1Q22 results in line with our expectations

Tungkong announced its 1Q22 results: Revenue fell 0.9% YoY to Rmb301mn, attributable net profit increased 2.6% YoY to Rmb45mn, and recurring attributable net profit declined 2.0% YoY to Rmb42mn, in line with our expectations.

Trends to watch

Revenue edges down. Revenue fell 0.9% YoY in 1Q22. We attribute this to the COVID-19 resurgence in multiple regions of China as well as sluggish demand caused by: 1) decreased paper tickets and securities,

2) lower issuance volume of social security cards due to the transition from second-generation to third-generation cards, and 3) stricter requirements for new bank card issuance.

Selling expense ratio falls significantly; profitability improves slightly. In 1Q22, Tungkong’s gross margin (GM) fell 0.5ppt YoY to 38.3%. Period expense ratio dropped 0.3ppt to 19.8% YoY. Specifically, expense ratio for selling dropped 2.1ppt YoY to 5.6%, while that for G&A increased 0.4ppt YoY to 7.2%, for financial rose 0.7ppt YoY to 0.6%, and for R&D gained 0.7ppt YoY to 6.3% YoY. Thanks to the lower selling expense ratio and the contribution from net investment income and other revenue sources, the firm’s profitability improved moderately, with attributable net margin up 0.5ppt to 15.1% YoY.

Watch the recovery of traditional and laminated products and new business development. 1) Traditional and laminated products: Tungkong’s printing business was hit hard in recent years due to weakened paper ticket demand, reflecting the industry’s transition to electronic tickets, sluggish industry growth, and intensified competition. However, the firm is focused on developing new products and acquiring new clients. With the issuance of third-generation social security cards and improved issuance policies of new bank cards, Tungkong expects a recovery in relevant products in 2022. 2) New business: First, the e-ticket industry is developing rapidly with the rise of e-commerce and mobile payment. E-tickets are environmentally friendly, highly resistant to counterfeiting, and can be stored and queried conveniently. The firm started to develop its e-ticket business in 2013 and applied blockchain technology to endorse their credibility. Second, it established a standardized archival storage base that combines physical archival storage with information technology. In our view, electronic files and documents could be the future trend in archive management. Tungkong’s subsidiary TungKong Ruiyun has covered 20 important cities. We suggest watching the recovery of traditional business and new business development.

Financials and valuation

We keep our earnings forecasts for 2022 and 2023 unchanged. The stock is trading at 20x 2022e and 18x 2023e P/E. We maintain an OUTPERFORM rating and a TP of Rmb9.57 (25x 2022e and 23x 2023e P/E), offering a 28% upside.

Risks

Price hikes of raw materials, and disappointing new business development.