Description

 

BII Railway Transportation Technology                                                      

 

 

In the last decade, railway manufacturers have consolidated— CNR (China North Locomotive Rolling Stock) merged with CSR (China South Locomotive Rolling Stock) to create a domestic monopoly with economies of scale to outbid international projects yet remain profitable and innovative over the long haul. CRRC dominates projects in Africa and the Middle East— it’s part of China’s One Belt One Road initiative to influence and consolidate power through infrastructure and debts (China seizes strategic ports/assets abroad when debts are not paid without resorting to military bases). To counter CRRC as the world’s number one rolling stock manufacturer, in 2020, competitor Bombardier merged with Alstom.

 

Beijing Infrastructure Investment Railway Transportation Technology caught my attention because it had a 33% monopoly on Passenger Information Systems (think display systems and route information) in China based on total units won in 2021, and they claim, for high speed rail, they own 50% of the high speed rail PIS market with CRRC.  

 

While doing this write up, I was shocked at the scale and pace in which railway infrastructure has grown in China. More than 37,900 km (about 23,500 miles) of railway lines span across the country, linking most of its major mega-city clusters, while the network was practically non-existent in 2008.

 

 

 

 

 

 

 

Background and Introduction

 

 

Beijing Infrastructure Investment Railway Transportation Technology (SEHK: 1522) is a non-capital intensive, leading railway information systems management company. Services include — automatic fare collection (AFC), passenger information systems (PIS), traffic control centres, etc. While there’s expansion abroad, the main market is China. Transport control systems includes trams and buses, but the main priority is still servicing railways through government or OEM tenders/bidding.

 

BII RTT’s competitive advantage is partly granted from the Chinese government owned Beijing Infrastructure Investment (BII) holding the majority shares of BII Railway Transportation Technology and transforming what was originally named “China City Railway” into a dominant force by injecting favourable assets with predictable business economics into what was originally a mediocre business. (From now on, the parent company or the Chinese state owned entity will be referred as BII, and the listed company will be abbreviated to BII RTT).

 

BII RTT’s valuation was 9x in 2019 and less than 6x in 2021, which does not fully reflect the increase in value from the major RMB1.045 billion (USD157M) acquisition of HuaQi intelligent in 2019.

 

BII RTT’s revenue was only hkd453M in 2018, after the boost from the HuaQi acquisition, 2021 revenue was hkd1.74B.

 

 

This acquisition not only makes BII RTT the #1 market leader for PIS (passenger information systems) in China— it also brings technical expertise and better financial management in terms of collecting receivables and eliminates unnecessary suppliers.

 

At a market cap fluctuating around 775 to 870M with 890M in cash and 300-500M of debt (enterprise value of hkd495M (USD63M)), BII RTT generates a free cash flow of around hkd150-200M (USD25-30M). At 2-4x earnings, this is a bargain due to halts in tenders from Covid and political speed bumps abroad.

 

BII RTT has the dominant market share for railway Passenger Information Systems for China—  In 2021, relevant authorities in 18 cities of China released tenders for on-board PIS systems for urban rail transit, involving a total of 989 vehicles— BII RTT won the bid for 323 vehicles. Out of those vehicles, 1894 out of 5810 PIS units were installed for all domestic train orders— accounting for approximately 32.6% of the total railway PIS market. BII RTT solidifies its leading position for PIS for six consecutive years. BII RTT also has a duopoly with CRRC in China’s high speed rail Passenger Information Systems. At present, only 50 cities in China have subways and BII RTT is in 49 cities. There are approximately 685 cities in China, so there’s still a long runway. The demand for more intelligent information services, ticketing, and rapid security inspection will only increase.

 

 

 

 

 

Introduction to different segments of Smart Rail Transit (railway/subway management products and services)

 

Subways and railways now have an integrated IT and payment service to realize passenger demand, vehicle operation, mobile payment, station facilities, control systems— also known as “smart rail transit.”

