Transwarp provides full matrix of big data products ranging from general platform to specific tools, supporting functions from storage to analysis and final applications. The demand for data governance is likely to surge, thanks to database localization and enterprise digitization and intelligence, and the prospects for the database and big data industries are promising. Leveraging proactive technical expertise in multi-model and cloud-native capabilities, distributed databases, and AI products and tools, the Company has become a domestic leader in big data infrastructure software. We assign 25x 2024E PS to derive a target market cap of Rmb19.8bn, equivalent to a target price of Rmb164, and initiate coverage with a "BUY" rating.
Company profile: A leader in enterprise-level big data infrastructure software.
Transwarp is one of the few full-stack providers of big data platform solutions in China, with full coverage from platforms to tools and from infrastructure to applications. The Company's products include big data infrastructure platforms, relational distributed databases, data development and intelligent analysis tools, and applications and solutions. Its founder and core team have extensive experience in the development of big data infrastructure software and strong industrial and technical backgrounds. It posted revenue of Rmb373mn/43mn in 2022/1Q23, up 12.62%/76.38% YoY. At Rmb498mn, its new orders were up 36.45% YoY in 2022, faster than revenue growth over the same period and paving the way for continued business growth. Reflecting continued ramp-up in R&D, its R&D investment grew 38.09% YoY to Rmb194mn in 2022. It focuses on enhancing core product capabilities to maintain its technological leadership.
Industry trends: The database and big data markets grow rapidly, driven by demand for "Xinchuang" (or IT application innovations) and data. According to iResearch, China's database market reached Rmb28.68bn in 2021 and is forecast to exceed Rmb50bn by 2025. Transwarp operates in the big data software industry. According to Frost & Sullivan (quoted from the Company's prospectus), China's big data software market is projected to reach Rmb49.2bn by 2024 at a CAGR of 27.5% over 2019-24. The big data platform market share report released by IDC in 1H21 showed that domestic companies led in China's big data platform software market. The top four players by market share were cloud giants Huawei Cloud, Alibaba Cloud, Amazon Web Services (AWS) and Tencent Cloud. Among independent third-party players, Transwarp stood out with a market share of 1.3%. With IT application innovations accelerating, the domestic database market is likely to further expand. In the meantime, the digital economy, 5G and other technologies bring with them massive data resources, creating new drivers for the development of big data infrastructure software.
Key highlights: Leveraging its deep technical expertise and strong product capabilities, Transwarp proactively develops AI products to venture into the vast, uncharted waters.
1) Technology side: Transwarp has deep expertise in distributed transaction technologies and a distinct advantage in compatibility and cloud native capabilities. Initially, the Company developed products on top of the open-source Hadoop architecture, and it has continued to improve and upgrade them. Currently, its products perform well in terms of resource isolation and scheduling versatility. Its core product, the big data platform Transwarp Data Hub (TDH), is already compatible with multiple SQL dialects and almost all mainstream data models. As an early mover in the cloud-native space, it is technologically leading the way. 2) Product side: The Company creates a closed-loop big data ecosystem and proactively develops intelligent large language models (LLMs). Several of its products have passed the TPC (Transaction Processing Performance Council) and other well-known tests, giving them some advantage in performance over major foreign competitors. So far, its products have facilitated import substitution in the field of critical information systems. Its distributed big data platform and analytical database are industry leading, and its self-developed graph database, StellarDB, outperforms foreign competitors on many test metrics and can work with its in-house developed enterprise-level vector database. In the AI domain, it has launched Infinity, a finance LLM, Solar, a big data analysis LLM, and a one-stop toolchain. As both the gold digger and shovel seller, it may open a broader market potential with its strategic planning.
Potential risks:
Intellectual property (IP) and high-tech brain drain; Transwarp's slower-than-expected new product development and promotion; increased market competition; disappointing promotion of domestic alternatives; and fluctuations in client IT spends.
Earnings forecast and investment recommendation:
We expect Transwarp to maintain rapid earnings growth, considering that: 1) against a backdrop of low penetration, rising demand supports continued rapid growth in the big data and database software markets; 2) driven by policies, the substitution of domestic for foreign software is accelerating; and 3) the Company is competitive with strong product capabilities. In 2023E-25E, we forecast revenue to be Rmb547mn, Rmb791mn and Rmb1,124mn and attributable net profit (ANP) to be -Rmb174mn, -Rmb80mn and Rmb65mn, respectively. Based on the valuation of comps, including Kingsoft Office (688111.SH), Empyrean Technology (301269.SZ) and Zwsoft (688083.SH), we adopt a combination of PS and PE valuation methods. Given the promising prospects for the big data and database industries and the Company's strong competitiveness, we conservatively value the stock at 25x 2024E PS, which gives us a target market cap of Rmb19.8bn and a target price of Rmb164. We initiate coverage with a "BUY" rating.
