Incident: The company released its 2022 annual report. During the reporting period, the company achieved revenue of 1,226 million yuan, +5.75% year on year; of these, revenue from outside Guangdong Province was 281 million yuan, +29.83% year on year; the company's big data software and smart transportation business/engineering design and inspection/planning consulting services achieved revenue of 3.60/356/508 million yuan respectively, +27.25%/-0.07%/-2.19% year-on-year; and realized Guimo's net profit of 160 million yuan, +0.11% year on year. In the fourth quarter alone, operating income was 454 million yuan, +15.65% year on year; net profit of the mother was 119 million yuan, +30.34% year on year. During the reporting period, the company's gross margins and net interest rates were 36.37%/13.50%, respectively -1.19pct/-0.33pct compared to the previous year.

Digital business is growing clearly, taking over traditional business to drive growth

As a pioneer in smart transportation, the company is committed to digital transformation and upgrading. In recent years, the amount of digital business contracts and revenue has increased year by year. The amount of new contracts signed by the company during the reporting period was 1.72 billion yuan, +16.80% over the same period last year, and the total number of new contracts signed has resumed growth. Among them, the amount of new contracts signed for the digital business reached 835 million yuan, accounting for 48.45% of the new contract amount signed, up +70.71% from the same period last year; the planning consulting business contract amount was 478 million yuan, accounting for 27.76% of the new contract amount, and +8.48% over the same period last year. The company's digital business achieved revenue of 360 million yuan during the reporting period, +27.25% year on year. As an intellectual-intensive high-tech enterprise, the company continued to deploy smart transportation and digitalization and increased R&D investment. R&D expenses during the reporting period reached 125 million yuan, +13.19% year on year, accounting for 10.22% of revenue, an increase of 0.68 percentage points over the same period last year.

There was a clear recovery in operations in the fourth quarter. It is hoped that smart transportation pioneers will ride the waves and ride the wind under the pressure of the epidemic in '22, and that the company's net profit will remain the same year on year. The established strategy will continue to be promoted, and policies will promote the development of the industry. Affected by the epidemic, the company's project promotion and contract signing declined in the first three quarters, and a clear recovery began in the fourth quarter. 2022:1) Signed a strategic framework cooperation agreement with Tencent and signed a deepening cooperation agreement with Huawei. Achieve strong alliances to promote business and product expansion. 2) Smart transportation welcomes major top-level design. The Ministry of Housing and Construction and the National Development and Reform Commission issued the “14th Five-Year Plan” National Urban Infrastructure Construction Plan. The document predicts that more than 4,000 kilometers of intelligent roads will be built during the “14th Five-Year Plan” period, and more than 130,000 smart multi-purpose light poles will be built. If the cost of a single kilometer of renovation amounts to one million yuan, road renovation alone during the “14th Five-Year Plan” period could bring an increase of several billion dollars to the new infrastructure market. 3) The nationalization layout is a big step forward. Revenue from outside of Guangdong Province increased significantly this year, and the transfer of shares of Nanjing Urban Communications Authority has obtained more opportunities for non-local expansion.

Profit forecasts, valuations and ratings: We are optimistic about the pioneering advantage of Shenzhen City Communications in the field of smart transportation, and even more optimistic about the continuous development of smart transportation business. Considering that under the pressure of the epidemic in '22, the promotion of the company's projects lags behind. We lowered the company's 23/24 EPS to 0.95 yuan/1.17 yuan (15.8%/11.4% respectively), and added the 25-year EPS to 1.55 yuan, maintaining the “increase in holdings” rating.

Risk warning: The implementation of smart transportation policies fell short of expectations, and order acceptance fell short of expectations.