Key points of investment
The company is an industry-leading supplier of core banking systems. The banking IT industry is the largest industry with the most stable IT investment.
1) Bank IT space is huge, bank customers are deeply dependent on IT, and investment is growing steadily. According to IDC statistics, China's bank IT solutions market in 2022 was 64.9 billion yuan, and is expected to increase to 142.9 billion yuan by 2027, with a compound annual growth rate of 17%. Looking at the financial reports of listed banks in China, it can be seen that investment in information technology is constantly improving, and intangible software assets are rapidly increasing, which is enough to reflect the importance attached to informatization.
2) The company focuses on 30 years of banking business systems. As of the end of June 2023, the company's coverage rate of all banks with assets over 500 billion dollars had exceeded 96%. The company has cooperated with 3 policy banks, 6 large state-owned commercial banks, and all national joint stock banks; the company has cooperated with 46 of 48 urban commercial banks and agricultural commercial banks with assets of more than 500 billion dollars.
3) The company is in a leading position in the industry in banking core system products. According to IDC data, the company ranked second in the market share of the bank core business system sub-market in 2021, accounting for 5.6%. The company's revenue in 2022 was 1.89 billion yuan, with a five-year compound growth rate of 15%.
Growth point 1: The company will clearly benefit from a new boom cycle in the construction of the core system of domestic banks.
1) This year, the company achieved the highest record for orders in the field of core business systems in history. According to the company's October 25 announcement, since this year, the company has identified 13 orders related to core system business, compared to an average of 5-6 per year in the past. According to the interim report, the amount of sales contracts signed by the company in the first half of 2023 increased by nearly 27% compared to the same period last year. Among them, the amount of sales contracts signed for digital finance business solutions increased by more than 40% year over year. First, because market demand has been suppressed in the past few years, and second, in the context of credit and innovation policies, customers also have a rigid demand for localized alternatives.
2) The quality of customers who have won the new bid has improved. This year's winning bid includes core system orders from a leading urban commercial bank and a joint stock commercial bank. The benchmarking effect is obvious, winning an opportunity for the subsequent peak credit and innovation reform period for small and medium-sized banks. In the past, the company had a good market share among small and medium-sized bank customers in the core system. Beginning in 2020, the company began to expand from focusing on small and medium-sized banks to large bank customers, winning bids for the digital business of leading banks such as Postbank and Bank of China. In 2022, the company cooperated with China Postbank to implement a next-generation distributed core system for personal business for more than three years, and was successfully put into full production and launch. We believe that the company's deep cultivation in leading banks has entered a harvest period, and it is anticipated that there will be significant room for improvement in customer unit prices in the future.
Growth point 2: Southeast Asia Bank customers continue to develop, and new demand for core system replacement has been added in recent years. The smooth expansion of overseas markets proves that the company has commercialization capabilities.
1) The company is the first Chinese company to successfully implement a core banking system in a major bank in Southeast Asia. Currently, it has 60+ customers in Southeast Asian countries such as Malaysia, Thailand, and Indonesia, and has formed many successful cases. According to the company's October 25 exchange minutes, at present, the company has seen many business opportunities for large-scale downsizing and systems going to the cloud. It has participated in many POC and bidding activities in the Southeast Asian market, hoping to bring transformation opportunities to overseas business this year.
2) The company is one of the few domestic IT companies that actually enter overseas with products. Overseas markets will be the main contributor to profits. It has fully verified the strong competitiveness of the company's products. Overseas markets are dominated by European, American and local manufacturers. Overseas products have a high degree of standardization, which is expected to bring high profits to the company. The company is expected to defeat European and American manufacturers by exporting advanced domestic core systems to overseas customers and providing personal delivery and operation and maintenance services.
Profit forecasting and valuation
We expect the company to achieve operating income of 20.24/23.41/28.22 billion yuan in 2023-2025, with a year-on-year growth rate of 7.25%/15.64%/20.57%, respectively; corresponding net profit of 0.5/2.00/255 billion yuan, year-on-year growth rate of 125.27%/295.98%/27.62%, corresponding EPS of 0.07/0.27/0.35 yuan, and corresponding PE of 155.60/39.30/30.79 times. For the first time, it was covered by a “buy” rating.
Risk warning
The promotion of the credit and innovation policy is not as strong as expected, and the products are not going overseas or falling short of expectations.