Core views:

PCI Technology is a solution provider for digital city construction with an in-depth presence in the Guangdong-Hong Kong-Macao Greater Bay Area (the Greater Bay Area). It focuses on smart transportation and mainly provides public safety and emergency response solutions for smart rail transportation and city governance. In recent years, the Company ushered in a breakthrough in regional expansion and successively obtained orders in Southwest and East China and other regions with sufficient backlog orders currently. Looking ahead, the Company's investment in artificial intelligence (AI) and digital twin will likely boast continuous growth prospects in the areas of the digital economy and smart city construction. Taking the private placement and investment returns from Cloudwalk Technology into account, we forecast the 2022E/23E/24E EPS to be Rmb0.14/0.30/0.35. Based on PCI's leading presence in the industry and its promising growth potential, and with the valuation of comparable companies as a reference, we assign 25x 2023E PE to derive a target price of Rmb7.5 and initiate coverage with an "OVERWEIGHT" rating.

Abstract:

PCI Technology: A safety and emergency solution provider in transportation sectorPCI Technology is deeply rooted in the Greater Bay Area, and its major business segments include industrial intelligent products/solutions and information and communications technology (ICT) products/services. The intelligent business focuses on the transportation sector and mainly provides public safety and emergency response solutions for smart rail transportation and city governance while the ICT business mainly focuses on the distribution and consignment of products from partner manufacturers. In recent years, the Company has made breakthroughs in regional expansion and self-developed products. It successively obtained orders in Southwest and East China and other regions, with increased revenue from high margin self-developed products. The Company has also actively invested in AI and digital twin. In 2021, it achieved revenue of Rmb6.224bn (+45.2% YoY) and ANP of Rmb314mn (+242.3% YoY). The 1Q22 revenue was Rmb1.036bn (+1.2% YoY), and ANP was Rmb37mn (+117.08% YoY).

Industry status quo:

Urban rail construction maintains normal rhythm, and smart urban rail is likely to grow. Based on the announcements of the National Development and Reform Commission (NDRC), the newly-approved urban rail transit lines in China totaled 1,600km with estimated investment of over Rmb220bn, lower than previous years. According to the China Association of Metros (CAMET), the completed investment of national rail transit remained at about Rmb600bn from 2019 to 2021. Coupled with clear statement of “moderately advanced infrastructure investment” in this year's government work report, the urban rail transit industry is likely to benefit from the new project starts. According to the data of Qianzhan Industry Research Institute, the market size of intelligent urban rail transit is likely to reach Rmb98.1bn in 2025 from Rmb47.3bn in 2021, with a CAGR of 20%, indicating a good development trend.

Smart city has become a key application direction of digital twin technology. The technology was previously focusing on aerospace and industrial sectors, but is applied more in city governance now, stimulating the elements of cities to monitor their operation status and assisting city planning and management. According to the China Academy of Information and Communications Technology (CAICT), the number of domestic city/civil/construction information modeling (CIM) projects has grown rapidly to 149 in Oct 2021 from 2 in 2018, with total project amount of over Rmb3bn in 2021. As a component of smart city, rail transit is also likely to explore the application of digital twin technology as well.

Company highlights:

Current backlog orders are sufficient and will likely contribute to earnings increment once commissioned. According to the Company's announcement, at the end of 2021, the amount of backlog orders was Rmb15.866bn. And in Apr 2022, it won the bid for a new project of Rmb1.291bn. Currently, the Company has sufficient backlog. Based on its confirmation method of earnings, and excluding the impacts of pandemic resurgences, we expect some of the orders to be gradually realized in the next 2-3 years. At the same time, self-developed products will likely contribute more to the total earnings alongside higher operating revenue and gross profit margin.

The Company will continue to invest in AI. It also announced a private placement plan involving an amount of no more than Rmb3.314bn. The proceeds are planned to be used for digital twin platform, rail transit digital system, transportation digital system and other researches. The Company has invested in the AI area for quite a long term and its target Cloudwalk Technology has listed on the SSE STAR Market. The proceeds are likely to be applied in development for products with competitive edge in digitalization and intelligentization, boosting their earning scale and revenue proportion and improving overall profitability.

Potential risks

Recurrence of the pandemic in some regions; macroeconomic pressure leading to less spending from the government on the industry; the construction progress of rail transit project missing expectations; longer period for accounts receivable and bad debts; intensified market competition; the development and application of digital twin and other new technology not up to expectations.

Investment recommendation

PCI Technology is a leading digital city construction solution provider rooted in the Greater Bay Area with an in-depth presence in public safety and emergency response solutions for smart rail transportation and city governance for many years. Benefit from the expansion of business areas and industries related to digitalization and intelligentization, the Company currently has sufficient backlog, which is likely to contribute profit increment continuously. The investment in AI and digital twin will also build up competitive edge for the Company. Under prudent considerations and assuming PCI Technology completes the private placement this year and issues new equity at the maximum limit, and not take into account the investment gains or losses of the IPO of CloudWalk Technology, we estimate the 2022E/23E/24E ANP at Rmb315mn/675mn/797mn (+0.3%/+114%/ +18.1% YoY), corresponding to EPS of Rmb0.14/0.3/0.35. Based on the average valuation of 18x 2023E PE (Wind consensus estimates) of China TransInfo Technology (002373.SZ) and GRG Banking (002152.SZ) as comparable companies and PCI Technology's leading presence in the industry and its promising growth potential, we assign 25x 2023E PE to derive a target price of Rmb7.5 and initiate coverage with an "OVERWEIGHT" rating.