Key points of investment

Incident: The company released its three-quarter report. In the first three quarters of 24, the company achieved revenue of 0.906 billion yuan, +23.83% year over year; net profit to mother 0.328 billion yuan, +33.98% year over year; net profit after deduction of 0.329 billion yuan to mother, +36.73% year over year.

Q3 Performance exceeded expectations, and profitability improved markedly

In 24Q3, the company achieved revenue of 0.347 billion yuan, +69.16% year over year; net profit to mother was 0.138 billion yuan, +94.21% year over year, higher than our previous forecast of 0.09-0.12 billion yuan; after deduction, 0.136 billion yuan, or +93.90% year over year. There was a high increase in Q3 performance, mainly due to a high increase in new orders and increased project acceptance in the first half of the year.

Profitability increased markedly. The gross margin of the 24Q3 company was 64.73%, +2.19pct compared to the previous year. The sales share of high-margin products increased, and the product structure was further optimized. The cost rate for the period was 22.0%, a year-on-year decrease of 5.4 pcts. The main reason was the improvement of company management efficiency. The comprehensive cost ratio was lower than the revenue growth rate, and the scale effect was released.

Orders continued to rise. New orders for LSP projects were 0.127 billion yuan. In the first half of 2024, railway customer tenders continued to pick up. The company accumulated 0.66 billion yuan of new orders signed in the first half of the year, an increase of more than 30% over the previous year. The order growth rate was significant since the second quarter.

In September '24, the subsidiary Lanxin Technology won the bid for the “Shenyang Bureau Group Corporation Locomotive Management Safety Auxiliary Protection System (LSP)” project, with a bid amount of 0.127 billion yuan (excluding tax).

Railway investment picked up markedly in '24, and the equipment renewal policy promoted the investment side. In the first three quarters of '24, the country invested 561.2 billion yuan in railway fixed assets, an increase of 10.3% over the previous year. On the policy side, equipment renewal continues to advance, and the central government coordinates around 300 billion of ultra-long-term special treasury bond funds to support equipment renewal and trade-in. In the next five years, central enterprises are expected to arrange a total investment of more than 3 trillion yuan for large-scale equipment upgrades. As a leader in LKJ systems, the company is expected to fully benefit from locomotive equipment updates.

Focusing on shareholder returns, the 24-year dividend rate is expected to be 4.31%

The company announced a profit distribution plan for the first three quarters of 2024, and distributed cash dividends of 2.50 yuan (tax included) to all shareholders for every 10 shares, for a total cash dividend of 95.32 million yuan, accounting for about 29% of net profit due to mother for the first three quarters. The company's cash dividend ratio reached 70% in 2023. According to our profit forecast, assuming the company's dividend rate remains unchanged in 2024, we expect the company's dividend rate to be 4.31% in 2024.

Profit forecasting and valuation

The company's Q3 performance exceeded expectations. We raised our profit forecast. The company's net profit for 24-26 is 5.4, 6.6, and 0.8 billion yuan respectively, +31%, 22%, and 21%, corresponding to 24-26 PE multiples of 16, 13, and 11 times, respectively, maintaining a “buy” rating.

Risk warning

The progress of railway equipment upgrades fell short of expectations, China Railway Group's investment fell short of expectations, risk of impairment of goodwill, etc.