Key points of investment
For the first time, the “Gold Label” unified regulation of cash machines, reshaping the competitive pattern to eliminate backward production capacity and benefit industry leaders. “Technical Specification for the Identification Capability of RMB Cash Machines” issued by the People's Bank of China
For the first time, cash machines that previously had no counterfeiting standards to be relied upon will reshape the competitive pattern of the industry. Companies that rely on low quality and low price competition, such as OEM and workshop-style companies, are unable to quickly keep up with the pace of the industry because they do not have sufficient independent research and development capabilities, and will gradually be eliminated from the market.
Sorting machines replace space of 51-91 billion yuan, and counter machines replace space of 37-5.5 billion yuan, concentrating on completing the replacement this year and next two years. A small number of domestic manufacturers are competing for this market. By the end of 2019, there were 228,000 bank branches in China, and the scope of this round of replacement will basically cover all bank branches in China. We estimate that the average purchase scale of each branch sorter is 3-5 million yuan, and the average purchase size of a bill counter is 20,000 to 30,000 yuan. Assuming that 80% of bank branches are re-purchased, the replacement scale will reach 55-91 and 37-5.5 billion yuan respectively. The vast majority of banks officially opened and completed tenders for new cash machines in 2019. We judge that the revenue of the winning company will be reflected centrally this year and next two years. Domestic production trends have been determined, and tender data shows that the share is concentrated on local leaders. As can be seen from the results of bank procurement projects, Guao Technology, Julong Co., Ltd., China Bank Cinda, and Radio, Television, and Express have basically monopolized the shortlist of candidates.
Self-service devices for corporate banks are expected to become a new growth point. All major banks in China have made the transformation and upgrading of smart bank branches a strategic priority and are actively promoting implementation. The transformation of more than 220,000 bank branches will generate a large demand for self-service equipment. Compared with cash handling equipment, self-service equipment, especially non-cash self-service equipment, is in a period of rapid market growth. Product functions have not yet been defined. There are certain differences between products and value-added services among various manufacturers, so the gross margin of self-service equipment is higher. The company has previously developed and released a series of smart bank products, and will move from the R&D period to the sales stage. The company's smart banking series products, especially smart safe deposit boxes and smart seal card lockers, are expected to become new growth points.
The company's strategic transformation and upgrading is accelerating. Since its listing, the company has been seeking transformation and upgrading of its main business. In April 2020, the company acquired 60% of Qian Yu Information's shares for 24 million yuan (focusing on options trading system development) to explore strategic transformation and upgrading. At the end of April, the company issued a non-public offering plan to raise no more than 450 million yuan (issue price 23.91 yuan/share) from three specific targets. The introduction of strategic investors will accelerate the company's strategic transformation and upgrading in the field of fintech. The two sides will cooperate in various areas such as sharing technology, products, customers, talents and expert resources. At the same time, strategic investors will assist in providing all-round support, including capital, in the company's main business and the operation of industries such as upstream and downstream mergers, acquisitions and restructuring.
Profit forecast and investment rating: Net profit for 2020-2022 is expected to be 0.67/0.82/100 million yuan respectively, and the current price corresponding to PE is 59/48/40 times, respectively. Looking back at the previous round of bank cash machine procurement cycles, the average PE (TTM) value of Julong Co., Ltd. was 50 times, which can be used as a safety cushion for Guao's lower valuation limit. Considering that the company's new independent products are about to be released, and at the same time, growth expectations for future business transformation and upgrading should enjoy a premium, and the average static valuation of companies in the target industry in 2019 reached 112 times, and Guao's static valuation was 88.5 times. It was covered for the first time, giving it a “buy” rating.
Risk warning: The epidemic affects bank procurement progress, and business strategy upgrades are slow
