3Q24 results in line with our expectations

Daqin Railway announced its 3Q24 results: Revenue fell 8.6% YoY and rose 1.5% QoQ to Rmb18.61bn, gross profit fell 31.3% YoY and 14.1% QoQ to Rmb3.25bn, gross margin fell 5.8ppt YoY and 3.2ppt QoQ to 17.4%, attributable net profit fell 23.3% YoY and 2.8% QoQ to Rmb2.74bn, and attributable net margin fell 2.8ppt YoY and 0.6ppt QoQ to 14.7%. The firm's results are in line with our expectations.

In 1-3Q24, revenue fell 9.2% YoY to Rmb55.21bn, and attributable net profit fell 22.6% YoY to Rmb8.60bn

Trends to watch

Railway transport volume of the Daqin Line declined YoY in 3Q24, but recovered MoM in October. According to the firm, freight volume of the Daqin line fell 13.2% YoY and 1.2% QoQ to about 93.52mnt in 3Q24. Data from Wind shows that the volume of coal transported by railways at Qinhuangdao Port began to recover MoM in September, growing 11.3% in September and 8.3% in October. The YoY growth turned positive to 10.8% in October. We believe the firm's fundamentals in 4Q24 may improve compared with that in 1-3Q24.

Shareholder returns are attractive. In April, the firm announced a three- year dividend payment plan for shareholders (2023-2025). It would distribute dividends in cash each year (except in special circumstances), and the cash dividend payout ratio should not be lower than 55% of the total net profit attributable to shareholders. The firm also paid its first interim dividend this year, with a DPS of about Rmb0.13. Based on our 2024 earnings forecasts and an assumption of a 55% dividend payout ratio, we estimate the firm's dividend yield in 2024 at 4.5% (excluding convertible bonds). If all convertible bonds are converted into shares and total dividends remain unchanged, we think the firm’s dividend yield in 2024 will be 4.1%.

Financials and valuation

Although fundamentals in 4Q24 may improve compared with the level in 1-3Q24, we leave our earnings forecasts unchanged for 2024 and 2025 at Rmb9.64bn (-19.2% YoY) and Rmb10.66bn (+10.6% YoY), considering settlement projects at year end. The stock is trading at 12.3x and 11.1x 2024e and 2025e P/E. We maintain an OUTPERFORM rating and our target price of Rmb7.3, implying 13.8x and 12.5x 2024e and 2025e P/E, implying 12.1% upside. Current share price corresponds to a dividend yield of 4.5% (not considering convertible bonds) in 2024.

Risks

Falling demand for coal used for electricity generation; changes in cost settlement mechanism.