1Q22 results missed our forecast
Tongtech announced 1Q22 results: Revenue fell 47% YoY to Rmb79mn, attributable net loss reached Rmb47mn, and recurring net loss was Rmb50mn. Major businesses faced pressure amid COIVD-19 resurgence in 1Q22, with tenders for computer middleware and emergency security projects both deferred.
Tongtech announces plans for equity incentive, management stake increase. The firm announced a plan to grant 16.88mn share options to no more than 260 core employees with an exercise price of Rmb14.53/sh, a 3% discount to the April 27 closing price. The prerequisite is net profit should grow no less than 21% YoY in 2022 to Rmb300mn, and 33.3% in 2023 to Rmb400mn. All shares will be granted if net profit increases 51.2% YoY to Rmb375mn in 2022, and 33.3% to Rmb500mn in 2023. We think the small price discount and high earnings targets show confidence in medium-to-long term earnings growth. HUANG Yongjun (actual controller, Chairman and General Manager) and XU Shaopu (director, Deputy General Manager and Board Secretary) plan to increase their stakes by Rmb30-50mn using their own or self-raised funds.
Trends to watch
COVID-19 resurgence weighs on 1H22 earnings. Import substitution in major sectors such as finance will likely proceed steadily in 2022, but the delayed government procurement amid COVID-19 resurgence may drag short-term earnings, in our view. Moreover, we believe the pandemic will also slow the delivery of emergency security projects, in turn weighing on 1H22 earnings.
Clear signal for import substitution over the medium-to-long term; high visibility of strong earnings growth in 2023. According to industry-related policies, we think demand for China-made middleware from corporates and government will rise more robustly starting from 2023. Moreover, the firm is expediting expansion into regional markets for emergency security, which we think will offer another growth driver for Tongtech.
Financials and valuation
The COVID-19 resurgence adds to business uncertainties, and revenue contribution from low-gross margin middleware and low-gross margin emergency security may change. We maintain our 2022 and 2023 revenue forecasts, and lower our 2022 and 2023 net profit forecasts by 9% and 10% to Rmb396mn and Rmb534mn. We maintain our OUTPERFORM rating and cut TP by 11% to Rmb24, implying 28x 2022e P/E, offering 60% upside. The stock is trading at 17x 2022e and 13x 2023e P/E.
Risks
Import substitution disappoints; COVID-19 resurgence.