 

PIS and AFC are two of the six major information systems of rail transit.

 

 

 

BII RTT focuses on 3 main core Smart transit system areas—

 

(1) Automatic fare collection systems (AFC);

 

(2) Passenger information systems (PIS);

 

(3) Traffic Command and Control (TCC);

 

 

 

PIS and AFC makes up 70-85% of BII RTT’s revenues. BII RTT is mainly concentrated in tier 1 and tier 2 cities in China.

 

 

 

 

 

The AFC (Automatic Fee Collection) comprises of:

 

1. Line network-level automatic ticket sales and collection clearing center (ACC),
2. Automatic ticket collection line network management center (ANCC),
3. Line network command center (COCC) & line-level AFC (TPU).

 

When tier 2 cities like Tianjin experience an increase in passenger flow and open additional routes, they realize that their existing system isn’t adequate— both fare collection and clearing need to be improved by investing in AFC systems to cope with the increasing sophistication. The system implements a fare collection based on the distance travelled without double charging or neglecting to charge. There’s also a clearing center and a multi-line sharing system using Huawei’s cloud platform. For fare collection, you need a clearing center— machines to receive payment via mobile phones, QR codes, or a card.

 

It’s hard to differentiate a commodity-like service with AFC (fare collection) with so many competitors. Due to the pandemic and intensifying competition, BII RTT found it difficult to expand its AFC business in markets outside Beijing, reflected by a drop in market share in 2021.

 

 

 

 

Passenger Information System (PIS)

 

 

 

The main functions of the PIS system include:

 

1.   Passenger information display system: includes itinerary destination, travel times, outside temperature, vehicle speed, etc

 

2.    Multimedia playback system: A media playback system for entertainment facilities such as first-class and second-class carriages and business seats in the train.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AFC projects generally completes in 2-3 years, and PIS projects completes in about 2 years or less.

 

 

 

 

Company Information and History

 

The first subway line was built in Beijing in 1962, with only 4 stations. The charging model was simple— fees were 2 yuan for each line. In 2000, more lines were added, and the ACC system was inadequate in consolidating data for the automatic fare collection (AFC) system to calculate the actual distance of each passenger’s trip. Fare collection and subway management in the 1980- 2000’s in China was not up to par and needed upgrades and reform. Beijing needed a subway/railway with information systems technology— passenger fare collection, etc.

 

BII RTT was originally a private enterprise called China City Railway Transportation Technology founded by Cao Wei. Founder Cao Wei graduated in engineering from Harbin University, and worked in rail transit before starting his own company— cooperating with an Australian company called VIX through its subsidiaries – Beijing ERG and Hong Kong ERG. Their first project was to inspect and upgrade Hong Kong’s subway. The “Octopus” card in Hong Kong was a debit card for small purchases and daily metro use in Hong Kong. Some of the original hardware was provided partly by Sony, but the system implementation was from VIX’s Technology.

 

For those who live in Hong Kong— Kowloon Motor Bus, First Bus, Lantau’s Bus, and Sun Ferry are all BII’s clients. Part of the fare collection machines for Hong Kong’s light rail platform and MTR were demolished due to the civil unrest were replaced in 2019 by BII RTT’s Kowloon Bay workshop.

 

China City Railway Technology began bidding for other domestic AFC and PIS contracts across the China with VIX’s technology. ERG’s majority shares in China City Railway enabled ERG to participate in China and obtain a CISI certification, but the subsidiaries would eventually have to belong to a Chinese owner— China City Railway Technology. ERG was a majority shareholder in China City Railway until state owned entity— Beijing Infrastructure Investments took over.

 

 

 

Public Listing and Transfer of Ownership from ERG to BII (Chinese State Owned Entity)

 

Before China City Railway (now BII Transportation) was listed in 2013 on the main board in Hong Kong, they were listed on the GEM in 2012—the enterprise stock exchange, which had easier listing requirements.

