1H23 results in line with our forecast

Daqin Railway announced its 1H23 results. Revenue rose 3.9% YoY to Rmb40.44bn, and net profit attributable to shareholders rose 3.03% YoY to Rmb7.54bn, in line with our expectations. In 2Q23, revenue fell 0.3% YoY to Rmb20.60bn, and attributable net profit declined 10.7% YoY to Rmb3.88bn, mainly due to rising costs related to passenger transport services amid recovering passenger transport, which resulted in a 3.4ppt YoY decline in GM.

In terms of profitability, GM rose 0.1ppt YoY to 25.4% in 1H23. Staff expenses increased 2.3% YoY, equivalent to 23.8% of revenue of the firm’s main business (down 0.4ppt YoY).

Trends to watch Passenger transport revenue recovers notably; freight transport revenue edges down YoY. 1) Freight transport: In 1H23, the firm's freight transport revenue fell 1.3% YoY to Rmb30.98bn. Freight transport volume declined 2.0% YoY to 343mnt, translating into turnover volume of 195.9bnt-km, down 0.8% YoY. Freight volume of Daqin Line (core asset) fell 0.8% YoY to 208mnt. 2) Passenger transport: In 1H23, the firm's revenue from passenger transport rose 115.6% YoY to Rmb4.10bn, up 11.2% from 2019. Passenger transport volume grew 92.9% YoY to 19.17mn, and passenger turnover increased 128.6% YoY to 1.6bn pkm.

Coal transport volume to remain well supported in 2H23. As the

economy continues to recover, we expect ramp-up of industrial and infrastructure construction activities to lift coal demand. Meanwhile, the strong coal consumption in peak seasons such as summer and winter should also underpin demand. As a major coal transport channel in China (the firm accounted for 27.7% of China's total railway coal transport volume in 1H23), the firm’s full-year transport volume will be well supported, in our view.

A defensive stock with solid dividend payout. According to the firm's shareholder return plan for 2020-2022, it plans to pay an annual cash dividend of no less than Rmb0.48/sh. We believe the firm will maintain its dividend policy. In addition, it shows characteristics as a defensive stock with solid fundamentals and visible earnings. Assuming a dividend payment of Rmb0.48/sh, the current price implies a dividend yield of 6.6% in 2023 and 6.6% in 2024, highlighting the firm’s investment value.

Financials and valuation

We maintain our 2023 and 2024 earnings forecasts. The stock is trading at 8.6x 2023e and 8.3x 2024e P/E. We maintain an OUTPERFORM rating and a target price of Rmb8.70, implying 10.2x 2023e and 9.9x 2024e P/E, and offering 19.0% upside.

Risks

Disappointing economic growth; worse-than-expected diversion by other rail lines.