Performance is in line with our expectations
The company announced 2023 and 1Q24 results: 2023 revenue of $1,995 million, a year-on-year decrease of 19%, and net profit to mother of $89 million, a year-on-year decrease of 61%. The results were in line with expectations. 1Q24 revenue was 423 million yuan, up 43% year on year, and net profit to mother was 12 million yuan, up 23% year on year.
The level of profitability has declined. The gross profit margin and net margin decreased by 3.9/4.8ppt to 34.0%/4.5% year-on-year in 2023, mainly due to a shift in profit levels along with the delivery of high-profit orders. 1Q24's gross profit margin and net margin decreased by 5.0/0.5ppt to 30.7%/2.9% year-on-year.
Cash flow improved year over year, and new contracts were signed at a high level. The net cash inflow from the company's operating activities in 2023 was 193 million yuan, and the net outflow was 60 million yuan in 2022. In 2023, the company signed a new total contract of 2,017 billion yuan for signal systems, which is close to the previous three-year level of 2,147 billion yuan. At the end of 2023, it had orders of 6.192 billion yuan, an increase of 423 million yuan over the previous year.
Development trends
New urban rail construction is under pressure, and the amount of new construction is expected to remain stable over the next 2 years. According to the China Urban Rail Transit Association, China added a net of 867 kilometers to 11,200 kilometers of new urban rail transit lines in 2023, which is lower than the number of new construction lines of more than 1,200 kilometers in 2020 and 2021. Among them, the subway added 535 kilometers, a decrease of half from the peak period, and 231 kilometers of urban express rail, which is a significant increase from 65 kilometers in 2020. The Association estimates that the scale of construction of new lines in 2024 and 2025 is comparable to 2023. The current funding situation of local governments has had a certain impact on the intensity and progress of subway construction. Looking ahead, along with the construction of the metropolitan area, we believe that the urban express rail may complement the overall urban rail.
It is expected that demand for modifications and maintenance may gradually increase. The service life of the urban rail signal system is about 15 years, and construction of urban rail in China began to accelerate around 2010. According to the company's announcement, by the end of 2023, there are 29 subway lines that have been in operation for more than 15 years, totaling 1,183 kilometers, and 50 cities in mainland China have entered the maintenance phase of about 9,207 kilometers. We expect demand for subsequent renovation and maintenance will continue to grow. At the same time, the company continues to invest in the development of new technology. The next-generation vehicle communication technology PB-TACS has been commercialized, with revenue of 161 million yuan in 2023, an increase of 3.3 times over the previous year.
Profit forecasting and valuation
Keep the outperforming industry rating unchanged. Considering that industry demand is still under pressure, the profit forecast for 2024 was lowered by 78% to $33 million, and a profit forecast of $99 million for 2025 was introduced. Considering the pressure on industry demand, the valuation switched to 2025. The current transaction is 35x P/E in 2025. Considering that the company's contract conditions are good, the target price of 21.00 yuan remains unchanged, corresponding to 40x 2025e P/E, corresponding to 15% upward space.
risks
The tender for the new project fell short of expectations, and downstream customer repayments fell short of expectations.