Electronics City (600658.SH) is the only technology service platform under “Beijing Electronic Control”, a large high-tech enterprise group controlled by the Beijing State-owned Assets Administration Commission. The predecessor of the company, Beijing Electronics City Co., Ltd., was founded in 1994. After more than ten years of development, after the company successfully implemented the upgrading of the old industrial base of the Electronics City and the development and construction of the Electronic City Science and Technology Park, Electronics City replaced its assets with Zhaowei Technology in 2009, and Electronics City officially landed on A shares. In 2013, the company proposed a “based in Beijing and going to the whole country” layout. In 2017, the company began to expand across the country and took over land in many cities such as Xiamen and Kunming. In the same year, the company proposed a strategic plan to transform into technology services.

Currently, the company's main business is park real estate sales, technology service business, and cultural media business.

There was a significant increase in 2020H1 performance and improved profitability. The company's performance from 2017 to 2019 fluctuated greatly, and since 2020, the company's revenue has experienced significant growth. 2020H1's revenue was 1.28 billion yuan, a year-on-year increase of 150.42%, mainly due to a sharp increase in the company's park sales and rental revenue. Among the company's various businesses, 2020H1's park real estate sales, technology service business, and cultural media business revenue was 1,457 million yuan, 319 million yuan, and 102 million yuan respectively, with changes of +493.9%, +10.8%, and -4.2% respectively. In addition, 508 million intersegment offsets were included, and park real estate sales increased brilliantly. The company's net profit has fluctuated greatly in recent years, mainly due to the increase in the company's operating costs and period expenses. The net profit of the company in 2020H1 was 235 million yuan, an increase of 38.06% over the previous year. The company's diluted ROE also showed a downward trend in recent years. The company's diluted ROE reached 5.3% in 2019. It is expected that this indicator will improve in 2020 as the net profit of the parent company increases. In terms of gross profit, the gross profit of real estate sales in the 2020H1 company park accounted for 88.7%, new technology services accounted for 10.5%, and cultural media accounted for 0.8%. In terms of gross margin, the gross margin of the company's park real estate business declined steadily, and 2020H1 began to improve. The gross profit margin of the company's park real estate sales business in 2020H1 was 56.46%, up 2.75 PCT from the end of 2019; the gross margin of the new technology service business declined, and the gross profit margin of the 2020H1 business was 30.35%, down 6.96 pcts from the end of 2019. The gross margin of the cultural media business increased significantly in 2020H1, reaching 61.24%, up 18.82% from the end of 2019. The operating conditions of 2020H1 Company have gradually improved. The management expense ratio and financial expense ratio were 8.13% and 9.14% respectively, down from 10.41% and 9.75% at the end of 2019. The company's profitability has improved since 2020.

Sales are growing across a large scale, land acquisition is active, and there are plenty of saleable land reserves. Since 2020, the company's real estate sales have increased dramatically. In the first half of the year, it achieved sales of 2,514 million yuan and a sales area of 167 million square meters, an increase of 1814.1% and 401.5% over the previous year. Among them, the sales area is mostly concentrated in Beijing, Tianjin, and Shanxi. The company's real estate sales increased dramatically in 2020. At the same time, by the end of 2019, the company's saleable area reached 862 thousand square meters, which can cover the company's sales for 2-3 years. As the epidemic eases, the company's sales are expected to go further. By the end of 2019, the company's land reserves were 760,000 square meters, mainly concentrated in Beijing, Xiamen, Kunming, Shuozhou and other places. Since 2020, the company has actively acquired land. In June, the company won two plots of land in Shuozhou, adding 471,500 square meters of land, adding a total land price of 234 million yuan. In 2019, the company's construction area was 1,448,800 square meters, and YOY +106.8% reached a new high, providing a guarantee for subsequent performance.

Since the 2018 annual report, the company has integrated the original park property leasing and property management business into new technology services. Currently, the company's revenue from new technology services is mainly from park leasing and property management businesses. Revenue from new technology services has continued to grow in recent years. 2020H1's business revenue was 319 million yuan, YOY +10.76%, and gross margin continued to decline. The gross margin of 2020H1 reached 30.35%, down nearly 7 percentage points from the end of 2019.

The company's leverage level continues to rise, and financing costs have remained stable. As of 2020H1, the company's balance ratio is 56.99%, and the balance ratio excluding prepaid accounts is 54.86%. The company's balance ratio has increased in recent years, which may be related to the company's expansion, but it still remains low below 60% and is at a low level in the industry. The net debt ratio increased significantly in 2018 and 2019. The 2020 H1 company's net debt ratio was 57%, up 12 PCTs from the end of 2019. The increase in the company's net debt ratio is mainly due to the increase in the amount of the company's interest-bearing debt. The company's financing costs are stable, and the ratio of short-term cash to debt has declined. The company's comprehensive financing cost has remained between 4%-5% for a long time. The company's comprehensive financing cost in 2019 was 4.76%, down 0.16 PCT from 2018. However, due to the increase in the amount of debt, the company's short-term cash to debt ratio continued to decline, and the 2020H1 company's monetary capital/short-term debt ratio reached 79.85%.

Investment advice: The company relies on Beijing's abundant electronic control resources to actively transform in the direction of scientific and technological services and is beginning to bear fruit. The company's profitability increased in the first half of 2020, the gross margin of park sales and cultural media businesses both rebounded, and overall gross margin picked up. In 2019, the company's land storage was stable, the area under construction reached a new high, and subsequent carry-over is guaranteed. It is expected that the increase in the rental rate of owned properties, the reduction in rent relief, and the increase in the added value of property management will provide more room for growth in the company's new technology service business. Based on this, we expect the company's net profit to be 456 million yuan, 472 million yuan, and 548 million yuan respectively in 20-22. The corresponding PE valuations are 14.91X, 14.41X, and 12.40X respectively. This was covered for the first time, giving a “buy” rating, with a target price of 7.92 yuan/share.

Risk warning: real estate sales fall short of expectations, financing cost control falls short of expectations, project development progress falls short of expectations