1Q24 results fell short of our expectations

The company announced 1Q24 results: revenue of 6.509 billion yuan, a year-on-year decrease of 13.1%, and net profit to mother of 604 million yuan, a year-on-year decrease of 10.8%. The performance was lower than our expectations. The main business revenue declined mainly due to changes in the pace of order delivery.

Business revenue has declined, and profitability has increased dramatically. Main business revenue declined to varying degrees in 1Q24. Railway revenue decreased by 10% to 3,558 billion yuan, urban rail revenue decreased 7% to 1,615 billion yuan, and general engineering contract revenue decreased 15% to 1,144 billion yuan. The gross margin for the first quarter increased 4.7ppt to 27.4% year-on-year, continuing the trend of increasing gross margin since last year. The expense ratio increased by 3.8ppt year-on-year during the period, and the net interest rate increased slightly by 0.2ppt to 9.3%.

The quality of operations has improved. The net cash inflow from the company's operating activities in the first quarter was 2,082 billion yuan, compared with a net outflow of 1,307 billion yuan in the same period last year, mainly due to a sharp increase in the sales repayment rate. By the end of the first quarter, the balance of the company's accounts receivable and notes was $23.143 billion, both of which decreased from month to month, and contract liabilities of $9.278 billion, both of which increased from month to month.

Development trends

New orders are divided, and there is pressure on urban rail lines. 1Q24 signed new orders of 11.4 billion yuan, a year-on-year decrease of 17%. Among them, railway orders increased 10% to 4 billion yuan year-on-year, urban rail decreased 55% to 1.5 billion yuan year-on-year, and general engineering contracting decreased 15% to 4.5 billion yuan year-on-year. The funding situation of local governments has had a certain impact on the pace of commencement of urban rail and general engineering contracting business. It is recommended to pay attention to subsequent improvement trends.

Pay attention to the release of demand for railway signal system replacement. The service life of the railway signal system is 10-15 years. Around 2010, China's high-speed rail construction reached its peak. At this stage, some lines have entered the replacement window one after another. The company's product share in the high-speed rail sector is at a high level. We anticipate that the subsequent release of railway signal system replacements will drive the growth of the company's main business.

Profit forecasting and valuation

Maintain an outperforming industry rating. Considering the pressure on the urban rail and engineering general contracting business, the 2024e profit forecast was lowered by 9% to $3.60 billion, and a profit forecast of $3,726 billion for 2025 was introduced. Currently, A shares are trading at 15.9x/15.3x 2024e/25e P/E, H shares are trading at 7.8x/7.2x 2024e/25e P/E, maintaining a target price of HK$5.60 for A/ H shares, 16.5x/15.9x 2024e/25EP/E, H shares correspond to 8.0x/7.4x 2024e/25e P/E, and A shares/H shares respectively correspond to 4%/3% upside.

risks

Downstream tenders fell short of expectations, and project payback fell short of expectations.