 

The GEM prospectus reveals that ERG was the majority shareholder with 60.16%. BII, at that time, only owned 9.95%. China City Railway was listed on the main board of the Hong Kong Stock Exchange in 2013. BII felt that China City Railway had some important strategic assets needed to be localized, and ERG, as a foreign company, understood that it had to withdraw at a certain stage, so there was a mutual agreement that BII would first be the majority shareholder (55% of the shares) and parent company when it went public.

 

By 2017, BII would acquire China City Railway and renamed BII Railway Transportation Technology (BII RTT). After the company went public, founder Cao Wei slowly stepped down from his management role, and became a non-participating shareholder with 11% of the company’s shares still held today.

 

Cao Wei concentrated his energy on creating a “YiTongXing” 译同行 mobile app for QR code payments which could be scanned for most public transport. This mobile app has 30million registered users, and its QR code rides account for 38% of Beijing's entire transportation network and is also in major cities such as Shanghai, Tianjin, GuangZhou, which generated a revenue in the past two years. This project is in collaboration with one of BII RTT’s investors— Ru Yi Xing. RuYiXing is a mobile payment business that BII invested RMB 50M in, holding 9.8% of the shares.  

 

 

 

Barriers to entry— BII (Beijing Investment Infrastructure) & Beijing/Northern Territorial Advantage

 

By 2016, Beijing Infrastructure Investment, managed by Beijing State-owned Assets Supervision and Administration Commission, a railway infrastructure development enterprise—became the major shareholder of BII Railway Transportation Technology (BII RTT). BII has deep pockets and has total assets of RMB 707B and net assets of RMB 250B.

 

Beijing Infrastructure Investment, a state owned enterprise, is involved in digging up tunnels, and produces subway vehicles— they received 3 orders for about 200 to 300 vehicles in Beijing last year. Vehicle orders that the parent company receive will naturally favour BII RTT for PIS contracts. Every subway line requires careful consideration and approval by the state and the process is quite complicated. When certain criteria are met, the Law Reform Commission still needs to give final approval. The rules will only be stricter over time, making it difficult for incumbents.

 

With BII’s support, a minnow was capable of swallowing a whale. BII helped acquire Huaqi intelligent by providing financing and political connections. As Beijing Infrastructure is now the parent company, Huaqi has an easier time penetrating regions such as Northern China and Beijing.

 

A total of 73 new contracts outside Beijing were won and signed for 2020, and 53 contracts for 2021 which made up the bulk of the year’s contract sum at RMB911M. Within Beijing 33 contracts for RMB 169M was signed. There were 6 foreign contract in 2021 totalling RMB 103M. Orders in hand of RMB 2.06 billion for 2020 and 2.2B for 2021. Operating cash flow is about hkd200-300m (USD30-40M), with annual maintenance capital expenditures ranging from hkd40-80m (USD10-20M). BII RTT has 2.06B (usd 260M) orders on hand for 2020, and hkd2.2B (usd282M) for 2021.

 

 

 

In terms of the average number of passengers or riders commuting daily, the two busiest cities in China would be Beijing and Shanghai. BII is extremely strong in Beijing and competes modestly in Shanghai. Beijing has one of the highest daily passenger flow in China— with the number of people commuting daily at 8.5 to 10 million, which exceeds the entire population of New York City. BII RTT supplies most of the AFC and dominates ACC in Beijing. At present, 27 subway investments for the city of Beijing have been completed, with a total mileage of 783 km.

 

However, in terms of total track length covered— the longest would be Shanghai. Shanghai also has a high speed magnetic levitation line.

 

 

 

BII Transportation/Railway is doing better in Eastern regions also but is still relatively weaker in Guangzhou and Southern China. GuangZhou ranks third in terms of total rail transit operating length at 611km (Beijing is 781km), and the Greater Bay Area (HK, GuangZhou, ShenZhen) is a key development region for China and BII RTT is trying to make inroads.

