2024 and 1Q25 results miss our expectations

Daqin Railway announced its 2024 and 1Q25 results: In 2024, revenue fell 7.9% YoY to Rmb74.63bn, and net profit attributable to shareholders fell 24.2% YoY to Rmb9.04bn, missing our expectations due to higher-than- expected depreciation costs.

In 1Q25, revenue fell 2.6% YoY to Rmb17.80bn, and net profit attributable to shareholders fell 15.6% YoY to Rmb2.57bn, missing our expectations, mainly due to disappointing freight volume of Daqin line in 1Q25 (down 5.6% YoY).

Trends to watch Depreciation cost rose; financial expenses declined. As the firm’s

costs are relatively stable, the firm's revenue fell 7.9% YoY in 2024, but its operating cost fell only 1.7% YoY, with depreciation costs rising 8.6% YoY.

As a result, gross profit fell 31.8% YoY. However, the firm's financial expenses dropped Rmb150mn YoY to only Rmb13.72mn in 2024, mainly due to a sharp decline in interest-bearing liabilities, falling cost of funds, and ample cash flow (cash on hand of Rmb61.3bn at end-2024).

Coal market demand was weak in 1Q25, and freight transport volume

of the Daqin line declined YoY. The coal industry supply YTD has risen rapidly, while downstream demand has been weak, and inventories have remained high. According to the China Coal Transportation and Distribution Association, inventories at key coal companies rose 30.1% YoY as of April 20. Data from the National Bureau of Statistics shows that revenue of coal mining and washing companies above designated size fell 19.0% YoY in 1Q25. The sluggish coal market led to a decline in railway coal transport volume, and Daqin Railway announced that freight transport volume of the Daqin line fell 5.6% YoY to 92.72mnt in 1Q25.

Ample cash flow; solid dividend payouts. The firm announced a total of

Rmb5.18bn dividends for 2024, with a dividend payout ratio of 57.3%.

According to its shareholder return plan (2023-2025), the dividend ratio should not be lower than 55% of net profit attributable to shareholders, and the firm paid out its first interim dividend in 2024, ensuring reasonable returns for investors. Assuming the firm maintains its dividend payout ratio for 2024, we estimate its dividend yield will reach 3.6% in 2025 and 3.8% in 2026.

Financials and valuation

As freight volume of the Daqin line is lower than we expected, we lower our 2025 and 2026 net profit forecasts 19.1% and 15.6% to Rmb8,607mn and Rmb9,022mn. The stock is trading at 15.8x 2025e and 15.1x 2026e P/E. Given the firm's solid dividend policy, we maintain an OUTPERFORM rating and TP of Rmb8.00, implying 18.7x 2025e and 17.9x 2026e P/E, offering 18.2% upside.

Risks

Sharper-than-expected cost increases; disappointing freight volume of Daqin line.