After being delisted from the New Third Board on August 9, 2019, after nearly four years of preparation, China and Jiangxi Communications wanted to return to the capital market.

The Zhitong Finance App learned that China and Jiangxi Communications, which specializes in providing telecom infrastructure services and smart city solution services, submitted a prospectus to the Hong Kong Stock Exchange on June 30 and applied for listing on the Main Board. Zhongtai International is the exclusive sponsor.

In terms of performance, the revenue of China and Jiangxi Communications over the past three years has clearly fluctuated under the influence of the epidemic. Its revenue from 2020 to 2022 was 337 million yuan (RMB, same below), 479 million yuan, and 413 million yuan respectively; net profit for the same period was 32.306 million, 36.173 million, and 349.75 million yuan respectively, and remained stable overall.

Why can net profit remain stable even though revenue fluctuates greatly? Can the company's performance enter a growth trajectory after the impact of the epidemic is eliminated? With the above questions in mind, you can find answers from them by thoroughly analyzing the company's prospectus.

Achieve stable net profit across two major tracks

Sino-Gan Communications was founded in 2002 and is headquartered in Jiangxi. At the beginning of its establishment, the company mainly engaged in telecommunication infrastructure services. By 2018, the company began providing smart city solution services. At this point, the business layout of China-Jiangxi Communications spans the two major telecom infrastructure and smart city solutions tracks, and the business layout has officially taken shape.

According to the prospectus, the telecommunication infrastructure services of China and Jiangxi Communications mainly build, modify and install the network infrastructure of the entire telecommunication network for customers, and carry out continuous maintenance. The business's customers include the three major operators, China Tower (00788), local governments, quasi-government agencies, state-owned enterprises, and others.

Smart city solution services refer to integrating various hardware and software systems under a unified platform through smart technologies such as the Internet of Things, cloud computing, big data, artificial intelligence, and blockchain, thereby improving the operational efficiency and productivity of customers. The solution is divided into three business sub-segments, namely integrated solutions, software solution services, and system maintenance services. The difference between the first two business sub-divisions is that integrated solutions require procurement of hardware and software from third parties, while software solution services require the required software to be custom-developed by China and Jiangxi Communications.

According to the prospectus, in the past performance period, China and Jiangxi Communications focused on the industry and has undertaken a number of smart city solution service projects, including smart healthcare, smart education, smart health, smart government, smart industry, and smart city management. The clients involved include telecommunication network operators, local governments, quasi-government agencies, state-owned enterprises, and private companies.

After years of development and accumulation, the business of China-Jiangxi Communications has gone beyond Jiangxi Province. On June 21, 2023, the company's business expanded to 20 provinces and cities in China. Looking at the business structure, telecom infrastructure services are the main business of China and Jiangxi Communications. In 2022, this business will account for 82.9% of revenue, and smart city solution services will account for 17.1% of revenue.

Looking at the split, the volatility of the two major businesses was consistent. Revenue increased significantly in 2021 and declined somewhat in 2022. This fluctuation was mainly due to the impact of the pandemic. It is worth noting that in 2022, the revenue of integrated solution services and software solution services under smart city solution services changed significantly. This is mainly because the company did not purchase third-party software during the reporting period, but rather preferred to provide customers with customized software, so the share of software solution service revenue increased markedly.

In terms of gross margin, gross margin in 2020 and 2022 was relatively stable and remained around 25%, but gross margin in 2021 was only 19%, down more than 6 percentage points. This is mainly due to the relatively low gross margin of project revenue determined in 2021. It is worth noting that the gross margin of smart city solution services increased significantly in 2022, to 86.1%. This is an obvious benefit brought about by vigorously developing software solution services, and the increase in profitability is very obvious.

Under varying frequency fluctuations in revenue and gross margin, the gross profit of China and Jiangxi Communications achieved steady growth. From 2020 to 2022, it was 85.1988 million yuan, 91.88 million yuan, and 104 million yuan respectively, with a compound annual growth rate of about 10%. However, due to the impact of operating expenses, overall net profit remained stable during the reporting period, and the increase was not significant.

