Event Overview:

On August 29, Tongbao released the “2024 Semi-Annual Report”. In the first half of the year, the company achieved operating income of 0.328 billion yuan, up 18.18% year on year; net profit to mother was 0.106 billion yuan, up 8.01% year on year; net profit after deducting non-return to mother was 96.815 million yuan, up 8.01% year on year.

The ETC distribution business increased steadily. According to Q2 of the large-scale promotion sheet for smart transportation operation and management systems, the company achieved revenue of 0.175 billion yuan, an increase of 21.32% year on year; net profit to mother was 61.2315 million yuan, up 6.84% year on year; net profit without return to mother was 51.8122 million yuan, up 6.7% year on year. By business, according to the semi-annual report, ① smart transportation electronic billing business revenue was 0.183 billion yuan (YoY +5.31%). Among them, ETC distribution business revenue was 0.113 billion yuan (YoY +11.65%). During the reporting period, the company developed a total of 1.058 million ETC users, including 0.911 million bus users and 0.147 million truck users, accounting for 12.9% of the national ETC distribution volume in the first half of the year. The market share increased 2.73 percentage points compared to 10.17% at the end of 2023. In the front assembly market, the company has established business partnerships with 16 OEMs including SAIC Motor Group, Changan Automobile, Geely, Tesla, NIO, and Jaguar Land Rover, as well as Fuyao Glass. During the reporting period, 0.05 million units were distributed through the ETC front-loading model, with a cumulative total of 0.229 million units distributed through the front-loading model. Additionally, e-billing services generated revenue of 70.0989 million yuan (YoY -3.51%). During the reporting period, the cumulative export traffic of the Jiangsu Connected Expressway was 411.61 million vehicles, an average of 2.26 million vehicles per day. Affected by factors such as an increase in the number of free days in the first half of the year, the company's electronic toll service business revenue declined slightly.

② Smart traffic operation management system business revenue was 0.126 billion yuan, up 38.86% year on year. The company's smart traffic operation management system products have been applied on a large scale and promoted nationwide, and now cover about 20 provinces, cities and regions across the country. The company's smart transportation products mainly include a series of cloud control platform products such as scheduling clouds, AI video analysis cloud control platforms, high-speed brain cloud control platforms, state-owned clouds, free flow cloud billing solutions, charging robots, SD-WAN intelligent networking technology services, and digital twin services.

③ Smart transportation derivative business revenue of 19.0038 million yuan (YoY +45.56%). Relying on the number of ETC users and data volume advantages, “ETC+” is used as the core to build ecological scenarios, focusing on vertical business areas such as high-speed traffic, parking, fueling, road area economy, and vehicle maintenance, to provide users, financial institutions, and other partners with value-added scenario services, customer drainage, supply chain collaboration services, and risk management and control services.

Benefiting from vehicle-road cloud integration and deeply participating in smart transportation construction in Jiangsu Province in July 2024, five ministries and commissions announced 20 pilot cities for the application of “vehicle-road cloud integration” for intelligent connected vehicles. Within Jiangsu Province, they are Nanjing, Suzhou, and Wuxi. According to reports, pilot cities across the country will be built in stages according to actual conditions. According to preliminary research, the funding for the Che Road Cloud project mainly comes from financial grants, local implementation of state-owned enterprises, special treasury bonds, etc., and the financial guarantee is relatively reliable and stable. Bidding for some projects is expected to begin in December, and it is expected that large-scale construction will begin in the next two years. The company's vehicle-road cloud business is mainly divided into highway vehicle-road cloud and urban vehicle-road cloud business. In terms of highway traffic cloud, the company mainly focuses on information technology business, providing system platform construction to highway management departments and road network operation and management units. In the future, the company will actively expand its intelligent hardware manufacturing and system integration business to further expand its market share. In terms of urban vehicle cloud, it mainly relies on the company and its subsidiary Baoyi Technology to provide customers with products and services such as roadside intelligent hardware equipment and edge computing algorithm systems.

According to the Ministry of Transport's “Highway and Waterway Transport Infrastructure Digital Transformation and Upgrading Demonstration Areas (First Batch) Notice”, the eight regions of Beijing, Jiangsu, Zhejiang, Fujian, Henan, Hunan, Guangdong, and Sichuan are listed as the first batch of digital transformation demonstration areas. This round of digital transformation projects will complete project bidding and implementation of some projects before the end of this year. Project construction will be completed in 2025-2026, and project acceptance will be completed by 2027 at the latest. As a leading digital transportation enterprise in Jiangsu Province, the company has strong digital transportation product research and development capabilities in smart expansion, free flow charging, road network cloud control platforms, and video AI monitoring. With the support of the Jiangsu Provincial Department of Transportation, the company participated in the implementation of the Jiangsu Provincial Transportation Infrastructure Digital Transformation and Upgrading Project.

Investment advice

Tongbao is a leader in the ETC electronic charging industry and is expected to benefit from the new round of OBU replacement boom in the ETC 2.0 phase. We expect the company's revenue for 2024-2026 to be 0.911/1.145/1.429 billion yuan, and net profit to mother of 0.234/0.294/0.375 billion yuan, respectively.

Maintaining a buy-A investment rating, the 6-month target price is $22.62, which is equivalent to a dynamic price-earnings ratio of 40 times in 2024.

Risk warning:

ETC 2.0 fell short of expectations; business expansion outside the province fell short of expectations; implementation of data element policies fell short of expectations.