 

 

 

With 2.2B of backlog, we can see that most of the orders on hand for 2021 are up north and in Beijing—

 

 

From the chart above, we can see that High Speed Rail is still a small portion of the backlog and will continue to grow.

 

BII Transportation Technology is mainly distributed in Beijing, Chengdu, Zhengzhou, Shenzhen and other places, and Huaqi's business area is mainly located in East China such as Suzhou, Hangzhou, Xiamen, etc., forming a complementary geographical advantage. Of the 49-50 cities covered by BII in China, 12 are rail transit operations for new lines or mainly cities having railway for the first time. 36 are expansion on existing cities.

 

In the first half of 2022, BII Transportation focused on obtaining orders one after another in Shaoxing, Shenzhen, Shenyang and other places. One of the biggest projects is a Shaoxing platform screen door and low current integration project, the total contract sum for ShaoXing is RMB 550 million (approx. USD 80M).

 

There is still about 300 million unaccounted for the Shaoxing project—

 

160 million yuan should be recorded in 2022

 

60 million RMB should be recorded in 2023

 

2024 is when the budget is balanced

 

2.5% is used for the guarantee period, which will be retrieved after 2 years.

 

 

 

 

PIS competitors – Peers placed at higher valuation, but have a weaker competitive edge

 

Competitors/Peers are placed at a much higher multiples— yet BII RTT is NOT a cigar-butt and is arguably the best amongst its peers. If anything, with BII RTT being a subsidiary of a government entity and having connections— they are effectively playing “house” in the poker game. The bidding and approval process for projects will be easier for infrastructure works in Beijing and nearby regions.

 

If BII RTT has 32% of the market, Tianjin Beihai Communication Technology has 21% of the market based on tenders bid. Tianjin Beihai Communication’s parent company is Beijing Century Real Technology Co., Ltd (SZSE:300150) - 北京世纪瑞尔技术股份有限公司 is at a multiple of 94x. JinHang comes in third place with 15% market share.

 

 

 

AFC competitors

 

AFC (fare collection) has a lot of participants and is a more commodity-like business since product differentiation is harder than PIS.

 

Nanjing Panda (SHSE: 600775) 南京熊貓 (SHSE:600775) focuses on the AFC business and has a multiple of 60-70x.

 

“JiaDou” or PCI Technology BII Transportation Technology (SHSE:600728) - 佳都科技集团股份有限公司 has a multiple of 30-40x. BII RTT does not have the same political or geographical advantage in winning bids as PCI technology within Southern China or the Guangzhou region—PCI Technology (SHSE:600728) - 佳都科技集团股份有限公司has won a 3-5 year contract of  RMB 1.5 billion (USD 235M) for orders in Guangzhou.

 

 

 

Market and future growth prospects of railway in China

 

China has a speculative property market with an over construction of residential and office buildings and a pervasive mentality of flipping buildings to make a quick profit. This lack of prudence will have an impact on the Chinese government’s decision to inject capital into railway infrastructure.

 

Over the next decade, there won’t be a complete halt in railway contractor bids. Railway projects temporarily suspended will eventually resume. While China’s previous 13th Five-Year Plan was high growth, 14th Five-Year Plan is intermittent growth— Chinese railway infrastructure investments should be made to maintain China’s GDP growth target around 5.5%. At a national level, the development of subways or high-speed railways have not been stopped— High Speed Rail’s operating mileage has exceeded 40,000km in 2021. China has the world's longest urban rail transit system that was more than 7,500 km (4,700 mi) long, as of 2020.

 

 

 

Fixed asset investments in China's rail infrastructure from 2009 to 2020(in billion yuan)

 

 

Based on the chart above, it seems like there’s only a slight decrease for rail infrastructure, and despite the pandemic, RMB 749B (about 117 billion U.S. dollars) was invested in 2021. The investment in railway fixed assets in the first quarter of 2022 was 106.5B. This investment growth is aligned with smart rail transit systems, which is also expected to grow at least 10% annually.

