The ETC market is booming and the industry is bright

Policies vigorously promote ETC construction, driving market explosion

What is ETC?

ETC (Electronic Toll Collection System) is an electronic non-stop toll collection system.

Different from the traditional MTC (Manual Toll Collection system) highway semi-automatic lane toll collection system, ETC can realize vehicle identification and information reading and writing when the vehicle passes through the toll node through dedicated short-range communication technology, and automatically deduct the corresponding fees from the bound financial account.

ETC technology has greatly improved the traffic capacity of motor vehicles per unit time, reduced repetitive manual labor, and reduced operating costs.

ETC mainly consists of three parts: on-board electronic tag (OBU), road side unit (RSU) and dedicated short-range communication technology (DSRC).

When a vehicle approaches a toll station, the on-board electronic tag communicates with the roadside unit through professional short-range communication, and uses a computer network to conduct background processing with the bank, so that the vehicle can pay the fee without stopping.

The vehicle-mounted electronic tag includes two components: the vehicle-mounted electronic tag and the IC card. The vehicle-mounted electronic tag is installed on the inside of the front windshield of the vehicle, mainly storing the information of the identified vehicle and serving as a communication repeater that interacts with the antenna of the roadside unit.

The data exchange between IC card and roadside unit can only be completed through the vehicle-mounted electronic tag; the roadside unit consists of two components: lane antenna and lane antenna controller. The former is mainly responsible for sending/receiving, modulating/demodulating, encoding/decoding, encrypting/decrypting signals and data; the latter controls the transmission and reception of data and processes the information sent and received to the upper computer.

The government promotes the rapid growth of ETC penetration

ETC has greatly shortened the toll collection time and improved the traffic efficiency, so it has been vigorously promoted in China in recent years. According to the "13th Five-Year Plan" for the development of modern comprehensive transportation system released in February 2017, the utilization rate of ETC for highway buses will reach 50% in 2020.

According to the "Implementation Plan for Accelerating the Promotion of Electronic Non-Stop Fast Toll Collection Application Services on Expressways" issued by the Ministry of Transport and the National Development and Reform Commission in May 2019, it is required that the number of ETC users nationwide exceed 180 million by the end of 2019, and the proportion of vehicles using ETC at the entrances of expressways in various provinces (autonomous regions and municipalities) should reach more than 90%. Driven by the policy and the advancement of road standardization, the ETC market has exploded.

In addition, the industrial upgrading of mobile payment will further drive the consumption demand of ETC. As the product price drops year by year, ETC is gradually expanding from toll payment to automobile financial consumption, smart parking and other directions. With the development of ETC application, the payment function of ETC will occupy a larger market in personal consumption and automobile consumption in the future.

At the same time, financial institutions purchased large quantities of equipment such as vehicle electronic tags for the purpose of attracting deposits, which led to a huge explosion in the scale of the ETC industry. For financial institutions, by binding ETC, they can take the opportunity to promote bank products and services such as bank cards and credit cards. Therefore, after the introduction of the policy to promote ETC, major financial institutions have stepped up their efforts to actively promote ETC applications and compete for ETC customers.

ETC construction is advancing rapidly, and the future growth is considerable

The current penetration rate of ETC is only about 30%, and there will be great market demand in the next one to two years. As of the end of 2018, there were 77 million ETC users and 240 million cars in total, with an ETC penetration rate of only about 30%.

According to the "Implementation Plan for Accelerating the Promotion of Electronic Non-Stop Quick Toll Collection Application Services on Expressways" issued by the National Development and Reform Commission and the Ministry of Transport in June this year, the number of ETC users nationwide will exceed 180 million by the end of December this year, which means that in the next six months, nearly 100 million sets of ETC will need to be installed.

The existing lanes are still mainly semi-automatic toll lanes, and there is still a lot of room for the ETC market.

As of the end of June 2019, among the 9,464 toll stations in 29 provinces (excluding Hainan and Tibet) connected to the network, there were 20,800 ETC lanes, 62,900 manual toll lanes (MTC lanes), and 2,000 mixed lanes, of which ETC lanes accounted for less than 25% of all lanes. It is roughly estimated that about 60,000 lanes will need to be converted into ETC lanes in the future.

In order to achieve the goal of eliminating provincial border toll stations on highways and charging according to vehicle type, the highway ETC system will usher in large-scale procurement and construction in the second half of the year.

As of August 21, 2019, the number of ETC users nationwide has reached 110 million, completing 58% of the total issuance task. A total of 17,000 ETC gantry systems have been started nationwide, accounting for 667% of the total plan; of which 4,000 have been completed, accounting for 16% of the total plan.

