DAQIN RAILWAY(601006)：COVID-19 WEIGHS ON 4Q22 RESULTS;OPERATIONS RETURN TO NORMAL IN 1Q23

　　2022 results miss our expectations; 1Q23 results in line
　　Daqin Railway announced its 2022 and 1Q23 results. In 2022, revenue fell 3.7% YoY to Rmb75.76bn and attributable net profit fell 8.1% YoY to about Rmb11.2bn, missing our forecasts as COVID-19 weighed on 4Q22 earnings. In 4Q22, revenue fell 19.3% YoY to Rmb16.99bn and attributable net profit fell 80% YoY to Rmb386mn. The sharp decline in 4Q22 earnings was mainly due to a significant decline in freight volume.
　　In 1Q23, revenue rose 8.7% YoY to Rmb19.84bn and attributable net profit rose 23.2% YoY to Rmb3.65bn, thanks to the resumption of normal operations of freight and passenger businesses. Gross margin in 1Q23 was 1ppt lower than in 1Q19, and net margin in 1Q23 was 1.9ppt lower than in 1Q19.
　　Trends to watch
　　Freight and passenger businesses pressured in 4Q22 due to COVID-19; normal operations resumed in 1Q23.
　　Freight transport: Freight transport revenue at Daqin fell 2.6% YoY in 2022 to Rmb60.75bn. Freight transport volume in 2022 fell 2.2% YoY to 680mnt, translating to a turnover volume of 388.7bnt-km, down 0.9% YoY. Freight volume of Daqin Line in 2022 fell 5.8% YoY to 397mnt. Freight volume of Daqin Line in 4Q22 fell 30% YoY due to the impact of COVID-19, dragging down full-year freight revenue.
　　Passenger transport: Passenger transport revenue at Daqin fell 34.2% YoY in 2022 to Rmb4.07bn due to the impact of COVID-19. Passenger transport volume in 2022 fell 44.2% YoY to 20.26mn. Freight volume of Daqin Line in 1Q23 rose 0.6% YoY to 100mnt. Freight and passenger businesses both resumed normal operations in 1Q23 as the impact of COVID-19 subsided.
　　Effective cost control and stable dividend payout. The firm effectively controlled its staff costs in 2022. Staff costs accounted for about 35% of the firm’s operating costs and increased 3.3% YoY, a smaller increase than in previous years. Daqin’s dividend per share was Rmb0.48 in 2022, implying a dividend payout ratio of 64% （vs. 58% in 2021）。
　　Financials and valuation
　　We largely maintain our 2023 earnings forecast and introduce our 2024 earnings forecast of Rmb13.4bn. The stock is trading at 8.7x 2023e and 8.4x 2024e P/E. We maintain OUTPERFORM and roll over valuation to 2023. Given the firm’s high dividend payout ratio and visible earnings recovery, we raise our TP 12.8% to Rmb8.7 （implying 10x 2023e and 9.7x 2024e P/E） and offering 14.8% upside.
　　Risks
　　Economic recovery disappoints; diversion by other rail lines is worse than expected.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。