 

Despite signs of slowing down, urban rail transit remains an important infrastructure investment for China to bring about economic growth. In 15 years, by 2035, high speed rail network will approximately double in length to 70,000km. As of 2022 January, High Speed Rail in China has exceeded 40,000km in length. Half of 37,900km (about 23,500 miles) of total railway length has been completed in the last five years alone, with a further 3,700 km due to open in the coming months of 2021.

 

 

 

New lines such as the Ganshen high-speed railway and the Anhui section of the Beijing-Hong Kong high-speed railway will be put into operation. While Beijing's sub-center and the Xiongan New Area are under construction, and the Jingtang and Jingbin intercity railways will be built in 2022 to coordinate development in Beijing, Tianjin and Hebei.

 

The national high speed rail spans a 8 by 8 corridor grid (eight north-south ("vertical") corridors and eight east-west ("horizontal") ones) are generally electrified, double-tracked to accommodate train speeds of 250–350 km/h, but corridors also make use of intercity and regional HSR lines with speeds of 200 km/h.

 

 

 

 

Factors why BII Railway Transportation Technology will be successful—

 

 

 

HuaQi Acquisition brings expansion domestically and abroad; BII becomes the market leader in PIS

 

Through connections with TsingWah University and other political entities acquired HuaQi Intelligent in 2018-2019 from NetPosa Technologies, Ltd. (SZSE:300367)— BII Transportation spent 1.045 billion (USD128M) to acquire 95% of HuaQi Smart— which required financing from the parent company. HuaQi’s revenue is approximately hkd600-700M annually, with profit around 110-130M.

 

The merger lays a good foundation for the future development for PIS vehicle-ground integration; more than 20,000 railway vehicles equipped with Huaqi’s system are still under operation. Part of its PIS already caters to high-speed rail and intercity markets. Huaqi’s acquisition enriched BII Railway’s geographical reach— there were certain provinces within China that were out of grasp and a lack of HSR contracts won. BII RTT also never entered India and Australia successfully, which Huaqi penetrated in 2016.

 

 

A HuaQi lead engineer has pointed out that the entire PIS technology is manufactured in-house except for microchips, which are purchased from foreign countries. Huaqi has mastered PIS’s core technology better than CaoWei’s China City Railway (BII Trans. Tech).

 

The contract in HuaQi's acquisition had puts and a certain calculation stipulating performance commitments in the next three years for net profit to be RMB 108M in 2019, 129M in 2020, and 155M in 2021. Due to Covid, HuaQi could not meet their target in 2021, and there was a lot written off as goodwill. The price paid was a multiple of 10x which is reasonable, but no one could have predicted Covid and its dent to passenger traffic.

 

Huaqi performed well in 2019 and 2020. The fourth quarter of each year is normally when major railway and urban rail transit manufacturers tend to bid more aggressively.  However, by the end of 2021, there was a slowdown – the situation in China was very turbulent, with high-speed rail projects repeatedly delayed and even major railway manufacturers, customers, OEMs such as CRRC, Siemens, and Bombardier cancelled their orders.There was a yoy decrease of approximately 83% in the total number of tendered vehicles in the railway market in the PRC, and the yoy decrease of approximately 30% in the total number of tendered vehicles in the urban rail market in the PRC. Huaqi’s revenue in 2021 decreased by approximately 15% yoy.

 

Due to covid, and U.S. and Indian local policies imposing restrictions on orders thus affecting Huaqi’s operating results with goodwill impaired— BII Railway Transportation Technology’s goodwill impairment for 2021 was approximately HKD64.7M, representing an increase of approximately 100% compared over 2020. BII RTT decided to adjust their forecast for Huaqi’s future cash flow and growth rate over a five year period to a more reasonable assumption—revenue is expected to decrease by 13%, while gross margins are expected to increase slightly. 2-3% is the new estimated growth rate.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notice for the chart above, for 2019, non-current liabilities are hkd 42.8M and by 2020, it is 4.3M, while current liabilities has not fluctuated much. My assumption is that some long term loans were either paid off by BII or it could have been HuaQi owing BII Transportation. However, non-current assets shrunk also (210M to 61M). I don’t think tangible assets such as PPE were removed, and I don’t think hardware depreciated that much faster. Possibly receivables were collected faster and under a year.

