2021 results in line with our expectations

Tungkong announced its 2021 results: Revenue rose 1.7% YoY to Rmb1.201bn, attributable net profit grew 14.2% YoY to Rmb186mn, and recurring attributable net profit increased 12.0% YoY to Rmb154mn, in line with our expectations.

Tungkong’s revenue grew to Rmb304mn (+12.2% YoY) in 1Q21, Rmb297mn (+7.6% YoY) in 2Q21, Rmb278mn (+2.6% YoY) in 3Q21, and Rmb322mn (-11.2% YoY) in 4Q21. Its attributable net profit came to Rmb44mn (+18.3% YoY) in 1Q21, Rmb46mn (+25.6% YoY) in 2Q21, Rmb55mn (+18.7% YoY) in 3Q21, and Rmb41mn (-4.0% YoY) in 4Q21.

Trends to watch

Revenue relatively steady. Tungkong’s revenue grew 1.7% in 2021. By segment, printing business revenue grew 3.8% YoY to Rmb821mn as ongoing efforts to win new clients and develop new products offset the impact of decreased paper tickets. Revenue from laminated products fell 20.0% YoY to Rmb139mn in 2021 due to declining issuance volume of social security cards amid the shift from generation 2 to generation 3 cards. Furthermore, stricter requirements over issuance of new bank cards resulted in less usage of bank card products. Technological services revenue grew 4.0% YoY to Rmb159mn in 2021. Tungkong Ruiyun’s archival storage business covers 20 key cities in China.

Profitability slightly improved. The firm’s gross margin (GM) rose 0.8ppt YoY to 38.34% in 2021, with 4Q21 up 3.8ppt YoY to 33.34%. We mainly attribute it to the improved profitability of laminated products, whose GM grew 3.7ppt YoY to 43.4% in 2021. Period expense ratio fell 1.7ppt YoY to 21.4% in 2021, with selling expense ratio up 0.5ppt YoY to 7.3%, G&A expense ratio down 2.2ppt YoY to 7.8%, financial expense ratio up 0.1ppt YoY to 0.04%, and R&D expense ratio down 2.3ppt YoY to 6.2%. Tungkong’s attributable net profit margin increased 1.7ppt YoY to 15.53% in 2021, thanks to improved GM and lower expense ratios.

Watch the development of new businesses and recovery of laminated products. 1) Blockchain technology: We believe the firm enjoys advantages in client resources and technology in the blockchain market. Applying low-carbon solutions in e-bills, electronic licenses, and other service platforms via blockchain technology may accelerate the firm’s transition into a comprehensive information technology service provider. 2) Lottery tickets: In 2021, revenue from lottery tickets via new channels hit a new high of Rmb52.15mn. We think intelligent betting and lottery vending machines have substantial growth potential given they are easy to install and convenient to use, and their real-time monitoring function. 3) Laminated products: We suggest watching the generation 3 social security card issuance and changes in bank cards application policies.

Financials and valuation

We largely maintain our 2022 earnings forecasts and introduce 2023 EPS forecast of Rmb0.41/sh. The stock is trading at 21x 2022e and 20x 2023e P/E. Maintain OUTPERFORM and TP of Rmb9.57 (25x 2022e and 23x 2023e P/E), offering 16% upside.

Risks

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