In recent years, the market for electronic toll collection (ETC) has seen a significant transformation, particularly in Jiangsu Province, where Jiangsu Tongxingbao Intelligent Transportation Technology Co., Ltd(referred to as "Tongxingbao") has emerged as a dominant playerDespite the surge in ETC installations peaking a few years ago, the question remains: given that over 80% of the company’s assets are in cash, what is the necessity for its public listing?

This inquiry becomes particularly pertinent as the company prepares to submit its registration application for an IPO on the Growth Enterprise Market (GEM). The answer to this rests within the company's rapid valuation growth since its establishment just five years agoOriginally valued at only around 36 million yuan when it acquired its core assets, the company’s valuation now approaches a staggering 2 billion yuan as of the latest prospectus submissions.

Tongxingbao's primary business revolves around ETC toll collection, and it is the only entity authorized to issue ETC tags in Jiangsu

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This monopoly has allowed the company to corner a substantial share of the local market, but with similar entities present in each province—primarily state-owned enterprises—the prospects for expansion into other provinces appear bleak.

A spike in demand for ETC installations occurred in 2019; however, after this peak, a profound decline in performance emerged as the market stabilizedThis has led many ETC-related companies, including Tongxingbao, to experience notable drops in earningsCan Tongxingbao emerge from this industry predicament primarily reliant on connections and existing cash reserves? With an astounding 3.5 billion yuan in cash assets within a total of around 4.3 billion yuan, one wonders about the real intentions behind its IPO.

The astronomical increase in Tongxingbao's value, growing over 50 times since its inception, raises eyebrows

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The firm claims to provide intelligent transportation solutions, yet its chief operations remain tied to ETC sales and toll collection, complemented minimally by vehicle management systemsTongxingbao’s largest shareholder, Jiangsu Communications Holding Co., Ltd(JCHC), controls a significant stake, which further affirms the intertwining of government interests with corporate strategy.

In August 2016, the decision to independently operate the ETC business was initiated by JCHC, which subsequently led to the formation of TongxingbaoFollowing the completion of the business transfer agreement in December 2016, Tongxingbao acquired its core business from Jiangsu Highway Network Operation Management Co., Ltd(JHNM) for a mere 32.56 million yuan.

The growth trajectory for Tongxingbao has been steep

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From approximately 50 million yuan in 2017, profits surged to over 400 million yuan by 2019 before experiencing a decline back to nearly half in the following yearsDespite this fluctuation, the company achieved a net profit of 188 million yuan in 2021. However, the overarching question remains whether it can sustain such net profits in the years to come amidst a competitive market.

The rapid ascension of Tongxingbao's profits mirrors a broader trend in the ETC sector, where major players like Jinfeng Technology and Wanjie Technology witnessed staggering revenue drops following the peak year of 2019. The latter companies faced severe declines in revenue, attributed to a saturated market and reduced ETC installations as demand leveled offTongxingbao, while in a somewhat better position, is still subject to these industry-wide challenges.

The ETC boom originated in 2019 when China's Ministry of Transport initiated policies to broaden ETC adoption across the nation, thus enhancing profitability for companies like Tongxingbao

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However, with ETC users surpassing 200 million and a general automobile ownership exceeding 300 million by 2021, the once lucrative market is dwindlingConsequently, this contraction translates to a diminishing number of potential new customers for Tongxingbao.

A critical aspect of Tongxingbao's operations is its substantial cash reservesOver 81% of the company’s total assets as of the end of 2021 comprised cash and cash equivalentsThis liquidity raises fundamental questions about the impetus for its upcoming public fundraising effortsWith annual interests nearing 100 million yuan from these cash holdings alone, one must wonder whether such resources ought to be channeled into enhancing operations instead of pursuing external funding.

Traditionally, companies opt for an IPO to raise capital for expansion or enhancement—areas in which Tongxingbao currently does not appear to be lacking

By the end of 2021, its total assets stood at 4.27 billion yuanDuring this time, the cash inflows were substantial, further solidified by zero debt obligations and a lack of interest-bearing liabilitiesThese elements indicate a highly profitable entity that, rather than seeking external funds, might be better positioned to reinvest internally.

Currently, Tongxingbao intends to utilize its IPO fundraising for various projects, amounting to just over 500 million yuanNotably, the projected capital raise includes 230 million yuan earmarked for technology and infrastructure upgrades in the ETC space, including a smart traffic cloud platform and static traffic systemsYet half of such investments could arguably be addressed through existing cash reserves.

In summary, while the allure of public listing beckons for many companies, the scenario faced by Tongxingbao raises skepticism