Event Overview:

1) Recently, the Ministry of Finance and the Ministry of Transport jointly issued the “Notice on Supporting and Guiding the Digital Transformation and Upgrading of Highway and Waterway Transport Infrastructure”. According to the notice, starting in 2024, about 30 demonstration areas will be formed in about 3 years, and efforts will be made to promote the digital transformation and upgrading of about 85% of busy national highways, 25% of busy ordinary national highways, and 70% of important national high-grade waterways.

2) Recently, Wanji Technology released its 2023 annual report and the first quarter report of 2024. In 2023, the company achieved total revenue of 909 million yuan, an increase of 4.11% over the previous year; net profit to mother was -386 million yuan, and net profit after deducting non-return to mother was -402 million yuan. 2024Q1 achieved revenue of 159 million yuan, an increase of 50.64% over the previous year; net profit to mother was -0.79 million yuan, net profit after deducting non-return to mother was -82 million yuan, and losses narrowed.

Revenue bottomed out and rebounded, and the automotive OBU business reached the bottom of the cycle

The company's revenue side bottomed out. By business, in 2023, the company's dedicated short-range communication, dynamic weighing, laser inspection, and intelligent connected electronic products achieved revenue of 5.30, 2.02, 1.05, and 68 million yuan, respectively, up 23.62%, -29.93%, 9.16%, and 23.80% year-on-year respectively. Many businesses were repaired. The biggest driving force came from the company's in-vehicle ETC-OBU business reaching the bottom of the cycle, and sales continued to pick up. This trend continued in 24Q1, when the company's revenue side reached 159 million yuan, an increase of 50.64% over the previous year. The company's profit side declined a lot year over year, mainly due to: 1) the company continued to increase its market and R&D investment in new products such as lidar and intelligent connectivity, and the R&D cost ratio was +8.64pcts year over year; 2) some product prices declined in 23 years, compounded by cost confirmation cycle factors, and gross margin fell 14.49pcts to 33.64%.

Digitalization of transportation has brought about a new round of construction opportunities, and the company is expected to continue to benefit. Recently, the Ministry of Finance and the Ministry of Transport jointly issued the “Notice on Supporting and Guiding the Digital Transformation and Upgrading of Highway and Waterway Transport Infrastructure”. According to the notice, starting in 2024, about 30 demonstration areas will be formed in about 3 years, and efforts will be made to promote the digital transformation and upgrading of about 85% of busy national highways, 25% of busy ordinary national highways, and 70% of important national high-grade waterways. In addition, the notice also clarifies the specific method of financial subsidies, that is, allocating funds according to a “combination of rewards and supplements”. The maximum upper limit for the highway sector is 1 billion yuan, the maximum upper limit for the waterway sector is 200 million yuan, and the reward ratio for the eastern, central, and western regions is 40%, 50%, and 60%, respectively. We believe that this “Notice” is quite clear in terms of financial support, project goals, implementation time, etc., and is expected to bring a new round of construction opportunities to digitize transportation. As a leading enterprise in the domestic intelligent transportation industry, on the one hand, the company has a deep layout in roadside equipment such as ETC, lidar, and V2X antennas. On the other hand, it has also participated in a number of intelligent construction projects, including the first smart highway with continuous tracking of the entire road section in China - Chongqing Yuxiang Expressway, Zhejiang Digital Twin Tunnel Construction Verification Key Pilot Project - Hangzhou-Jinqu Expressway, Zhejiang Xinling Tunnel, and the first smart toll demonstration station in Shandong Province - Gushan Toll Gate, etc. We believe that the company can fully benefit from this round of digital transportation construction opportunities with comprehensive product line layout and rich project experience.

Investment advice:

The company is a leading enterprise in the domestic intelligent transportation industry. Currently, the ETC business has reached the bottom of the cycle, driving performance improvement, and superimposing transportation digitalization has led to a new round of construction opportunities. We expect the company's revenue for 2024-2026 to be 1,241/16.29/1,983 billion yuan, respectively, and net profit of -0.81/0.35/158 million yuan, respectively. Maintaining the buy-A investment rating, the target price for 6 months is 34.96 yuan, which is equivalent to 6 times the dynamic market sales ratio of 2024.

Risk warning:

ETC front-end penetration falls short of expectations, the company's lidar development progress falls short of expectations, policy implementation falls short of expectations, and V2X promotion progress falls short of expectations.