 

 

 

Huaqi’s development for Train Capacity Monitoring—

 

Due to the pandemic, it’s necessary to monitor the maximum capacity of each train to make sure the door would remain closed when the car was fully loaded— this was implemented using video projection, and AI equipment. In addition, to shorten the time for entering and leaving the station facial recognition was employed. These improvements reduce congestion during peak hours. Nanjing recently just released their first smart subway with driverless trains.

 

 

 

 

Technical Prowess from CRRC abroad and HuaQi’s network will bring more foreign tenders

 

China's high-speed rail has developed many new technologies to become the lowest cost, high quality and innovative producer, so when CRRC enters foreign markets— customers get high performance for a low to reasonable price. This is not only from economies of scale, but also from in-house technicians and engineers who have incredible experience, allowing CRRC to penetrate Boston, the Indian and African market, etc. In fact, BII’s connections with CRRC allowed for BII RTT’s first collaboration in India and Mexico. Projects were signed and negotiated by CRRC and transferred to BII RTT. India is currently BII RTT’s largest foreign market with direct cooperation with local vehicle manufacturers. While it generates revenue on par with Hong Kong, projects are still losing money due to underbidding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In recent years, BII RTT has exported the successful domestic subway model to other countries and has successively won bids for PPP projects such as Urumqi, Dalian, and Shaoxing subways. BII RTT is in 22 cities (13 countries) abroad. Most recently, there has been development in Monterrey, Mexico due to collaboration with CRRC.

 

 

 

Duopoly and partnership/rivalry with CRRC for High Speed Rail in China

 

BII RTT and CRRC’s TsingDao SiFang Institute are the main 2 duopolies that install PIS for China’s high-speed rail stations and trains— fitting it with panels, station monitors, and passenger information systems. Manufacturing and assembly are located in Suzhou Industrial Park for BII RTT, and Tsing Dao for CRRC.

 

Management claims that they have a 50/50 market share of high speed rail PIS. With HSR PIS making up 9-11% of total revenue for BII RTT.

 

 

Gross margins are higher and more lucrative for high speed rail than normal transit due to higher safety and compliance requirements (50-60% vs 25-30%). Supplying infrastructure, software, and components to urban railway is mostly a “lowest bid wins” process for urban rail, but for high-speed rail, with maximum speeds of 350 kph (217 mph)—the most important thing is stability through good engineering. There’s a barrier to entry due to a difficult compliance test which requires a 600,000 km empty vehicle test and other bureaucratic requirements to be a vendor to China’s Railway system— it isn’t easy to penetrate into the high-speed rail market.

 

By 2020, 75% of Chinese cities with a population of 500,000 or more had a high-speed rail link. By 2035, China hopes that cities with a population of 200,000 will have access to the metro and railway, and all cities with more than half a million people will have access to high speed rail.

 

 

 

BII RTT’s Civil Communication Transmission Rental Service

 

To make revenue more stable beyond PIS— BII RTT, through building the original 2G, and 4G transmission infrastructure to support networks and server rooms, charges the 3 big mobile networks (China Telecom, China Unicom, China Mobile) for renting infrastructure. Civil communications transmission services comprise of 12-20% of current revenues. This recurring segment has higher margins than BII RTT’s intelligent rail (PIS & AFC) business.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The revenue of civil communication transmission services increased from hkd114M in 2017, hkd129M in 2018, and by 2021, revenue was hkd233M. Despite the communication transmissions limited to growth within Beijing’s metro lines, there’s still a lot of growth within Beijing alone— by 2020, the operating mileage of Beijing's urban rail transit will increase to 1,000km, and by 2035, it will not be less than 2,500km. Growth in telecommunications rental has low impact on Capex, and does not require shareholder capital injection, so it is a safe business.