The construction and renovation of ETC lanes has started for about 13,000 lanes nationwide, accounting for 25% of the total plan; of which 1,000 lanes have been completed, accounting for 3% of the total plan. Therefore, it is expected that the sales revenue of roadside antennas and controllers in the ETC market will further increase in the second half of the year.

▌The industry chain is mature, and the ETC market size will increase rapidly in the next two years

The ETC market industry chain is relatively mature and stable

ETC's upstream industrial chain is mature and the supply is stable.

The upstream industries of ETC's industrial chain include integrated circuits, electronic components, batteries, plastics, hardware die-castings, etc.

ETC's downstream industries include road operators, traffic management departments, system integrators, financial institutions, automobile manufacturers and property operators.

The upstream industry is basically a fully competitive industry. There are many suppliers that can meet the demand for raw materials, and the supply of raw materials is relatively stable.

At present, the ETC market has formed a mature supply chain. The main ETC equipment manufacturers are Jinyi Technology, Wanji Technology and Juli Technology (now acquired by Huaming Intelligent).

The main upstream battery manufacturers of ETC are Yiwei Lithium Energy and Penghui Energy.

The main upstream chip manufacturers of ETC are Broadcom Integrated, Scarlett Johansson, Fudan Microelectronics, Unigroup Guoxin Microelectronics, and Huada Semiconductor.

Jinyi Technology, Wanji Technology, and Juli Technology occupy the main ETC market

At present, the competition in my country's ETC machine market is mainly between domestic manufacturers. my country's ETC market implements strict qualification management, and ETC products must pass the inspection of the Ministry of Transport's Traffic Engineering Supervision and Inspection Center before they can be circulated in the market.

As of the end of March 2019, there were 21 domestic companies whose on-board electronic tags (OBU) products had passed the inspection and were within the validity period of the inspection, and there were 16 companies whose roadside unit (RSU) products had passed the inspection and were within the validity period of the inspection.

In 2018, Jinyi Technology, Wanji Technology and Juli Technology accounted for 81% of the ETC market share. In the ETC market, vehicle-mounted electronic tags are the main body of the ETC market.

According to the Ministry of Transport's plan, the number of vehicles equipped with electronic tags will reach 180 million by the end of 2019, and the ETC market size will explode in 2019.

The main competitors are Jinyi Technology, Juli Technology, Wanji Technology, etc. Last year, Jinyi Technology, Wanji Technology and Juli Technology sold 5.11 million, 2.92 million and 5.02 million sets of vehicle electronic tags respectively.

The three manufacturers had a combined market share of about 81% in 2018, with Jinyi Technology accounting for 35%-40%. Roadside units account for a relatively small proportion of the ETC market. Taking Jinyi Technology as an example, roadside units account for less than 20% of its operating income.

ETC sales revenue will see a massive increase in 2019. Under the influence of ETC business, Jinyi Technology's operating income in the first half of 2019 increased by 46.23% over the same period last year.

As of July 29, 2019, the total number of ETC users nationwide reached 97.8 million, completing 51% of the total task.

According to the remaining issuance tasks, an average of about 600,000 will be issued every day in the remaining 155 days of 2019. Although the supply shortage in the upstream of the ETC industry chain will still exist in the short term, it can still be seen that the orders in the ETC market will continue to grow significantly in the second half of the year.

Due to the rush to install, the sales volume of vehicle-mounted electronic tags increased significantly in the first half of 2019. In the first half of 2019, Wanji Technology and Juli Technology sold 241 and 274 vehicle-mounted electronic tags respectively, among which Wanji Technology's sales volume in the first half of 2019 reached 83% of the company's full-year sales volume last year.

Affected by the decrease in the unit price of on-board electronic tags, the overall gross profit margin of the ETC industry has declined. In recent years, due to market competition and other factors, the unit price of ETC has been on a downward trend.

The overall gross profit margin of the ETC industry is relatively high, but it has also declined due to price reduction. In the industry, Jinyi Technology has a strong cost advantage. In 2019, the industry's gross profit margin generally showed a downward trend, but Jinyi Technology's gross profit margin still increased by 50% compared with the same period in the first half of the year.

The ETC market size is expected to be about 9.73 billion yuan in 2019

The current average price of vehicle-mounted electronic tags is about 75 yuan per set. The current average price of ETC roadside units is 25,000 yuan per set.

Roadside unit products are relatively complex. Some models of a single roadside unit product use more than 130 types of IC chips. Most projects are also conducted through bidding, resulting in large price fluctuations.

