Daqin Railway's 2Q freight volume rebound failed to offset cost pressure; BofA cuts earnings forecasts and price objective

Overview

The report assesses Daqin Railway's 2Q26 results and the outlook for freight volume and margins in the second half, adjusting its earnings forecasts and valuation accordingly. BofA believes that the freight volume rebound drove revenue growth, but costs associated with new logistics operations, labor, and depreciation and amortization continued to erode margins. Combined with risks to coal transportation demand and declining dividend yield appeal, the report maintains its UNDERPERFORM rating and lowers its price objective.

Core views

Daqin Railway's 2Q26 results were weak. Revenue increased 6.2% YoY to RMB39.6bn, mainly supported by a 10% YoY rebound in second-quarter freight volume, but cost growth offset the improvement in transportation volume. Second-quarter gross margin declined 0.3ppt YoY, while net profit was RMB1.9bn, below market consensus and BofA's forecast; the source text describes its YoY change as “21% YoY” without specifying the direction. 1H26 results represented 57% of BofA's full-year forecast. The interim dividend was maintained at RMB0.08 per share, corresponding to a 37.6% payout ratio, slightly below 39.2% in 1H25; the company also proposed repurchasing RMB400mn–500mn of shares over the next six months. Margins are the core reason for the forecast cuts. Gross margin declined 1.1ppt YoY to 12.9% in 1H26, while operating costs increased 7.5% YoY. Door-to-door logistics expenses arising from the expansion of new businesses surged 142% YoY, labor costs increased 3.9% YoY, and depreciation and amortization expenses also rose following land acquisitions. BofA expects these factors to continue exerting pressure in 2H26 and therefore cut its 2026 EBITDA forecast by 16%. In the forecast table, 2026 EBITDA was reduced from RMB13.8246bn to RMB11.5733bn, 2027 EBITDA from RMB14.8084bn to RMB12.1852bn, and 2028 EBITDA from RMB15.1116bn to RMB12.7182bn. The freight business recovered, but the report believes its sustainability remains uncertain. Freight volume on the Daqin Line increased 10% YoY in the second quarter, supported by what the report described as stronger coal demand following the war. Together with the removal of some freight-rate discounts, this drove a 7% YoY increase in freight revenue in 1H26. However, BofA continues to warn of risks to coal shipment volumes in the second half: production constraints following safety incidents caused Shanxi coal output to decline 7.1%, 31.5%, and 35.8% YoY in May, June, and July 2026, respectively. Meanwhile, rising port inventories and a narrowing price gap between domestic and imported coal could also suppress transportation demand. Longer-term reasons for the rating also include structural headwinds to coal demand, historically high coal inventories, downward pressure on freight rates, and elevated operating costs. Based on margin and cash flow pressure, BofA cut its 2026–2028 earnings forecasts by 18%, 19%, and 17%, respectively. The forecast table shows 2026–2028 EPS declining from RMB0.37, RMB0.41, and RMB0.42 to RMB0.30, RMB0.33, and RMB0.35, respectively; the 2026 dividend-per-share forecast was cut from RMB0.23 to RMB0.19. The report expects a dividend yield of approximately 4.0%–4.5%, considers its appeal to have declined, and notes that the yield is no longer relatively outstanding following completion of the convertible bond issuance. The price objective was reduced from RMB4.9 to RMB4.4, continuing to use a 50/50 blend of DCF and PBV–ROE valuation methods. The DCF valuation declined from RMB5.64 to RMB4.58, mainly due to lower operating cash flow; the weighted average cost of capital remained at 7.3%, and the terminal growth rate remained at 0%. The PBV valuation edged down from RMB4.15 to RMB4.12, using an unchanged 2026E P/B multiple of 0.5x, corresponding to a 2027E ROE of 4.0%. BofA believes Daqin Railway has predictable, long-duration cash flows, making DCF appropriate; given its relatively stable earnings, the near-term target P/B multiple can be determined in conjunction with the future ROE trend. After combining the two valuation methods, the report derives a price objective of RMB4.4 and maintains its UNDERPERFORM rating. The company remains China's largest coal railway transportation corridor operator, with a market share exceeding 20%. The Daqin Line connects coal mines in Shanxi, Inner Mongolia, and Shaanxi with Qinhuangdao Port. However, BofA believes this network position is insufficient to offset structural pressure on coal demand, high inventories, freight-rate pressure, rising costs, and downside valuation risk. It therefore continues to prioritize its negative rating assessment over defensive capital-return measures.

Analysis framework

The report first compares second-quarter revenue, freight volume, gross margin, and net profit against year-earlier levels and expectations, then breaks down the impact of door-to-door logistics, labor, and depreciation and amortization on costs and margins. It subsequently assesses second-half freight volume by considering coal production, port inventories, the domestic-versus-imported coal price spread, and changes in freight-rate discounts. BofA then adjusts its 2026–2028 earnings, EBITDA, and dividend forecasts and finally recalculates its price objective using a 50/50 blend of DCF and PBV–ROE methodologies.