 

In 2019, BII RTT’s reach in Beijing consisted of 197 stations on 19 lines. As of the end of 2021, the civil communications service has covered 237 stations and 27 lines in Beijing for 100 MB 4G resources. BII RTT has self-built civil communications transmission systems for Beijing Subway Line 11’s western section, Line 17’s southern section, and Line 19’s Phase I, Capital Airport Express’ western extension.

 

 

5G transmission business model and partnership with China Tower

 

BII built China’s first 5G smart subway on the western section of Beijing’s Metro Line 11 (Winter Olympics branch line). 5G is mainly for civilian use, while the most valuable and profitable 5G would be for commercial use and enterprise.

 

In 2020, the State-owned Assets Supervision and Administration Commission clearly announced that 5G transmission infrastructure is to be centrally built and owned by China Tower (SEHK:788), and they can collect rent within their jurisdiction. BII RTT has recently reached an agreement with the 3 mobile operators to jointly promote and enhance 5G services in Beijing metro. Yet the ownership of 5G infrastructure in Beijing Metro remains an issue— BII RTT still needs to negotiate with China tower regarding cost and profit sharing. China Tower has been busy getting approval from national 5G ministries thereby delaying their response.

 

 

 

 

 

Important Partners, Subsidiaries and Shareholders

 

1.  Beijing Metro

 

A joint venture for Beijing Metro was established in 2016 by BII RTT with state owned Beijing Mass Transit Railway Operation Corp Ltd. to operate and manage subways, advertisement and property. This provides a 20 year operating right for the Beijing Subway Capital Express Line.

 

BII RTT realized an investment income of approximately HK 41.8 million in the first half of 2021, which was mainly due to the agreement between the BII RTT’s joint venture, Beijing Metro, and the transferor of the equity, Beijing DongZhiMen Airport Express Rail Co., Ltd.

 

Low passenger volume in 2021 in Beijing’s airport express has led to a cash flow drop. JVs have applied for subsidies from the landlord to ease the problem in Q1 of 2022. The long-term liabilities have increased due to a RMB 1B bank loan secured in 2021.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

By 2022, Passenger flow of the Capital Airport Line has rebounded, with the annual revenue and profit returning closer to normal figures. BII Railway Transportation Technology’s investment income in Beijing Metro has increased and began to develop and operate new lines inside and outside Beijing.

 

2.  Metro Technology

 

Metro Technology maintains AFC operation system integrations. Beijing Investment invested RMB 14.7M, holding 34.3% of the shares in 2016 as a joint venture partner, to secure maintenance contracts for control and network systems. This subsidiary’s profit declines progressively each year.

 

3.  Cornerstone Fund’s network helps with future acquisitions

 

Cornerstone Fund is a start-up investment company that has provides contracts and connections for BII RTT. A recent acquisition— cornerstone vision, which projects virtual aerial projection through the subway window (Dynamic Motor window), and 7.8% of Chi Lin YouDao was acquired mainly due to relationships forged by Cornerstone.

 

  

 

A brief update on BII RTT’s financials

 

BII RTT’s Revenue in 2018 was hkd 453 million, where smart transit (PIS & AFC) contributed to 70% of revenue at hkd 320 million. Total revenue in 2021 was hkd 1.75B, with a cash flow of 100-150M, which was less than 2020 which reached 250-300M.

 

1.2-1.4B of total revenue was generated from the smart transit segment (AFC & PIS). High-speed rail made up a tenth of revenue hkd180M. If the smart rail project contracts brings in 1.5 billion (1.74B total minus 200-300M for communications rental), if we deduct an additional 180M for high-speed rail, then smart transit for non-high speed urban subway transits is 1.33 billion. For PIS and AFC— a jump from 324M in 2018, to 1.3B in 2021 is a quadruple increase in revenue within 3 years. Compounded annual growth is over 50% a year. This was mainly due to the Huaqi acquisition, which expanded BII RTT’s scale and reach for PIS. In the future, a more realistic sales growth rate would be 10-30%.