The demand for on-board electronic tags surged in 2019 and 2020, and the demand for ETC remained stable after the ETC boom. According to the policy that newly purchased vehicles must be equipped with on-board electronic tags, the future demand for ETC on-board electronic tags can be divided into two parts: the expected annual increase in vehicles and the expected increase in ETC users for old vehicles.

Affected by factors such as aging and damage of electronic components in vehicle-mounted electronic tags, self-consumption of battery life, and high-temperature loss of batteries, the theoretical life of OBU is 5-8 years. In practice, the service life of vehicle-mounted electronic tags is currently about 3-5 years.

According to estimates, the shipment volume of ETC vehicle-mounted electronic tags in 2019 and 2020 will be 100 million sets and 80 million sets respectively, a significant increase over previous years. After 2021, as the vehicle-mounted electronic tag replacement market opens up, there will still be a stable demand for vehicle-mounted electronic tags.

The supply and demand will be tight in 2019, and the price is expected to rise. As the rush to install ETC drives up demand and the market supply is tight, it is expected that the price of ETC in the second half of 2019 will rise compared with the first half of 2019, to about 84 yuan per set.

The supply of ETC market will gradually stabilize in 2020, and the price of ETC in 2020 is expected to drop slightly by about 78 yuan/set compared with 2019. The price of on-board electronic tags will be further reduced after 2021, and the ETC prices are expected to be 73 yuan/set, 70 yuan/set, and 70 yuan/set in 2021-2023 respectively.

Therefore, it is estimated that the market space for vehicle-mounted electronic tags will be 8.73 billion yuan and 5.91 billion yuan in 2019 and 2020 respectively. After the ETC rush installation period, the market space for vehicle-mounted electronic tags is expected to still be more than 2 billion yuan per year.

It is estimated that the market size of roadside units will reach 1 billion yuan and 1.5 billion yuan in 2019 and 2020 respectively.

The Implementation Plan for Accelerating the Promotion of Electronic Non-Stop Quick Toll Collection Application Services on Expressways requires full coverage of ETC services in parking scenarios at large transportation hubs such as airports and docks by 2020.

In this regard, we assume that the demand for roadside units in 2019 and 2020 will be 40,000 and 60,000 sets respectively. The estimated market size of roadside units in 2019 and 2020 is 1 billion yuan and 1.5 billion yuan respectively.

▌ETC drives the development of upstream industries, and the battery market has huge potential

Chips and electronic components constitute the main raw material costs

The equipment configuration schemes of on-board electronic tags (OBU) products are similar, but the product structure of roadside units is more complex, and the configurations of various models vary greatly.

According to the prospectus of Jinyi Technology, a single on-board electronic tag (OBU) product of ETC equipment uses 4 dedicated IC chips (including one card reader chip, one MCU chip, one ESAM chip, and one radio frequency chip, and other general chips are not included in the statistics), battery equipment (Jinyi Technology uses solar cells and auxiliary backup batteries for power supply; Wanji Technology uses a dual power supply mode of lithium batteries and solar cells;

Juli Technology currently uses primary batteries and energy storage devices to form a battery pack to assist solar power replenishment power supply solution), 3 PCB boards (1 main board and 2 back boards), 2/(1 set) shells. The raw materials used in roadside unit products are relatively complex, and some models of single roadside unit products use as many as 130 kinds of ICs.

IC and electronic components constitute the main costs. The main raw materials of ETC products can be divided into IC, battery, electronic components and structural packaging (electronic components mainly include PCB boards and connectors, and structural packaging mainly includes hardware components and packaging).

According to the "Jinyi Technology Prospectus" and the "Hua Ming Intelligent: Issuance of Shares, Convertible Bonds and Payment of Cash to Purchase Assets and Raise Supporting Funds and Related Transactions Report", ICs account for the largest proportion of costs, approximately 36-37% of the raw material costs, followed by electronic components accounting for 25-36% (in Juli Technology, it includes electronic components and display devices), structural parts accounting for 11%-13% and batteries 7-15%.

In terms of price, the electronic equipment manufacturing industry such as electronic components, integrated circuits and batteries has a large number of manufacturers and fierce competition, with overall supply exceeding demand, and the prices of most products are showing a steady downward trend.

Due to the strong demand for some semiconductors and batteries in industries such as new energy vehicles, artificial intelligence and mobile phones, the supply and price of corresponding semiconductors and batteries may fluctuate, but the overall impact on costs is not significant. Raw materials such as plastics and hardware die-castings will be affected by fluctuations in raw material prices, and the gross profit margin level of industry products will fluctuate to a certain extent. Raw materials account for a small proportion of equipment costs.

