Shengye Capital(06069.HK) Technology empowers deep industries, and supply chain finance has great potential

First time ratingbuy-A 6 Monthly target price:12.9 HKD

-Deeply bind to industry leaders and supply chain technology empowerment to solve industry pain points.Sheng Ye Capital focuses on the three major industries of infrastructure, energy, and pharmaceuticals, deeply binds leading state-owned enterprises in the industry, and has embedded 11 blue-chip core enterprise ecosystems. It has efficiently solved the supply chain financing needs of more than 8,200 upstream and downstream micro, small and medium-sized enterprises, and provided supply chain SaaS services to enterprises and financial institutions.

-Empowered by industrial technology, supply chain finance business developed rapidly.The company's main business includes: 1) factoring business, using its own capital to lend money; 2) platform matching business to promote financing needs to cooperative funders; 3) industrial technology business to provide supply chain technology solutions to core enterprises.
The company mainly revolves around: 1)In terms of customer acquisition, relying on core enterprises to rapidly expand a large number of customers; 2)Funding aspectsCurrently, it mainly lends from own funds. The next step is to increase the platform's loan aid business, and has cooperated with 62 funders to expand diversified funding channels; 3)Risk control aspectsThrough supply chain technology solutions such as smart construction sites and pharmaceutical SPD, it deeply binds core enterprises, enhances customer retention, and strengthens risk control capabilities, thereby promoting the company's rapid development. The cumulative asset management scale of the 2021 H1 platform reached 114.9 billion yuan (YoY +39%).

-Supply chain finance addresses the pain points of micro, small and medium-sized financing, and favorable policies are frequent.China's supply chain finance market has reached 23 trillion yuan, and the potential financing gap for China's micro, small and medium-sized enterprises is as high as trillion US dollars. Document No. 205, the Civil Code factoring contract chapter, and inclusive finance policies have been implemented one after another, favoring third-party factoring and micro, small and medium-sized financing.

-Promote platform-based transformation and open up medium- to long-term growth space.We believe that the company has the following three core competencies:1)Accelerate the transformation to platform loan aid, and the penetration rate is expected to increase.2)Technology is embedded in the ecosystem to improve customer retention and asset quality.The SaaS system deeply integrates core enterprises, efficiently increases customer stickiness and improves the risk control system. Currently, the customer retention rate/asset failure rate has reached 95%/0.37% respectively. 3)Years of cross-industry penetration have led to subsequent development.Industry experience and corresponding ecological construction are becoming more and more mature, which is conducive to in-depth exploration of medium- to long-term industrial value and increased market share. We are optimistic that the company will step up its platform-based transformation efforts. With a foundation of financial cooperation, deep industry experience and fintech empowerment, long-term favorable performance will be released-Investment advice:Buy-A investment rating. We are optimistic about the company's medium- to long-term market prospects. We expect the company's BVPS for 2021-2023 to be 3.4 yuan/3.8 yuan/4.3 yuan respectively, with a target price of HK$12.9 for 6 months, corresponding to 3.2 times 2021 P/B.

Promote the development of supply chain finance business with technology as support

-Main business “Factoring”+Platform matching” business. By incorporating 11 large-scale blue-chip core enterprise ecosystems, the company has reached more than 1.5 million chain suppliers, and has now served more than 8,200 micro, small and medium-sized enterprises. The company applies underlying technologies such as SaaS and the Internet of Things to the supply chain ecosystem. It mainly provides customers with commercial factoring and platform loan assistance services, and earns interest and expenses as the main method of profit.

Supply chain financial technology

-“Industrial technology+“Digital finance” empowers the supply chain ecosystem.
1)Industrial technology. The company provides a full set of software, hardware and operation and maintenance services, implants core enterprises in the focused industry, and realizes the deep integration of SaaS and IoT systems with the industrial ecosystem, thereby facilitating data integration, intelligent management, etc.
Case: Smart construction site. The company provides integrated smart construction site solutions, combining electronic weighbridge, vehicle identification, project management, etc., to provide efficient supply chain informatization services for core enterprises in the infrastructure industry, while also providing credit reference for supply chain financing. In addition, the company also recently won a bid to provide smart site solutions to one of China's largest construction groups.
Case: Pharmaceutical SPD targets the pharmaceutical industry. The company cooperates with large pharmaceutical distribution companies for a long time to assist hospitals to build SPD supply chain management platforms to achieve fine management of pharmaceuticals and consumables, and efficient acquisition of order, delivery and storage data to create an intelligent ecosystem for pharmaceutical supply chain financing. Currently, the company has signed a cooperation agreement with one of the largest pharmaceutical distribution groups in China to provide SPD services to the hospitals it covers.