Methodology notes

• Valuation MethodDiscounted Cash Flow (DCF)

  DCF Valuation

  The report discounts Daqin Railway's predictable, long-duration cash flows to present value using a weighted average cost of capital of 7.3% and a terminal growth rate of 0%. Lower operating cash flow forecasts reduced the DCF valuation from RMB5.64 to RMB4.58.

• Valuation MethodPB valuation

  PBV–ROE Valuation

  The report determines the near-term target P/B multiple based on future ROE trends, using a 2026E P/B multiple of 0.5x and a 2027E ROE of 4.0% to derive a PBV valuation of RMB4.12. This result and the DCF valuation each account for half of the price objective.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of Freight Volume, Freight Rates, and Revenue

  The report separately examines the 10% YoY rebound in freight volume and the removal of some freight-rate discounts, using both to explain the 7% YoY growth in first-half freight revenue. It also notes that coal production, inventories, and domestic-versus-imported price spreads will affect subsequent transportation volumes.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Cross-validation of Revenue Growth Against Costs, Margins, and Cash Flow

  Rather than focusing solely on revenue and freight volume growth, the report further examines the impact of logistics, labor, and depreciation and amortization on gross margin, EBITDA, and operating cash flow, using this analysis to lower its earnings forecasts and DCF valuation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Daqin Railway (601006.SS)

  A recovery in coal railway freight volume drove revenue growth, but rising costs, risks to coal transportation demand, and freight-rate pressure weakened earnings and valuation.

  Strengths

  China's largest coal railway transportation corridor operator, with a market share exceeding 20%; its core line directly connects coal mines in Shanxi, Inner Mongolia, and Shaanxi with Qinhuangdao Port, and its long-term cash flows are relatively predictable.

  Weaknesses

  Rising door-to-door logistics, labor, and depreciation and amortization costs are pressuring margins; coal demand faces structural headwinds, and the dividend yield has become less attractive.

  Comparison

  The report does not provide operating data comparisons with specific peers; its rating framework classifies the company as one of the less attractive stocks in its transportation sector coverage group.

  Risks

  Weaker-than-expected coal demand, unexpected issues causing production suspensions, and pressure from coal inventories, freight rates, and operating costs.

Key data

• 2Q26 RevenueRMB39.6bnUp 6.2% YoY, supported by the recovery in freight volume.
• 2Q26 Freight Volume+10% YoYFreight volume on the Daqin Line rebounded YoY.
• 2Q26 Net ProfitRMB1.9bnBelow market consensus and BofA's forecast; the source text states a 21% YoY change but does not specify the direction.
• 1H26 Gross Margin12.9%Down 1.1ppt YoY.
• 1H26 Operating Costs+7.5% YoYLogistics, labor, and depreciation and amortization jointly drove costs higher.
• Door-to-Door Logistics Expenses+142% YoYThe principal margin drag arising from the expansion of new businesses.
• 2026–2028 Earnings Forecast Revisions-18%/-19%/-17%BofA cut its three-year forecasts due to margin pressure.
• 2026 EBITDA Forecast Revision-16%Reflects the possibility that margin pressure will persist in the second half.
• Interim DividendRMB0.08/shareFlat YoY, with a 37.6% payout ratio, below 39.2% in 1H25.
• Proposed Share RepurchaseRMB400-500mnThe company proposed implementing it over the next six months.
• DCF ValuationRMB4.58Previously RMB5.64; based on a 7.3% WACC and a 0% terminal growth rate.
• PBV ValuationRMB4.12Previously RMB4.15; based on a 2026E P/B multiple of 0.5x and a 2027E ROE of 4.0%.

Impact & implications

The report believes that although recovering freight volume and the removal of freight-rate discounts can support revenue, they remain insufficient to offset rising logistics, labor, and depreciation and amortization costs. Lower margins and operating cash flow directly led to cuts in earnings forecasts, the DCF valuation, and the price objective, while structural pressure on coal demand, high inventories, and the reduced appeal of the dividend yield are the primary reasons for maintaining the UNDERPERFORM rating.

Risks

• Upside risks include stronger-than-expected thermal coal demand.
• Upside risks include faster-than-expected maintenance progress on the Daqin Line.
• Upside risks include stronger-than-expected growth in passenger and other freight transportation.
• Downside risks include weaker-than-expected thermal coal demand.
• Downside risks include production suspensions caused by unexpected issues.

What to watch

• Monitor coal production restrictions and the production recovery in Shanxi during 2H26.
• Monitor changes in port coal inventories and the price spread between domestic and imported coal.
• Monitor whether door-to-door logistics, labor, and depreciation and amortization expenses continue to depress gross margin.
• Monitor the progress of the company's proposed RMB400mn–500mn share repurchase over the next six months.