Zhitong Finance App learned that China Post Securities issued a research report stating that in 2024H1, the national railway completed a fixed asset investment of 337.3 billion yuan, a year-on-year increase of 10.6%, setting a new historical record, and there is a high probability that the annual investment amount in 2024 will return to the 800 billion yuan mark. In the first half of the year, the national railway sent a total of 2.096 billion passengers, with a passenger turnover of 777.952 billion passenger kilometers, an increase of 18.4% and 14.1% year-on-year respectively, both setting new historical highs for the same period. With the surging demand for railway passenger transportation and the significant improvement in profitability of China National Railway Group, railway investment is expected to increase in intensity. In addition, according to the goals of the 14th Five-Year Plan, it is estimated that an average of 3,000 kilometers of new railways will be built in 2024 and 2025, of which 2,500 kilometers will be high-speed railways, which is expected to be higher than the average for 2021-2023.

The main opinions of Zhongyou Securities are as follows:

The fixed asset investment of the railway in 24H1 set a new historical record, and the annual investment amount is expected to return to 800 billion.

In 2024H1, the national railway completed a fixed asset investment of 337.3 billion yuan, a year-on-year increase of 10.6%, setting a new historical record. There is a high probability that the annual investment amount in 2024 will return to the 800 billion yuan mark. From 2020 to 2023, the number of 350-kilometer EMU purchased by China National Railway Group was respectively 83, 29.5, 92, and 164 sets. The first tender in May 2024 gave a quantity of 165 sets, which exceeded the expected scale. In addition, in terms of the bidding time, the first round of bidding in 2024 was earlier than June 5th, the first round of bidding in 2023.

As of July 2024, the amount of sales and maintenance contracts for EMUs signed by CRRC has far exceeded the annual total in 2023, and the backlog of orders is very full. CRRC is the main company for rail transit vehicles and directly benefits from the high growth of tenders by China National Railway Group. From the disclosure of the contracts signed by CRRC, it can also prove the high prosperity of rail transit equipment. From December 2023 to July 2024, the sales contracts for domestic EMUs signed by CRRC have exceeded 40 billion yuan, and the maintenance contracts for domestic EMUs are nearly 28.5 billion yuan. The amount of sales and maintenance contracts for EMUs has far exceeded the total amount for the whole year of 2023.

The railway-side rail transit equipment is expected to usher in a high prosperity period for the following reasons:

(1) The high growth of railway passenger transportation demand + significant improvement in the profitability of China National Railway Group, and increased investment in railways.

In 2024H1, the national railway sent a total of 2.096 billion passengers, with a passenger turnover of 777.952 billion passenger kilometers, an increase of 18.4% and 14.1% year-on-year respectively, both setting new historical highs for the same period. With the steady recovery of the domestic economy and the acceleration of personnel mobility, the demand for domestic railway passenger transportation has become increasingly strong. From the operational situation of China National Railway Group, the impact of the epidemic on passenger volume caused a significant loss in 2020-2022. In 2023, China National Railway had a net profit of 3.3 billion yuan, turning a loss into a profit, and even higher than the net profit in 2019 before the epidemic. With the surging demand for railway passenger transportation and the significant improvement in the profitability of China National Railway Group, railway investment is expected to increase in intensity.

(2) In the sprint phase of the 14th Five-Year Plan, the target for high-speed railway construction mileage in 2024-2025 is expected to be higher than the average for 2021-2023.

The planning of China's railway construction is relatively strong, and the historical completion rate is high. According to the 14th Five-Year Plan for transportation, the railway mileage will reach 165,000 kilometers and the high-speed railway mileage will reach 50,000 kilometers by 2025. As of the end of 2023, China's railway mileage was 159,000 kilometers, of which 45,000 kilometers were high-speed railways, accounting for approximately 28%. In 2021/2022/2023, China's newly-built railway lines were 4,208/4,100/3,637 kilometers, with an average of 3,982 kilometers; the new high-speed railway lines were 2,168/2,081/2,776 kilometers, with an average of 2,342 kilometers; and the proportion of high-speed railway in the new lines was 52%/51%/76%. According to the goals of the 14th Five-Year Plan, China Post Securities estimates that an average of 3,000 kilometers of new railways will be built in 2024 and 2025, of which 2,500 kilometers will be high-speed railways, which is expected to be higher than the average for 2021-2023.

(3) The aftermarket maintenance end: the central release period for the 5th level repair of EMUs.

The maintenance of China's EMUs is divided into five levels: levels one and two are called 'daily repairs'; levels three, four, and five are called 'advanced repairs'. Currently, level three repairs are mainly undertaken by the EMU depot of the railway bureau (China National Railway Group's self-repair rate is about 90%), level four repairs are jointly undertaken by the EMU depot and CRRC (China National Railway Group's self-repair rate is about 60%), and level five repairs are undertaken by CRRC. If calculated based on entering level four repairs after five years and entering level five repairs after ten years, the EMUs invested after 2019 will gradually enter level four repairs, and those invested after 2014 will gradually enter level five repairs. From historical data, the annual increase in new EMUs was 100-200 sets during the period from 2009 to 2013, and it increased to over 300 sets since 2014. The 5th level repairs for EMUs are expected to usher in a concentrated period of release.

Recommended stocks to watch include CRRC Corporation Limited(601766.SH), China Railway Signal & Communication Corporation Limited(688009.SH), Henan Thinker Automatic Equipment Co., Ltd.(603508.SH), Traffic Control Technology Co., Ltd.(688015.SH), Nanjing Kangni Mechanical&Electrical Co., Ltd.(603111.SH), KTK Group Co., Ltd.(603680.SH), CRRC Hi-Tech Equipment Corporation Limited(600528.SH), and China Railway Construction Heavy Industry Co., Ltd.(688425.SH), etc.

Risk warning: Rail passenger traffic is lower than expected, and domestic railway fixed asset investment is lower than expected.