Leading player in the RFID field. The Company provides the mostcomprehensive range of RFID solutions in China, its main productsinclude contactless smart cards, electronics labels and RFID cardreaders. Tatwah posted revenue of Rmb761mn in 2014, of which itsintegrated systems equipment/contactless IC cards/anti-counterfeiting &traceability printing/electronic labels/COB businesses accounted for56%/31%/6%/4%/3% of its total revenue. Its net profit was Rmb102mnfor 2014.We forecast its 2015-17E EPS to be Rmb0.18/0.42/0.56.
The anticipated “doubling” of the Internet of Things (IoT) marketby 2018 to stoke growth for the RFID industry. (i) Forecast from a topChinese research institute suggests size of the IoT market will reachRmb750.0bn in 2015 and expand to Rmb1.5trn-plus by 2018E. Suchdevelopment will pose as a huge positive for the RFID industry, which isprojected to reach Rmb87.8bn in market size by 2018E; (ii) IoT is madeup of three layers – perception layer, transportation layer andapplication layer. A huge discrepancy in valuation (16x) exists betweenthe RFID industry (part of the perception layer) and the overall IoTmarket, due to attractive profitability for the transportation andapplication layers. Moreover, the pattern of traditional hardwaremanufacturers transitioning into total solutions providers are becomingthe general trend for players engaged in the perception layer.
Core business on the up, seeking strategic upgrading with newpayment business leveraging on integrated solutions. As theleading player in China’s RFID industry, Tatwah holds a 30% -plusmarket share in the domestic electronics label market. In terms of thecore business, the Company already began its transition into anintegrated solutions provider since 2014, and has secured relevantorders from the public sector. Leveraging on its integrated productioncapability (across labels, readers and software, Tatwah is looking toupgrade the business model for its core business by expanding intopayment functions.
Foraying into precision payment fields through acquiring licensesand partnership with Tencent. Apart from securing a controlling stakein Cardinfo, Tatwah also struck up a strategic partnership with Tenpay(an online payment platform owned by Tencent) in 2015. Therefore,Tatwah will look to streamline their online (Tenpay has 200mn onlineusers) and offline (Cardinfo boasts extensive offline resourcesaccumulated through nearly two decades of operation) resources to kickstart its payment business in the future. Meanwhile, Tatwah also gainedaccess to two OTT licenses (only seven of such licenses have beenissued in China thus far) through its collaboration with two mediacompanies. Hence, the Company will be aiming to foster its onlinepayment business through the new media channel going forward (plansto cover 10mn clients by 2017). Given the continued improvement for itscore business, Tatwah will launch more O2O integrated precision payment platforms in the future.
Risks associated with investing in the Company: development of IoT/policy support/expansion intothe payment business/business consolidation falling short of expectations.
Earnings forecast, valuation and investment rating. Given that Tatwah has already consolidated itssmart payment businesses and struck up the strategic partnership by 3Q15, its earnings are expected tojump sharply from 2016 onwards. Taking into account earnings commitment from its acquisitions andhuge online traffic brought by Tenpay, we forecast its 2015-17E net profit to be Rmb196/510/658mn(CAGR of 83%), equivalent to 2015-17E EPS of Rmb0.18/0.42/0.56. As major players in the IoT field aretrading at over 80x P/E, we apply a valuation of 60x 2016E P/E (0.75x PEG), as impact from its businesstransition remains to be seen. Taking into account dilution from its private placement, we set a pricetarget of Rmb25.3 and initiate coverage with BUY.
