As a leader in financial informatization, CTJ Information Technology is committed to providing information management system solutions for government departments. By closely following the policy orientation, the Company has ventured into integrated fiscal management solutions, centralized electronic payment solutions for the treasury system, comprehensive management solutions for government finance and other businesses while constantly developing and expanding artificial intelligence (AI), big data, cloud computing and other technical applications. We are optimistic about the Company’s technical advantages, product capabilities and customer resources in the fields of electronic treasury payment and integrated fiscal budget management while also keeping tabs on the Company’s forward-looking presence in the fields of medical insurance, accounting and digital currency (e-CNY).Considering the Company’s leading market position and sound earnings growth prospects, we apply 50x 2023E PE to derive a target price of Rmb83 and initiate coverage with a “BUY” rating.
A fiscal informatization leader and provider of smart finance solutions.
CTJ Information Technology is leading in the financial informatization industry, with State-owned Assets Supervision and Administration Commission of Guangzhou Municipal Government as its actual controller.The Company’s business covers electronic payment (providing electronic voucher channels for the three systems of financial units at all levels, the People’s Bank of China and correspondent banks), integrated fiscal budget management (targeting policy fund budgeting, adjustments, execution, and decision-making, supporting the full lifecycle and comprehensive budget performance management of fiscal funds), industry digitalization (offering products and services such as electronic contracts, digital correspondence and other products and services for government departments at all levels, social groups, accounting firms, etc). According to the Company’s 2H23 earnings preannouncement, it is likely to achieve attributable net profit (ANP) of Rmb92mn-110mn in 1H23, up 51%-81% YoY; and ex-one-off ANP of Rmb84mn-100mn, up 50%-79% YoY.
Policy incentives and technology iteration make smart finance an imperative.
With the increasing proportion of digital economy in GDP, informatization has become one of the important means for the modernization of the national governance system and governance capabilities. The Ministry of Finance and the People's Bank of China (PBoC) have intensively issued relevant policies to promote initiatives such as electronic treasury payments and the integrated fiscal budget management. According to the data from the Ministry of Finance, China’s national public financial expenditure on fiscal informatization increased from Rmb1.605bn in 2010 to Rmb3.734bn in 2021, with a CAGR of 8.0%. We believe that with the ongoing technological advancement in the industry and the continuous call for integration of budget management, the industry is likely to maintain a sustainable development trend. We expect that with the development of Xinchuang industry (information technology application innovation) and upgrading of information modules in the field of electronic payment, the market will likely reach Rmb2.7bn in the next three years, while that of budget management integration may reach Rmb2bn with the promotion of policy supports.
Unified standards of information construction, and significant Matthew effect.
Financial informatization needs to meet the national unified business specifications and technical standards, and has high requirements for security and stability. According to IDC data, in 2020, CR5 in the IT solutions accounted for 43% of the financial industry market share. The Mattew effect is more pronounced in niche markets. According to the prospectus of CTJ Information Technology, as of Dec 2021, 1) In the field of electronic payment, the Company's business covered financial units of 35/328/2,828 at the provincial/prefecture and city/district and county level; 2) Those numbers of units in the field of financial budget management integration, were 11/165/1,520, respectively. In 2022, the number of added provincial-level financial units was three, making the total number turn 14, and the coverage may be further expanded. Industry leaders have accumulated relevant industry experience and first-mover advantages, which will likely further gain business opportunities in future market expansion.
Talent and technology build barriers, and forward-looking presence buildup opens up development space.
At present, the Company has built the core barriers of “technology + talent + strategic layout” to help its business expansion in the future. In terms of R&D, according to the Company’s announcement, its R&D expenses increased from Rmb42mn in 2018 to Rmb162mn in 2022, and the R&D expense ratio increased from 14.7% in 2018 to 17.8% in 2022, maintaining a high level. In terms of talents, according to the Company’s announcement, in 2022, there were a total of 611 people in its R&D team, accounting for 44% of the total number of employees. About 20% of the personnel in the implementation service system have ten or more years of industry experience, and about 40% have 5-10 years of industry experience. In terms of strategic presence buildup, relying on project experience in the financial field, the Company combines its own technical capabilities and industrial advantages to venture into digital healthcare, Xinchuang Industry solutions, e-CNY and other fields.The Company takes “digitalization and intelligentization” as the core, and help build the digital transformation and upgrading of digital government, finance and multiple industries in various aspects.
Potential risks:
Changes in industry policies; less-than-expected development of financial informatization; technical capability development of the product not up to expectations; decline in gross margin due to increased competition in the market; attrition of key customers; e-CNY development missing expectations; bad debts of accounts receivables; attrition of core personnel, etc.
Investment strategy:
We believe that with the continuous advancement of industrial policies and the ongoing enhancement of technological capabilities, smart finance is poised to accelerate its penetration into the lower-tier markets. The core technology of electronic vouchers in the field of smart finance is likely to expand into more application scenarios such as medical insurance and accounting, further supporting the development of e-government. We have a positive outlook on the Company’s first-mover advantage as a leader in the fiscal informatization sector. We are also paying attention to its forward- looking presence buildup in areas such as industry digitalization and e-CNY.We expect the Company to continue benefiting from the future industry development. We expect the Company’s EPS to be Rmb1.65/2.07/2.55 in 2023E/24E/25E on 41x/33x/27x PE at the current price. We select Boss Software (300525.SZ) and Servyou Software (603171.SH) as comparable companies, which also take financial informatization as main business and are trading at an averaged valuation of 42x 2023E PE (the former adopts Wind consensus estimates, and the latter adopts CITICS forecast).Considering that the Company, as a leader in electronic treasury payment and financial informatization, presents scarcity and also performs well in earnings growth rate, we assign 50x 2023E PE to derive a target price of Rmb83 to the Company. The current price of comparable companies corresponds to an averaged 6x 2023E PS. Considering the Company’s excellent profitability and sound performance growth rate, we assign 13x 2023E PS, to derive a market cap of Rmb15.5bn. Taking into account the Company’s market cap level, earnings growth and profitability level, we adopt PE valuation as the main valuation method and initiate coverage with a “BUY” rating.
