ZheShang Securities released a research report, predicting that in the first half of 2024, China's fixed asset investment in railways will reach CNY 337.3 billion, up 10.6% year-on-year. Assuming that it continues to maintain 10% growth in the second half of the year, it is expected to reach CNY 840 billion for the full year of 2024. From January to July 2024, the number of railway passengers reached 2.52 billion, an increase of 15.6% year-on-year, with railway passenger traffic hitting a historical high. Demand for high-speed trains is strong. Tender-wise, there were 165 high-speed train tenders in 2024, exceeding the full-year total of 2023. It is expected that the number of tenders will maintain rapid growth throughout the year. In 2024, there is high demand for advanced high-speed train maintenance tenders, with 361 tenders offered, of which 207 were fifth-level maintenance tenders, accounting for 57%. In 2024, China Railway announced that the contract for advanced maintenance had increased by 99% over 2023, and it is expected that there will be more advanced maintenance orders in the second half of the year, with annual results expected to exceed expectations.

Zheshang Securities' main points of view are as follows:

Railway equipment: Steady investment, continuous surge of passenger traffic, and strong demand for new high-speed trains.

The total fixed asset investment in China's railways is steadily increasing, with a year-on-year increase of 7.5% in 2023, returning to the growth track. In the first half of 2024, China's fixed asset investment in railways reached CNY 337.3 billion, an increase of 10.6% year-on-year. Assuming that it continues to maintain 10% growth in the second half of the year, it is expected to reach CNY 840 billion for the full year of 2024.

Line construction: It is expected that more than 1000 kilometers of new lines will be put into operation in 2024. As of 2023, the operating mileage of China's railways was 0.159 million kilometers, including 0.045 million kilometers of high-speed rail. China Railway Group plans to put into operation more than 1,000 kilometers of new lines in 2024. From January to June 2024, a total of 979.6 kilometers of new lines were opened.

New high-speed train manufacturing: Passenger traffic is running at a historical high, and demand for new high-speed trains is expected to continue to grow. In 2024, the national railway plans to complete the sending of 3.855 billion passengers, up 4.7% year-on-year. From January to July 2024, the number of railway passengers reached 2.52 billion, an increase of 15.6% year-on-year, with railway passenger traffic hitting a historical high. Demand for high-speed trains is strong. Tender-wise, there were 165 high-speed train tenders in 2024, exceeding the full-year total of 2023. It is expected that the number of tenders will maintain rapid growth throughout the year.

Freight cars/locomotives: The railway industry has implemented a new round of large-scale equipment updates, and strives to achieve basic elimination of old internal combustion locomotives by 2027. Benefiting from the "public to rail" and "multi-modal transport" and increasing freight volume, demand for freight cars/locomotives is steadily increasing. According to the statistics of China Railway Group's 2023 annual report, the total number of railway locomotives in China was 0.0224 million, among which 0.0078 million were internal combustion locomotives, accounting for 34.7%.

Urban rail equipment: The total investment amount has fallen, but vehicle purchase investment continues to grow. Urban rail construction investment fell from 2021 to 2023, and the planned investment in 2024 is CNY 415.4 billion, a year-on-year decrease of 4.7%. The planned vehicle purchase investment in 2024 is about CNY 21.6 billion, a year-on-year increase of 13.8%.

After-sales maintenance: The number of advanced high-speed train maintenance tenders is on the rise, and the demand for parts replacement is on an upward trend.

The number of advanced high-speed train maintenance tenders is on the rise: The average annual growth rate of the number of newly added high-speed trains from 2010 to 2014 was doubled compared to that from 2007 to 2009. It is expected that the high-speed train maintenance after-sales market will enter an upward trend from 2023. In 2024, there is high demand for advanced high-speed train maintenance tenders, with 361 tenders offered, of which 207 were fifth-level maintenance tenders, accounting for 57%. In 2024, China Railway announced that the contract for advanced maintenance had increased by 99% over 2023, and it is expected that there will be more advanced maintenance orders in the second half of the year, with annual results expected to exceed expectations.

Parts replacement: The parts need to be replaced multiple times during the entire life cycle of the vehicle. With the continuous increase in the number of high-speed trains and urban rail vehicles, the demand for parts replacement is on the rise.

Belt and Road Initiative concept: China's high-speed rail is going global, and rail transit equipment is expected to go overseas first.

Global railway investment continues to grow, and the global rail transit equipment market space may reach more than 90 billion euros by 2025. Europe and Asia (except China) are the two regions with the largest scale of overseas railway infrastructure investment in the future. From 2020 to 2040, the cumulative investment in Europe and Asia will reach 2,385 and 1,602 billion U.S. dollars respectively. From 2017 to 2022, the proportion of Chinese enterprises completing business turnover and signing new contracts in countries along the "Belt and Road" exceeded 50%.

CRRC's high-speed rail technology is globally leading, and international business is continuously increasing. It has set up 18 overseas R&D institutions and 74 overseas subsidiaries, and its products and services are available in 116 countries and regions around the world on six continents. In 2023, the revenue from overseas business was CNY 27.7 billion, a year-on-year increase of 14%, and the value of newly signed international orders was CNY 58.4 billion, a year-on-year increase of 15%. The end-of-year total value of international business is about CNY 112.7 billion.

Investment recommendation: Recommended stocks include China CNR Corporation Limited (601766.SH), China Railway Hi-tech Industry Corporation Limited (600528.SH), and Henan Thinker Automatic Equipment Co.,Ltd (603508.SH), with a bullish outlook on Times Electric Group Co., Ltd (688187.SH), China Railway Signal & Communication Corporation (688009.SH), etc.

Risk warning: Railroad fixed asset investment is below expectations; Bullet train bidding is below expectations; Belt and road initiative concept and high-speed rail going abroad and landing are below expectations.