Three potential risks have become management challenges

Judging from the development trend of the industry and the number of projects in progress, China-Jiangxi Communications is expected to enter a growth channel after the impact of the epidemic is eliminated. According to data from Frost & Sullivan, from 2017 to 2021, the size of China's telecom infrastructure services market increased from 1978 billion to 261.3 billion yuan, with a compound annual growth rate of 7.2%. It is estimated that from 2022 to 2026, driven by network demand from emerging technologies such as the Internet of Things, Internet data centers, and artificial intelligence, the size of China's telecom infrastructure services market will increase from 261.3 billion yuan to 346.8 billion yuan, with a compound annual growth rate of 5.8%.

Furthermore, smart cities are also an incremental market. According to data from Ipsos research and analysis, from 2018 to 2022, the market size of smart cities in China increased from 2.8 trillion yuan to 4.86 trillion yuan, with a compound annual growth rate of 14.8%; it is estimated that under the continuous penetration of digitalization, the compound growth rate of smart cities from 2023 to 2027 will still be 9.7%.

Judging from the development of the two major telecom infrastructure services and smart city tracks, the huge market is still developing steadily. Among them, there is no shortage of opportunities, and China-Jiangxi Communications will also benefit from it. Moreover, in the short to medium term, the ongoing projects of China-Jiangxi Communications are in a relatively adequate state.

According to the prospectus, as of June 21, the number of uncompleted projects of China-Jiangxi Communications was 182, an increase of 33 from 149 at the end of 2022. The amount involved in uncompleted projects was 1,343 billion yuan, up 17.9% from 1,139 billion yuan at the end of 2022. As the project is gradually completed and revenue is determined, the revenue of China-Jiangxi Communications is expected to continue to grow.

However, there are not a few challenges facing China-Jiangxi Communications. First, telecommunications infrastructure services are a highly competitive and highly fragmented market. According to the prospectus, in terms of revenue, China-Jiangxi Communications ranked third among telecommunication network infrastructure construction and maintenance service providers in Jiangxi Province in 2021, with a market share of about 3.7%. The third-ranking market share is less than 4%, which is enough to show the degree of fragmentation of this market. The reason for intense competition and high fragmentation in the market is that the technical barriers to telecommunication infrastructure services are relatively simple, and the vast majority of TO G and TO B businesses use a bidding model. Prices are relatively low, and there is almost no room for price increases. Therefore, in the future, there may be a situation where low project gross margin affects the company's overall profit level and thereby drags down overall performance.

Second, the various indicators of China-Gan Communications also show the nature of the company's business facing TOG and TOB customers. The most typical example is the number of accounts receivable turnover days. This indicator reached 689.6 days in 2022, that is, it will take almost two years to achieve repayment, while the number of accounts payable turnover days during the same period was 441.6 days. Obviously, in the upper and lower reaches of the industrial chain, China and Jiangxi Communications are on the weak side. Bargaining power is weak, and daily operating capital needs to be advanced. This has led to a high level of debt between China and Jiangxi Communications. According to the prospectus, as of the end of 2022, the total assets of China and Jiangxi Communications were 1,035 million yuan, total liabilities were 847 million yuan, and the balance ratio was as high as 81.83%.

Furthermore, there is a high concentration of China-Gan Telecom customers. According to the prospectus, from 2020 to 2022, the five largest clients of China and Jiangxi Communications accounted for 97.4%, 99.4%, and 99.2% respectively, and the business relationship ranged from 2 to 20 years. Obviously, the revenue of China and Jiangxi Communications depends too much on telecom operators. If telecom operators cut capital expenses, it may have an impact on their performance.

Overall, the revenue of China and Jiangxi Communications has fluctuated significantly over the past three years due to the impact of the epidemic, but the company developed into software solutions through integrated solutions, increasing the level of profit during the period, thus keeping the company's overall net profit stable. As the impact of the pandemic is eliminated, the industry grows, and a large number of uncompleted projects are expected to grow, but the potential risks of intense competition, high debt, slow repayment, and high customer concentration are all challenges they need to face.