New stock outlook | Wentai: Practitioner of smart cities, accounts receivable is high, and the debt-to-equity ratio is "off the charts"

With the application of new generation information technologies such as big data, artificial intelligence, Internet of Things, and cloud computing becoming increasingly widespread in recent years, the pace of China's smart city construction is accelerating. According to a Frost & Sullivan report, in terms of revenue, the market size of the Chinese smart city industry is expected to increase from 10.4 trillion yuan in 2019 to approximately 30.2 trillion yuan in 2023, with a compound annual growth rate of 30.5%. Benefiting from rapid demand growth and utilizing artificial intelligence and big data technologies to support smart city construction, Qingdao Wanda Tong Technology Co., Ltd. ("Wanda Tong"), has achieved rapid business growth and embarked on the journey to list on the Hong Kong Stock Exchange. According to HKEX disclosure on August 13, Wanda Tong has submitted its listing application to the HKEX main board, with Shenwan Hongyuan and Huabao Capital acting as its joint sponsors. Despite increasing revenue, profitability is challenging, and the company's leverage ratio is reaching alarming levels. The prospectus shows that Wanda Tong was founded in Qingdao, Shandong Province in 2001. The company specializes in developing artificial intelligence and big data technologies for smart city construction. In December 2011, Wanda Tong transformed into a limited liability company and was listed on the New Third Board in January 2014. According to the Frost & Sullivan report, among innovative private enterprises in the comprehensive smart city solutions industry in Shandong Province, the company ranks second in 2023 in terms of revenue. During the performance period (fiscal years 2021, 2022, 2023, and the first three months of fiscal year 2024), Wanda Tong generated revenue mainly from four business lines: information system integration solution services; property services; community life services; and others. Among these, information system integration solution services are the largest business line for Wanda Tong, accounting for 48% of revenue in 2023; meanwhile, property services were the second-largest business line, representing 40.4% of revenue in the same year; community life services were the company's third-largest business line, accounting for 8.4% of revenue in 2023. According to the prospectus, Wanda Tong's information system integration solution services are primarily used in smart city construction. The company leverages technologies such as the Internet of Things, artificial intelligence, big data, cloud computing, and geographic information systems to connect hardware devices with software systems (including proprietary software), combining them into an efficient integrated hub. This enables the company to provide end-to-end solutions for smart city construction, meeting the digital transformation needs of various urban scenarios. The company's services allow for intelligent deployment and management in different urban scenarios, including smart communities, smart governance, smart parks, and other areas of smart city development. In terms of property services, Wanda Tong integrates digital and intelligent technologies to achieve efficient operations, providing convenience to owners and users through intelligent inspections and data analysis. The services cover systematic property management and diverse value-added services, aiming to enhance property value through efficient operations and scientific management to promote a "one-quarter-hour convenient life circle." The types of properties managed by the company include residential properties, commercial properties, government properties and public facilities, hospitals, campuses, and industrial parks. Regarding community life services, as of the latest practicable date (August 7, 2024), Wanda Tong Technology operates 14 offline stores in various communities, selling necessities and fresh goods to the surrounding areas, and offering pre-sale self-pickup services. In terms of online services, the company operates through a WeChat mini-program called "City Guide," which allows users to place orders online and choose delivery services. The company's catering services primarily include providing restaurant contracting services to government departments, enterprises, educational institutions, and large communities and delivering fresh goods to local restaurants. It is worth noting that as the demand for smart city construction grows, Wanda Tong's business scale has shown stable growth, but profits have fluctuated significantly. In 2021, 2022, 2023, and as of March 31, 2024, the company's revenues were approximately 647 million yuan, 980 million yuan, 1.115 billion yuan, and 186 million yuan, respectively. During the same period, the annual net profits were 53.238 million yuan, 81.758 million yuan, 65.576 million yuan, and 7.74 million yuan, respectively. The net profit in 2023 decreased by 19.8% year-on-year, while the net profit in the first quarter of 2024 decreased by 10.5% year-on-year. From a financial perspective, Wanda Tong's profit growth has shown signs of weakness, reflecting the operational risks faced by the company. During the performance period, the trade receivables and promissory notes, other receivables, and anticipated credit losses on contract assets of Wanda Tong were approximately 7.694 million yuan, 17.899 million yuan, 29.727 million yuan, and 4.746 million yuan. In the