1H22 earnings slightly miss our expectation

Business-Intelligence of Oriental Nation (BION) announced its 1H22 results: Revenue grew 2.69% YoY to Rmb893mn, and attributable net profit fell 44.3% YoY to Rmb59mn (including the one-off impact of a Rmb24mn investment loss generated from the sale of all equity in its UK subsidiary Cotopaxi). Recurring attributable net profit declined 39.6% YoY to Rmb40mn. In 2Q22, revenue slid 4.5% YoY to Rmb423mn, attributable net profit dropped 57.3% YoY to Rmb18mn, and recurring attributable net profit decreased 72.0% YoY to Rmb11mn. The firm’s 1H22 earnings missed our expectation mainly due to delayed project bidding and deliveries amid COVID-19 resurgence and cost hikes.

Trends to watch

Overall revenue remained on growth track amid COVID-19; revenue growth from financial industry a bright spot. BION expanded steadily its business in the financial industry and saw its revenue from clients in the industry grow 29% YoY to Rmb273mn in 1H22, accounting for 31% of its total revenue (+6ppt YoY). Revenue from telecom clients maintained solid growth of 10.7% YoY, while revenue in the government and industrial businesses came under pressure from the COVID-19 resurgence and fell 29% and 31% YoY in 1H22.

GM under near-term pressure from cost hikes. In 1H22, the firm’s GMs declined across all its businesses due to the resurgence of COVID-19. Its overall operating cost rose 15% YoY, with staff compensation rising 20% YoY (representing 72% of BION’s total costs). As a result, the firm’s blended GM dropped 6ppt YoY to 40% in 1H22.

Decreasing government subsidies and one-off investment loss from the sales of subsidiary weighed on profit; COVID-19 resurgence dragged payment collection and cash flows. In 1H22, BION sold its UK subsidiary Cotopaxi and recognized an investment loss of Rmb24mn. Coupled with a YoY decrease of Rmb12mn in government subsidies, this put the firm’s profit under pressure. In 1H22, net operating cash flow fell significantly YoY mainly due to delayed payment collection amid the COVID-19 resurgence. As the pandemic subsides, we expect the firm’s operations to improve in 2H22.

Commercialization of BION’s big data products and services progressing smoothly in telecom and financial industry. In 1H22, the firm continued to make breakthroughs in its big-data related businesses (e.g. database, data operations, and governance) with telecom operators. It also won a new bid for a real-time database project from China Tower. In 1H22, BION’s new orders from clients in the financial industry grew nearly 30% YoY, and the firm’s big data platform - CirroData - has been adopted by several customers in the industry. Meanwhile, the firm continued to upgrade products and services in its industrial internet business, and the repurchase rate looked encouraging. Product wise, BION optimized its cloud-edge collaboration framework and rolled out 5G solutions, while strengthening its presence in process optimization. The firm continued to receive orders from existing clients such as China National Nuclear Corporation, North China Electric Power Research Institute, and North China Grid Company in 1H22.

Financials and valuation

Considering the COVID-19 resurgence weighed on the firm’s revenue growth and profit in 1H22, we lower our 2022 revenue forecast 9.8% to Rmb2.94bn, and revise down our 2022 earnings forecast 41.7% to Rmb390mn. We introduce our 2023 revenue and earnings forecasts at Rmb3.51bn and Rmb539mn. We maintain OUTPERFORM and cut our target price 17% to Rmb10 (21x 2023e P/E), offering 21% upside. The stock is trading at 24x 2022e and 18x 2023e P/E.

Risks

Slower-than-expected development of big data products; policy implementation disappoints; fiercer competition.