2)Supply chain digital finance. The company uses digital technology to provide full online and automated supply chain financial services, mainly including factoring, platform inclusion matching, and asset securitization technology support services. Through the digital finance sector of the supply chain, the company can obtain stable cash flow, providing a solid foundation for developing the industrial technology sector and enhancing digital technology capabilities. At the same time, digital finance and industrial technology empower each other, achieve integration of industry and finance, and increase customer stickiness. Furthermore, driven by digital technology, the company can provide flexible and fast supply chain financing solutions to micro, small and medium-sized enterprises through supply chain digital finance services, implement inclusive finance, and help the real economy develop. At present, through self-research and strategic cooperation, the company's platform technology capabilities have led the industry. Specifically, through self-research and strategic cooperation, the company's platform technology capabilities have led the industry, including:

Artificial intelligence: Based on natural language processing (NLP) +optical character recognition (OCR) +Internet of Things+AI to achieve intelligent analysis, monitoring and credit transfer;

Blockchain: Ensuring end-to-end data security with technical features such as traceability and immutability;

Cloud: Self-developed Shengyitong Cloud Platform combines CFCA electronic signatures and face recognition technologies to achieve full online operations and provide flexible and timely supply chain finance and SaaS services;

Big data analysis: Accumulated data from about 1.5 million suppliers, connected to the central bank's credit reporting system, Zhongdeng network, industry databases and public opinion banks, and multi-dimensional batch data mining to achieve intelligent pricing;

Internet of Things: Industrial digitalization embeds to improve operational efficiency.

Case: Smart procurement SaaS platform data connection to promote the efficiency of financing and procurement processes. The company reached a digital supply chain cooperation with large construction central enterprises to break traditional information barriers through data connection on smart procurement SaaS platforms, saving suppliers 90% + of loan application time, and increasing loan amounts without confirmation from core companies.

Strengthening the digital finance sector “Customers+funds+“Risk control”, the momentum for scale growth is clear

-Customer acquisition and retention: Relying on core enterprises to expand upstream and downstream enterprises “1+N” model: Relying on core enterprises to tap upstream and downstream financing needs. The company relies on blue-chip core enterprises (“1”) within the focused industry to reach a large number of upstream and downstream suppliers (“N”), and seeks out enterprises with stable cooperation and capital requirements with core enterprises to facilitate business cooperation.Continuously increase customer stickiness and repurchase rateThe supply chain financial services provided by the company are gradually showing results, making it easier to get recognition from target customer groups, which is conducive to word-of-mouth building, contributing to market effects, and the spread of radiation upstream and downstream to core enterprises; on the other hand, the company's ecosystem is highly bound to the core enterprise, and customer stickiness continues to increase. As of 2021H1, the company's customer retention rate has reached 95%.

- Funding: Own capital+platform loan aid to accelerate platform model transformation and diversification to expand funding channels. The company's main sources of capital are its own capital and partner capital. Among them, partner funding channels mainly include banks, trusts, asset management companies, factoring companies, credit funds and ABS. As of 202H1, the company has reached cooperation with 62 funders including China Construction Bank and CICC Payment (YoY +82%). The company's net interest spread has been relatively stable in recent years. 2021H1 has narrowed to 7.1%, mainly due to the increase in the share of platform-matched assets. The interest yield fell to 9.6% during the same period, but the overall size of factoring assets increased. It is expected that in the future, with the further expansion of the company's capital channels and the vigorous advancement of platform-based transformation, it is expected that the growth limit of capital business in the table will be broken at an accelerated pace.

- Risk control: Technology empowers risk control systems to improve risk control capabilities more and more. Through a) focusing on the three major industries for many years, the company has accumulated a mature understanding of the industrial chain while diversifying risks; b) screening blue-chip core enterprises with high credit and strong ability to carry out contracts; c) embedding supply chain technology into the ecosystem to solve the problem of information opacity; d) strengthening risk management and control capabilities by applying digital finance to accurately and efficiently monitor public opinion and intelligent credit. Zhongden.com checks a single transaction as fast as 0.5s, and OCR accuracy is as high as 97%. Affected by the pandemic, the company's non-performing rate rose slightly to 0.60% in 2020, but now some loans have been recovered, and 2021H1 has dropped to 0.37%.

-Combines “industry focus+non-authorised factoring”, with outstanding core features

It features a deep focus on industry and the expansion of factoring nodes forward.We believe that the core characteristics of the company's business model are mainly reflected in two aspects: 1) the selection of the three strategic industries of infrastructure, pharmaceuticals, and energy, which are related to basic livelihood and resistance to the economic cycle, continue to cultivate, avoid certain systemic risks, have first-mover advantages and accumulated industry experience; 2) supply chain financial services cover early points such as order factoring and arrival factoring to better meet the capital needs of micro, small and medium-sized enterprises. We believe that deep accumulation in the three major industries will help the company further increase its market penetration rate, while at the same time it may reserve experience for entering a new circuit in the medium to long term.

