Action

The share price of Daqin Railway rose 1.3% in 2024, underperforming the CSI Dividend Index by 13.2ppt and significantly lagging behind high- dividend transportation assets (share prices of most key companies rallied more than 40% in 2024). We attribute this to two reasons: First, Daqin Railway's business fundamentals were weak (the firm's earnings fell 22.6% in 1-3Q24, underperforming other high-dividend assets). Second, the firm converted Rmb18.7bn of convertible bonds into shares in 2024, which weighed on its share price.

Still, we see clear investment value in Daqin Railway at this point, considering that: 1) The firm's business fundamentals are likely to stabilize and improve. Data from sxcoal.com shows that freight volume of the Datong-Qinhuangdao Railway (i.e., the Daqin Line) turned positive YoY in December 2024; 2) the pressure on its share price from convertible bonds may be coming to an end; and 3) we expect Daqin Railway to deliver dividend yields of 4.0% in 2024 and 4.7% in 2025, higher than other high- dividend assets in the transportation sector (their dividend yield may average 3.8% in 2025).

Reasoning

We believe freight volume of the Daqin Line will likely stabilize and recover in 2025, driving Daqin Railway's earnings to improve. Raw coal output in Shanxi rose 0.7% YoY in July-November 2024 (vs. down 13.3% YoY in 1H24), and is likely to grow YoY in 1H25 on a low base, in our view. Meanwhile, with ample water inflows in 2024, the proportion of hydropower in total power generation in China increased 1.1ppt over 11M24, squeezing some of the share of thermal power.

According to the CICC Research Wind Power, Solar Power, Public Utilities, and Environmental Protection team, hydropower generation will likely remain stable and thermal power generation will likely maintain mild growth in 2025. We believe that stable downstream demand for thermal power will ensure the freight volume of the Daqin Line, which we expect to reach 392mnt in 2024 and 421mnt in 2025, returning to the historical average level in 2025.

Funding pressure may gradually ease. The firm announced on December 25, 2024 that its convertible bonds have triggered conditional redemption, and it has decided to exercise the right of early redemption for its convertible bonds. The firm issued Rmb32bn of convertible bonds in December 2020, with the balance of convertible bonds at about Rmb7.7bn as of end-2024. The firm converted about Rmb18.7bn of convertible bonds into shares in 2024. We think the firm may face less funding pressure after forced redemption of convertible bonds.

The firm's dividend yield is attractive in comparison to other high- dividend transportation assets. On April 26, 2024, the company announced its dividend return plan for shareholders over 2023-2025, proposing a cash dividend payout ratio of no less than 55% of the total attributable net profit for the year. Based on our earnings forecasts and the dividend payout ratio of 55%, we estimate Daqin Railway's dividend yields at 4.0% in 2024 and 4.7% in 2025, 0.3ppt and 0.9ppt higher than those of high-dividend assets in the transportation sector (average dividend yield at 3.7% in 2024 and 3.8% in 2025).

Financials and valuation

As freight volume data over 11M24 slightly missed our expectations, we trim our 2024 profit forecast by 4.4% to Rmb9.22bn, but keep our 2025 earnings forecast largely unchanged at Rmb10.65bn. We introduce our 2026 earnings forecast at Rmb10.69bn.

The stock is trading at 11.8x 2025e and 11.8x 2026e P/E. We roll over valuation to 2025. Given the firm's solid dividend payout, we maintain an OUTPERFORM rating and raise our TP 9.6% to Rmb8.00, implying 14.1x 2025e and 14.1x 2026e P/E and dividend yields of 3.4%, 3.9%, and 3.9% in 2024, 2025, and 2026. Our TP offers 19.8% upside.

Risks

Falling demand for thermal coal; changes in freight rates of the Daqin Line.