 

 

 

Financials

 

 

 

BII RTT has abundant cash— by the end of June, the cash and cash equivalents on hand were hkd 1.08B.

 

 

 

For the fiscal year of 2021, the total assets of BII RTT was approximately hkd4B, with current assets making up 2.8B, and PPE only making up approximately hkd200M. The liability to asset ratio was about 37.2% and net quick was about 1.8-2x.

 

 

 

 

 

 

 

BII RTT has adequate working capital of approximately 1.3B, with manageable debt at hkd 300M. Previously the loan was at hkd 500M with 200M of long term debt repaid. Capital deployed would be around 1.3B or working capital with 200-300M of PPE, which should remain fixed or at a slow growth. Cashflow generated should increase as 

 

1.         High Speed Rail bids bring greater margins

 

2.         BII RTT consolidates its grip on PIS in other regions in China such as Guangzhou and other southern regions

 

3.         India continues to open up and BII RTT’s success allows them to expand to other cities

 

4.         CRRC and other international OEMs bring in more projects

 

 

 

Days Receivable Outstanding was 360-470 days from 2015-2018. After the Huaqi acquisition, from 2019-2022, we can see it ranges from 240-270 days. While receivables are collected faster, inventory outstanding was previously 55-85 days. After acquisition, inventory outstanding was 140-180 days, while for Beijing Century it’s around 170-195. While Beijing Century Real Technology (SZSE:300150) is listed and has the second largest market share, it’s not an apples to apples comparison due to their other business segments.

Days payable for BII RTT still remains similar and a bit unpredictable—suppliers may be dragged along and paid in 330-380 days, while in good years, BII Railway may pay in 150-190 days. Despite inventory taking longer to be converted to sales, the cash conversion cycle has been reduced by acquiring Huaqi, due to the better practice of collecting receivables sooner. Cash conversion cycle is around 150 days for BII RTT and 380-400 days for Beijing Century. BII RTT is a country-mile better than its second competitor. 

 

BII RTT’s R&D has continued to increase, accounting for 15.2% of revenue. It is mainly invested in the development of software, systems and product standardization for rail transit, as well as upgrading an iteration of mature products such as an integrated utility tunnel, smart construction sites, smart parks, etc.

 

 

 

 

 

Risks

 

 

 

Procurement of microchips

Due to a slow down in logistics, management has indicated that they have been hit by rising costs in the microchip market. Management was able to book a lot of inventory in 2021 since they were prepared in 2019, but 2022 has presented a lot of difficulties. If BII can’t procure chips domestically in the future, it will have to continue to buy it from foreign countries at possibly unreasonable prices.

 

Poor sentiment on China and how it affects bids and tenders abroad

 

The trade war and the unpopular sentiment of China is an additional factor— some projects abroad that were meant to be started such as the NY subway renovation was dragged or may even be terminated.

 

Fair price for privatization

 

Would the Chinese government offer a fair value offered to shareholders should they decide to privatize such valuable assets? There was a previous attempt by the parent company, BII, to privatize the company, which failed. In May 2021, BII RTT decided not to privatize.

 

The current market capitalization (780M) is less than the cash and cash equivalents (890M) held by the BII RTT. BII RTT trading at 3 to 4x is a steal— analysts stopped coverage in 2018, just when the company reached an inflection point.

 

 

 

 

 

Catalyst

 

-     With the support of the parent company, and the Huaqi acquisition BII RTT should have the opportunity to become a leading passenger information systems provider (PIS) for urban rail transit and High Speed Rail in China.

 

-    The expansion of Beijing railway will only help the communications systems segment.

 

-    Resumption of transportation and railway passenger flow will open up tendering and bids after Covid. Urban Rail Transit Investment growth remains strong.

 

-    Foreign contracts will start to make up a bigger portion of revenue.