498/558 million yuan in 2022/2023/2024. We raised the target price by 5.7% to 5.97 yuan (previous value of 5.65 yuan), based on 1.15x 202E PB (Wind's unanimous expectation was a 15% premium on the weighted average market value of comparable companies because the company's ROE was higher than the weighted average of comparable companies; previous value was 1.1x 202E PB). Maintain an “increase in holdings” rating.

The gross profit of the railway special container business increased, and container turnover efficiency continued to improve. Looking at the sub-business segments, railway special containers, railway freight and port logistics, and supply chain management businesses contributed 47%, 39%, and 12% of 1H22's total gross profit, respectively. In the first half of the year, the company's railway special boxes sent 835,900 TEU, an increase of 19.4% over the previous year; at the same time, box turnover efficiency continued to improve, resulting in a 21.7% year-on-year increase in business gross margin and an increase in gross margin of 6.66 pp to 27.4%. In the same period, national railway containers sent 1.58 million TEU, an increase of 19.7% over the previous year. The main container type of the company's special container business is a dry bulk container. The main types of this box type are coal, sulfur, phosphate fertilizer, cement, clinker, etc., followed by tank containers, refrigerated boxes, steel coil boxes, etc. In the second half of the year, with the steady growth policy of trusteeship infrastructure, we expect demand for dry bulk special container transportation to improve. Railway containers are also in line with the long-term trend of “rolling to rail” and “decentralization”.

The traffic volume of the Shaba Line increased steadily. The gross profit of the supply chain benefited from the rise in steel prices in the first half of the year. The company's railway freight and port logistics gross profit increased 2.0% year-on-year, and gross margin increased by 6.25 pp to 20.1%, mainly due to the steady increase in traffic on the Shaba Line. In 1H22, the delivery volume of the company's Shaba Railway reached 29.43 million tons, an increase of 3.49% over the previous year. In the first half of the year, the company's territory experienced two long periods of epidemic containment, and the cold chain business continued to lose money. The subsidiary Tielong Cold Chain recorded a loss of about 26 million yuan in 1H22 (1H21: loss of 35 million yuan). The gross profit margin of the 1H22 supply chain business increased 10.17% year over year, and gross margin reached 1.23%. The company's supply chain business was born out of a steel supply chain project and gradually expanded to commodities such as coal and coke. Since this year, steel prices have been rising slowly, rising to a high point during the year by mid-April and then gradually falling back. The price rise phase is beneficial to the steel supply chain.

The development strategy is adjusted, and the main business will receive more concentrated resource support

The company mentioned strategic adjustments in its 2021 annual report, and the railway special container transport logistics and regional port logistics business will receive more concentrated resource support. The gross profit share of the two core businesses of 1H22 reached 86%, an increase from 2021 as a whole (gross profit ratio of 84%), and the results of the strategic adjustment are showing initially.

Risk warning: The development of special boxes fell short of expectations, the rental rate of cold chain logistics parks was low, and the Shaba Line fell short of expectations.