CRRC Times Electric: rail transit speed up again，is there great potential for infrastructure development?

Times Electric (3898.HK/688187.SH) released its third-quarter earnings report (as of September 2023) after the Hong Kong stock market closed on the evening of October 26, 2023. The key points are as follows:

Revenue: Times Electric achieved a revenue of 5.525 billion yuan in the third quarter of 2023, a year-on-year increase of 27%, exceeding market expectations (5.18 billion yuan). The revenue growth in this quarter was driven by two main business segments. The revenue of the rail transportation equipment business reached 3.01 billion yuan, a year-on-year increase of 15%, showing a significant acceleration in growth. The new equipment business also maintained a growth rate of over 30%.

Gross profit margin: In the third quarter of 2023, Times Electric's gross profit margin was 34.5%, a year-on-year increase of 2.7 percentage points, far exceeding market expectations (31.6%). The significant outperformance of the gross profit margin was mainly due to the increased proportion of the rail transportation business, which brought about structural growth.

Net profit: Times Electric achieved a net profit attributable to shareholders of 899 million yuan in the third quarter of 2023, a year-on-year increase of 29.9%, significantly exceeding market expectations (640 million yuan). The outperformance in the company's profit was mainly driven by the growth in revenue and gross profit margin, although there was a slight increase in operating expenses this quarter.

Overall view: Times Electric's performance in this quarter significantly exceeded market expectations.

Regarding the performance of this quarter, Times Electric outperformed market expectations in terms of revenue and gross profit margin. Dolphin Research believes that the outperformance in this quarter is mainly due to the company's strong performance in the rail transportation equipment business.

Times Electric's newly developed emerging equipment business continues to show high growth. With the fading of factors such as the pandemic, the company's rail transportation equipment business is also showing signs of recovery. Due to the higher gross profit margin of the rail transportation business compared to the emerging equipment business, Dolphin Research speculates that the significant increase in gross profit margin this quarter is mainly driven by the traditional rail transportation business. With the impressive performance of Times Electric in the third quarter, it is expected that the company's performance in the second half of the year will reach new heights, and market expectations for the company will be further raised. Considering the current market value of HKD 36 billion, the corresponding PE ratio for this year's performance is around 10 times.

Times Electric's traditional business continues to rebound, while its emerging business maintains high growth. As a leading player in an industry with growth potential (with a growth rate of over 20% and a dividend yield of over 2%), the company currently has a PE ratio of only around 10 times. Dolphin Research believes that Times Electric at its current position is still worth paying attention to.

The following is Dolphin Research's specific analysis of the financial report of CRRC Times Electric:

1. Key Indicators: Revenue and Gross Margin Exceeded Expectations

1.1 Revenue

In the third quarter of 2023, Times Electric achieved a revenue of CNY 5.525 billion, a year-on-year increase of 27%. The company's revenue growth mainly comes from the recovery of its traditional rail transit business and the growth of its new equipment business.

Specifically:

Rail Transit Equipment Business: In this quarter, the rail transit equipment business achieved a revenue of CNY 3.01 billion, a year-on-year increase of 15%. The growth of the rail transit business accelerated significantly this quarter (compared to a growth rate of only 2% in the first half of the year).

Emerging Equipment Business: In this quarter, the emerging equipment business achieved a revenue of CNY 2.334 billion, a year-on-year increase of 37%. Among them, power semiconductors and industrial power conversion products maintained high growth, while new energy vehicle electric drive products showed a significant decline. The overall growth of the emerging business remained high.

Overall, Dolphin Research believes that the revenue growth of Times Electric this quarter is mainly due to the accelerated recovery of the rail transit business. With the arrival of the delivery peak season in the second half of the year, the rail transit business is expected to achieve even greater volume.

1.2 Gross Profit and Gross Margin

In the third quarter of 2023, Times Electric achieved a gross profit of CNY 1.905 billion, a year-on-year increase of 37.6%. The company's gross profit growth rate exceeded that of revenue, mainly due to the upward improvement of the gross margin.

The gross margin of Times Electric this quarter was 34.5%, a year-on-year increase of 2.7 percentage points. The improvement in gross margin this quarter is mainly due to two factors: 1) the accelerated recovery of the traditional rail transit business with higher gross margin, leading to a structural improvement in gross margin; 2) the increase in the proportion of higher gross margin sub-segments in the emerging business, driving the gross margin of the new equipment business.

Dolphin Research believes that with the recovery of the business, the company's gross margin in the fourth quarter is expected to remain at a relatively high level.

2. Cost and Profit Situation: High Profit Growth Despite Fixed Costs

2.1 Operating Expenses

In the third quarter of 2023, Time Electric's operating expenses were 1.043 billion yuan, a year-on-year increase of 30.2%. Operating expenses and revenue grew in sync, with an operating expense ratio of 18.9%, slightly higher than the same period last year.

Research and Development Expenses: This is the company's largest operating expense. R&D expenses for this quarter were 458 million yuan, a year-on-year increase of 22.5%. The R&D expense ratio was 8.3%, a slight decrease of 0.3 percentage points compared to the same period last year. The increase in absolute value was mainly due to the increase in personnel salaries and technical service fees.

Sales Expenses: Sales expenses for this quarter were 347 million yuan, a year-on-year increase of 36.1%. The sales expense ratio was 6.3%, a slight increase of 0.4 percentage points compared to the same period last year. The increase in sales expenses was mainly due to the expansion of sales scale.

Management Expenses: Management expenses for this quarter were 238 million yuan, a year-on-year increase of 38.4%. The management expense ratio was 4.3%, a slight increase of 0.3 percentage points. The increase in management expenses was mainly due to employee salaries, depreciation and amortization expenses, and maintenance fees.

2.2 Net Profit Situation

In the third quarter of 2023, Time Electric achieved a net profit attributable to shareholders of 899 million yuan, a year-on-year increase of 29.9%. The growth rate of net profit was similar to that of revenue, and the net profit margin for this quarter was 16.5%, slightly higher, mainly due to the drive of gross profit margin.

Dolphin Research's historical articles on CRRC Time Electric:

Earnings Season

March 31, 2023, Earnings Report Review: "CRRC Time Electric: Overcoming Rail Transit Challenges, Embracing Change"

October 17, 2022, Earnings Report Review: "Time Electric Third Quarter Report Overview"

August 27, 2022, Earnings Report Review: "Spring Sowing and Autumn Harvest: Time Electric in the 'Chip' Era"

In-depth Analysis

June 14, 2022, Company In-depth Analysis: "Dancing on the Safety Cushion: Will IGBT Create a New Era for Time Electric?" On May 16, 2022, our company published a in-depth article titled "Times Electric: Racing on Rail Transit, or Riding the IGBT East Wind?".

Please refer to the following links for the risk disclosure and statement: Dolphin Research Disclaimer and General Disclosure.