-Focus on the three major private industries, and focus on the three strategic industries by deepening the supply chain finance business.
1) Infrastructure industry: Based on industry characteristics such as large project volume, large capital consumption, and complex project measurement, the company took root in it, strengthened knowledge and understanding of detailed fields such as bidding, construction, and completion settlement, targeted accounts receivable in the infrastructure supply chain, and tailor-made financing plans and factoring services for various participants. At present, the company has reached cooperation with leading central enterprises in the industry, and has jointly invested with Tencent in infrastructure SaaS supplier Mengcheng Technology to empower the infrastructure supply chain through BIM, smart construction sites, etc.
2) Pharmaceutical industry: The company enters all aspects of pharmaceutical and medical transactions and provides special financing plans and factoring services to various entities based on the financing needs of raw material suppliers, manufacturers, distribution, hospitals, etc. At present, the company has invested in leading consumer healthcare SaaS leader Lingjian and established strategic cooperation with Lianren Health, a medical big data platform owned by Mobile, to further improve the pharmaceutical supply chain ecosystem.
3) Energy industry: In response to the accounts receivable and order financing needs of energy and chemical enterprises in the supply chain, Shengye Capital provides targeted supply chain financial services to meet their requirements of fast capital and large capital, and help energy and chemical enterprises develop healthily.

Core recommendation logic

-Accelerating the transformation to platform loan aid has great potential to increase penetration
The company is now gradually developing its platform business, and the subsequent improvement of risk control capabilities will enhance the recognition of investors, which is expected to further expand the cooperative base of 62 investors. The company's 2021H1 platform matching (loan aid) daily balance increased 185% year-on-year, accounting for 22.6% (YOY+13.5 pct.) ; Currently, platform loan aid and other businesses account for about 14% of revenue, and the plan is to increase it to 30%/50% in the medium/long term respectively. We believe that while the net interest spread of the platform loan aid business is difficult to achieve in factoring business, the medium to long term is beneficial to driving a rapid increase in the company's business scale and market share, and at the same time promoting revenue growth through volume and price compensation.

-SaaS With deep bundling, the defect rate is expected to improve further.

SaaSImplanted in the ecosystem, customer stickiness continues to increase.The company has continuously strengthened the development and upgrading of SaaS systems, embedded them into the supply chain ecosystem, and deeply tied to core enterprises. On the one hand, the company's system is integrated and interconnected with the core enterprise's internal systems. Over time, under the influence of inertial compatibility and deep embedding, the binding relationship between the two is difficult to break. Existing order turnover rates have been reduced, and the customer repurchase rate has increased. Currently, the customer retention rate has reached 95%. On the other hand, the upstream and downstream core enterprises have large potential capital requirements. As a platform party that is already closely linked to the core enterprise, the company is more likely to receive endorsements and recommendations, thereby expanding its customer base.

As big data risk control is consolidated, the defect rate is declining.In addition to increasing customer stickiness, we believe that ecological implantation will also help the company strengthen its digital risk control capabilities and help the quality of assets steadily improve. The company already has certain technical barriers in the field of big data risk control, and successfully connected to the central bank's credit reporting system and Zhongdeng Network. The 21H1 non-performing rate dropped to 0.37% (YOY-0.23 pct.) It is also superior to the level of commercial banks during the same period. Commercial banking level. In the future, the risk control system will be further improved through the efficient application of SaaS and IoT systems in business processes such as order monitoring, goods tracking, and warehouse control. Combined, the core enterprises are all central enterprises. The probability of default is relatively low, which is expected to drive a further decline in the non-performing rate.

-Cross-industry penetration, continuing to cultivate industrial application scenarios

It has been deeply cultivated for many years. Infrastructure and energy are the main ones, and medicine has been steadily improving. Taking into account cross-border and focus, the industrial ecology is becoming more and more mature. We are optimistic that the company will explore industrial value in depth vertically while crossing industries that do not cross each other horizontally, and further increase the penetration rate of various industries in the future with increasingly mature industry experience.

Predictions andvaluations:

First coverage gives you a buy-A Investment ratings. The company introduced diversified funding channels, gradually transformed into the main platform matching, opened up room for business scale growth, and compounded the financing gap for a large number of micro, small and medium-sized enterprises, customer source advantages and risk control capabilities based on ecological implantation and deep industry cultivation. We are optimistic about the company's medium- to long-term market prospects. There is some room for a premium in the current valuation. We expect the company's BVPS for 2021-2023 to be 3.4 yuan/3.8 yuan/4.3 yuan respectively. Referring to the average P/B of comparable companies in 2021, we gave a target price of HK$12.9 for 6 months, corresponding to 3.2 times 2021 P/B.