3Q21 results in line with our expectations

Tungkong announced its 3Q21 results: Revenue rose 7.5% YoY in 1-3Q21 to Rmb879mn and 2.6% YoY in 3Q21 to Rmb278mn; attributable net profit increased 20.7% YoY in 1-3Q21 to Rmb145mn and 18.7% YoY in 3Q21 to Rmb55mn; and recurring attributable net profit increased 22.8% YoY in 1- 3Q21 to Rmb133mn and 19.1% YoY in 3Q21 to Rmb50mn, in line with our expectations.

Trends to watch

Revenue growth slowed. Revenue at Tungkong rose 7.5% YoY in 1- 3Q21 and 2.6% YoY in 3Q21 to Rmb278mn, with the growth rate declining 4.9ppt vs. 2Q21 and down 6.4% vs. the two-year CAGR over 3Q19-3Q21. We attribute the slowdown in revenue growth to the lingering impact of COVID-19 and declining demand for invoice printing amid electronization. We expect the firm’s new businesses to grow steadily.

Expenses continue to drop; profitability improved. We believe that the firm’s gross margin fell 0.87ppt YoY in 1-3Q21 to 40.2% and 2.46ppt YoY (0.33ppt QoQ) in 3Q21 to 40.7%, mainly due to rising raw material prices. In 1-3Q21, the selling expense ratio dropped 2.1ppt YoY to 6.6%; the G&A expense ratio fell 0.5ppt YoY to 7.1%; the financial expense ratio declined 0.02ppt YoY to -0.1%; and the R&D expense ratio fell 1.8ppt YoY to 6.5%. Profitability improved steadily on effective expense control. Net margin rose 2.0ppt YoY in 1-3Q21 to 16.5% and 2.7ppt YoY in 3Q21 to 19.8%.

Watch development of new businesses. In recent years, Tungkong has increasingly developed new businesses such as electronic archives management and blockchain-technology-backed platforms. We expect the development of new businesses to bring new growth drivers, optimize business structure, and improve profitability.

1. Electronic archives management: Subsidiary Donggang Ruiyun boasts extensive experience with leading technologies in archives management. We are upbeat on the growth prospects of the firm’s electronic archives storage platforms and its public technical service platform for small and micro businesses archives amid a trend toward electronization.

2. Blockchain technology-backed platforms: Subsidiary Tungkong Ruihong has leveraged blockchain technologies to establish platforms focusing on a variety of services, such as e-invoices and government administration. The firm has cooperated with China Electronic Energy-saving Technology Association to develop blockchain-based low-carbon products, and strategically cooperated with virtual reality (VR) and augmented reality (AR) laboratories. With continuous expansion of application scenarios for blockchain-technology-backed products, we are upbeat on the growth outlook of the firm’s new businesses.

Financials and valuation

We leave our 2021 and 2022 earnings forecasts unchanged. The stock is trading at 22.6x 2021e and 19.5x 2022e P/E. We maintain OUTPERFORM and our TP of Rmb8.22 (25.0x 2021e and 21.5x 2021e P/E), offering 10.5% upside.

Risks

Sharp fluctuations in raw material prices; new business expansion disappoints.