China Railway Group (CREC) has reported 9M26 revenue/attributable net profit (NP) of RMB717,088/12,424mn (-7.60/-28.97% YoY). For 3Q26, the figures were RMB243,980/3,768mn (-7.43/-33.46% YoY). The 3Q26 profit fell short of our expectation (RMB4,531mn), primarily due to an increase in expense ratios YoY. Considering the company’s abundant order backlog and the improving trend in the gross margin, we maintain OVERWEIGHT on both the A- and H-shares.
3Q26 gross margin rose further, impairment losses contracted
CREC’s 1Q/2Q/3Q26 revenue decreased by 5.4/9.8/7.4% YoY, maintaining a slight downward trend on the top line. For 9M26, the overall gross margin was 8.54% (-0.10pp YoY); the 3Q26 gross margin reached 8.93%, up by 0.09/0.20pp YoY/QoQ, continuing the quarterly upward trend. For 9M26/3Q26, the overall expense ratios were 5.17/5.49% (+0.12/+0.12pp YoY), with the 9M26 sales/administrative/R&D/ financial expense ratios at 0.59/1.92/1.61/1.04% (+0.04/-0.04/-0.15/+0.27pp YoY). For 9M26, total credit and asset impairment losses accrued were RMB2,609mn, decreasing by RMB897mn YoY (vs. RMB3,506mn for 9M25). Taken together, for 9M26 the attributable net margin was 1.73% (-0.52pp YoY), with 3Q26 at 1.54% (-0.60/-0.27pp YoY/QoQ).
Operating and investing cash flows weakened YoY
For 9M26, the net operating cash flow was -RMB83,550mn, with the net outflow expanding YoY (vs. -RMB72,883mn for 9M25). For 3Q26, the net operating cash flow was RMB3,111mn (vs. RMB6,748mn for 3Q25), which we think was mainly driven by accelerated payment timing: at end-3Q26, total payables (accounts payable + contract liabilities + other payables + long-term payables) decreased by RMB14,283mn from end-1H26. For 9M26, the net investing cash flow reached -RMB35,192mn, with the net outflow expanding YoY (vs. -RMB24,307mn for 9M25). The debt-to-assets ratio at end-9M26 was 77.42% (-0.46pp YoY).
Emerging businesses, resources, equipment orders grew YoY
New contract value reached RMB1,378.35bn (-13.0% YoY) for 9M26, including RMB372.67bn (-21.7% YoY) for 3Q26. By segment, engineering construction new contracts were RMB980.73bn for 9M26, down by 7.9% YoY; emerging businesses/resource utilization/equipment manufacturing new contracts reached RMB221.54/28.18/36.05bn for 9M26, up by 0.6/19.9/1.9% YoY. Real estate sales contracted value reached RMB26.68bn (+11.1% YoY). By region, domestic/ overseas new contracts totaled RMB1,254.99/123.36bn (-11.5/-26.0% YoY), reflecting intensified pressure on overseas orders.
Earnings forecasts and valuation
Considering that infrastructure demand may remain under pressure in 4Q, we lower our 2026/2027/2028 attributable NP forecasts by 12.08/7.03/5.91% to RMB18,022/18,209/18,285mn with EPS of RMB0.73/0.74/0.75. Considering the company’s temporary earnings pressure, we value its A-/H-shares at 6.5/4.0x 2027E PE, below their peers’ averages of 6.59/4.37x on iFinD consensus, for our target prices of RMB4.81/HKD3.46 (previous: RMB5.84/HKD4.31, based on 7.0/4.5x 2026E PE). Maintain OVERWEIGHT on both.
Risks: slowdown in infrastructure investment growth, real estate recovery below expectations, and gross margins below expectations.