Event: Qianfang Technology released its report for the first quarter of 2022 on April 27. In the first quarter of 2022, the company achieved revenue of 1,312 million yuan, a year-on-year decrease of 26.11%; net profit loss of 266 million yuan was 256 million yuan, a year-on-year decrease of 282.5%, after deducting net profit loss of 65 million yuan, a year-on-year decrease of 149.4%.

The impact of the epidemic is compounded by non-recurrent factors, and short-term performance is under pressure

With 2022Q1, the company's revenue side and profit side both experienced a certain degree of decline. Looking at the revenue side, the company achieved revenue of 1,312 billion yuan in the first quarter, a year-on-year decrease of 26.11%, mainly due to the impact of the epidemic. On the one hand, product sales declined year on year, while delivery of transportation solution projects was also partially delayed, leading to corresponding delays in revenue confirmation. Looking at gross margin, the company's gross margin in the first quarter was 30.66%, which is basically the same as the same period last year. This shows that the trend of price increases for upstream raw materials has gradually stabilized. Looking at the profit side, the company's net profit loss of 256 million yuan in the first quarter was mainly due to the company holding a total of about 15% of Hongquan IoT's shares. Due to market fluctuations, the decline in its fair value had an impact on net profit of 227 million yuan. At the same time, considering the rigidity of various expenses, the decline on the revenue side has also put some pressure on the profit side.

Digitalization is still the long-term driving force of smart transportation. Looking at the full-year performance outlook for the whole year, we are still cautiously optimistic that the company will resume profit growth in 2022. Judging from industry sentiment, within the past six months, the Ministry of Industry and Information Technology, the Ministry of Transport and other relevant ministries and departments have successively introduced “14th Five-Year Plan” related to smart transportation, including the “14th Five-Year Plan” issued by the Ministry of Industry and Information Technology, the “14th Five-Year Plan for Digital Transportation” issued by the Ministry of Transport, and the “National Comprehensive Three-dimensional Transportation Network Plan Outline” issued by the State Council. We believe that the plans of various departments for smart transportation or digital transportation have far-reaching guiding significance for the development of the industry in the next five years. Although the short-term epidemic will have a certain impact, industry sentiment is expected to recover in the long run. Looking from within the company, according to the information disclosed in the annual report, on the one hand, the company has basically completed channel sinking and large-scale R&D investment in 2021, and it is expected that various expenses will be controlled in 2022; on the other hand, in response to price increases in upstream raw materials, the company has also prepared certain materials, which is conducive to keeping costs stable. Coupled with the easing of the epidemic in various regions and the orderly delivery of existing projects, we expect the company's profit in 2022 to grow at the same time as revenue.

Wait for the triple transformation to help the company develop with high quality

In addition to changes at the performance level, we recommend focusing on the company's own triple transformation: 1) Accelerating the driveway collaboration strategy. The company increased its capital in Lianlu Intelligent Transportation in 2021. With the high-quality front-loading experience and qualifications that Lianlu Intelligence already has, the company obtained two 5G V-Box designated projects on the basis of delivering hundreds of thousands of front-loading 4G T-Box products in 2021. We believe that the capital increase in Lianlu's intelligent transportation is an important layout for the company in the field of car-road collaboration, and is expected to form a complete closed loop from the end of the vehicle to the end of the road. 2) Strengthen AI capabilities to enhance the added value of business technology. The construction of AI capabilities is a major layout for the company's strategic transformation. To this end, the company established Perspective Intelligence in early 2020 as a business unit parallel to smart transportation and intelligent IoT. According to annual report data, by the end of 2021, Boguan Intelligence had launched 100+ AI training and learning algorithms, 200+ pre-training models, and 900+ industry algorithms. We anticipate that Broken Intelligence is expected to increase the added value of solution technology through internal and external empowerment, and promote continuous optimization of the company's profitability. 3) The transformation from project-based to platform-based. In 2020, the company released Omni-T, the industry's first global transportation solution. On the one hand, it expanded the center platform by forming standard modules to increase the project reuse rate; on the other hand, it also catalyzed the company's transformation from a project system to a platform system. According to the company's 2021 semi-annual report, some of the company's products achieved a standard module satisfaction rate of nearly 80% or more for similar businesses, and R&D man-hours dropped by nearly 40%. Furthermore, the company's transportation cloud business achieved revenue of 341 million yuan in 2021, an increase of 56% over the previous year, and gross margin was 53.1%, an increase of 2 percentage points over the same period last year. The development momentum is good. We believe that the company is currently at a critical point in its business model upgrade. As the revenue share of transportation cloud business continues to rise, the company's transformation logic from project-based to platform-based is expected to continue to be implemented.

Investment advice: We believe that the company is a leader in smart transportation and a leading enterprise in intelligent IoT. Combining the business model transformation brought about by Omni-T and the establishment of optimistic intelligence to strengthen AI and product capabilities, the investment in Lianlu Intelligent Transportation has further accelerated the closed loop of car-side and roadside solutions, and its long-term competitive advantage is expected to expand. The company is a direct beneficiary of the digital economy. We expect the company's revenue in 2022-2024 to be 111.131.1/15.15 billion yuan respectively, and net profit of the mother to be 811/1,077/1,407 million yuan respectively, maintaining the buy-A investment rating. A target price of 12.78 yuan was given for 6 months, corresponding to PE in 2022 25 times.

Risk warning: 1) the recovery of the overseas epidemic fell short of expectations; 2) the digital and intelligent transformation of the industry fell short of expectations; 3) the implementation of the company's intelligent transportation solutions fell short of expectations; 4) the risk of the industry's competition pattern intensifying.