|Shares Out. (in M):||2,097||P/E||4.16||0|
|Market Cap (in $M):||776||P/FCF||6.2||0|
|Net Debt (in $M):||407||EBIT||233||0|
|TEV (in $M):||401||TEV/EBIT||1.39||0|
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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:
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.