Battery and chip suppliers account for the highest proportion of purchases. From the perspective of the proportion of purchases by major ETC companies, battery and chip suppliers account for the highest proportion of purchases. Due to the high demand and unit price of batteries, the procurement suppliers are relatively concentrated, and the purchase amount of major battery suppliers accounts for a higher proportion than other suppliers.

Among them, the amount of ETC batteries purchased by Juli Technology from Yiwei Lithium Energy in the first half of 2019 accounted for 14%, and the amount of ETC batteries purchased by Wanjie Technology from Yiwei Lithium Energy in 2016 accounted for 16%.

It is estimated that the market space for ETC raw materials will reach 5.17 billion yuan in 2019

According to our calculations, the market size of in-vehicle electronic tags in 2018-2020 is RMB 1.44 billion, RMB 9.73 billion, and RMB 7.41 billion respectively. According to the gross profit margins of Jinyi Technology, Wanjie Technology, and Juli Technology in 2018 were 38%, 34%, and 36%, respectively, the average is 36%.

According to the 83.2% cost ratio of raw materials for on-board electronic tags of Juli Technology in 2018, we take the raw materials cost ratio as 83%, and obtain the ETC material market space of 770 million yuan, 5.17 billion yuan and 3.94 billion yuan in 2018-2020 respectively.

According to the cost breakdown of Jinyi Technology in 2016 and Juli Technology in 2018, chips accounted for 36-37% of the raw material cost (with an average of 36.5%), followed by electronic components at 25-36% (Juli Technology includes electronic components and display devices, with an average of 30.5%), structural parts at 11%-13% (with an average of 12%) and batteries at 7-15% (with an average of 11%).

The top two ETC chip suppliers are Broadcom Integrated and Skerelli

The top two chip suppliers in the upstream of the industry chain are Broadcom Integrated and Skerrilli. Broadcom Integrated is an integrated circuit design company that provides wireless communication RF chips and solutions. In terms of ETC business,

The company has successfully developed three types of integrated radio frequency chips (BK5822, BK5823), contactless card reader chips (BK1308), and security module ESAM chips (BK5121). In the currently popular dual-chip OBU, each device uses one of the three types of chips.

At present, the "high-speed ETC system" developed by Broadcom chips has covered 29 provinces, achieved national networking, and covered 21 million users. It accounts for about 70% of the domestic ETC market, and its customers include Jinyi Technology, Wanjie Technology, Chenggu Technology, and Etes.

Skerelli is committed to providing terminal manufacturers with highly integrated, high-performance, and low-power RF chips and solutions.

At present, Skyray has successfully developed three chips for ETC equipment: ET6601, ET6602 and SKY6605. Skyray's customers include major Juli Technology and Wanjie Technology.

The main supplier of RF chips in the upstream chip supply chain is Broadcom Integrated; the main suppliers of main chips are Scarlett Johansson, Fudan Microelectronics and Unigroup Guoxin Microelectronics; the main supplier of MCU chips is HuaDa Semiconductor.

An OBU product generally uses only four dedicated IC chips (one card reader chip, one MCU chip, one ESAM chip, and one RF chip, and other general-purpose chips are not included in the statistics). Generally speaking, the RF chip has the highest value, followed by the MCU chip, while the card reader chip and ESAM chip have relatively low value.

The scale of ETC battery market increased dramatically in 2019, and EVE Energy was the main supplier

The main battery suppliers involved in the upstream of the industry chain are EVE Energy and Penghui Energy. In the past few years, EVE Energy has been the main supplier of ETC batteries for Wanjie Technology and Juli Technology, and currently accounts for about 70% of the ETC battery market share.

In the first half of 2019, EVE Energy's ETC battery purchases accounted for 14% of Juli Technology's total purchases, with a purchase amount of approximately RMB 26 million. According to Penghui Energy's 2019 semi-annual board of directors' business review, Penghui Energy developed Jinyi Technology and Wanji Technology, the main domestic ETC equipment service providers in the field of ETC equipment in the first half of the year, laying the foundation for the rapid growth of ETC battery business in the second half of the year.

In recent years, ETC has been vigorously promoted due to its convenience and efficiency. Driven by policies, the upgrading of the mobile payment industry, and the deposit collection of financial institutions, the ETC industry will usher in its development climax in 2019 and 2020.

According to the goal of ETC covering 180 million users in 2019, it is expected that the number of new users will reach 100 million in 2019, and the ETC market size is expected to reach 9.73 billion yuan in 2019. At the same time, the rapid development of the ETC industry has promoted the rapid development of its upstream and downstream industries. It is expected that the ETC raw material market space will reach 5.17 billion yuan in 2019. Among them, the ETC battery market size is expected to reach 1.14 billion yuan in 2019.