prospectus, Wanda Tong pointed out that the company may face credit risks due to business arrangements with customers. If customers severely delay payments or owe debts, or if the company fails to bill or recover contract assets, its financial condition and operating performance may be significantly adversely affected. Contract assets are recognized by Wanda Tong when the revenue from a contract with unconditional rights to consideration is recognized. When the rights to consideration become unconditional, the contract assets are reclassified as receivables. During the performance period, the contract assets of the company were approximately 1.27 billion yuan, 4.98 billion yuan, 8.2 billion yuan, and 8.05 billion yuan; trade receivables and promissory notes were approximately 1.95 billion yuan, 2.92 billion yuan, 4.43 billion yuan, and 4.8 billion yuan; and the average turnover days of trade receivables and promissory notes were approximately 110 days, 109 days, 145 days, and 235 days, respectively. It is noted that the high amount of trade receivables and promissory notes, combined with a longer turnover period, have had a negative impact on the company's operating cash flow. In 2022, 2023, and the first quarter of 2024, the cash flow used in operating activities was approximately 267 million yuan, 203 million yuan, and 90 million yuan respectively. Due to tight operating cash flow, Wanda Tong needs to rely more on financing activities to meet its operational needs. In 2022 and 2023, the net cash flows from financing activities were approximately 2.39 billion yuan and 3.25 billion yuan, respectively, leading to a rapid increase in the company's leverage ratio. The prospectus shows that Wanda Tong's leverage ratio increased from 29.5% at the end of 2021 to 124.1%, further increasing to 124.3% by March 31, 2024.The smart city industry is expected to grow rapidly in scale. The high asset-liability ratio of Wanda Communications indicates the need to optimize financing channels. The company disclosed in its prospectus that the main purposes of financing for its Hong Kong IPO include: enhancing the company's smart city solution capabilities; upgrading the company's products to provide comprehensive solution services to customers while upgrading technology; expanding business through strategic alliances, investments, and acquisitions; expanding online and offline new retail service networks, as well as optimizing supply chain management; and repaying some of the loans, etc. According to a report by Frost & Sullivan, the big data and artificial intelligence technology industry in China has vast market space for practitioners to explore. The revenue of the big data technology industry in China is expected to increase from 539.7 billion yuan in 2019 to 1.903 trillion yuan in 2023, with a compound annual growth rate of 37%. The market is expected to reach 6.7241 trillion yuan by 2028, with a compound annual growth rate of 28.9% compared to the level in 2024. The revenue of the artificial intelligence technology industry in China is projected to increase from 263.2 billion yuan in 2019 to 578.4 billion yuan in 2023, with a compound annual growth rate of 21.8%. By revenue, the artificial intelligence technology market is expected to grow at a compound annual growth rate of 18% from 2024 to 2028, reaching 1.3041 trillion yuan by 2028. Frost & Sullivan points out that the big data and artificial intelligence technology industries are growing in tandem, highlighting the synergistic relationship between the two: big data analysis provides the foundation for artificial intelligence algorithms, while artificial intelligence enhances the ability to extract insights from massive data sets. This expansion is driven by favorable government policies, increased investment in technology infrastructure, and the recognition of data and artificial intelligence as key drivers of economic growth. As the two industries continue to evolve, they are expected to play a core role in the development of smart cities, promoting digital transformation, and deepening China's technology landscape. In terms of the development prospects of the smart city industry, the market size of China's smart city industry is expected to increase from 10.4 trillion yuan in 2019 to about 30.2 trillion yuan in 2023, with a compound annual growth rate of 30.5% according to revenue. Looking ahead, with further upgrades and applications of emerging technologies and the support policies for smart city construction, it is expected that the market size of China's smart city industry based on revenue will continue to expand, reaching approximately 77.6 trillion yuan by 2028. Compared to 2024, the compound annual growth rate is 20.5%. Driven by multiple favorable factors such as policy support and technological innovation, Wanda Communications Technology, as a company dedicated to smart city construction with artificial intelligence and big data technology, has shown good growth potential and market competitiveness. If the company successfully goes public on the Hong Kong Stock Exchange, it is expected to further expand its market share, strengthen technological research and development, and enhance its brand influence. However, while Wanda Communications has "long-term vision," it also faces "near-term concerns" such as weak bargaining power and high debt ratio. Investors need to closely monitor how the company improves its bargaining power, optimizes financial indicators, mitigates operational risks, and enhances its investment value in future operations.