Report summary
The 2016 results were better than expected. China Baiyin announced its 2016 full-year results. Overall revenue increased 139.5% year-on-year to 4.09 billion yuan. Among them, the manufacturing/jewelry new retail/silver trading business revenue accounted for 35.6%/60.3%/4.1% respectively. Overall gross margin increased 5.1 percentage points to 15.3% year over year, driven by the recovery in silver prices; the sales management fee ratio improved 3.7 percentage points year over year to 5.4%, driven by scale effects. The above led the company to turn a loss into a profit, with a net profit of 304 million yuan and a net profit margin of 7.4%. The overall performance was better than our and market expectations.
The new jewelry retail business has experienced explosive growth. The company's new jewelry retail business revenue increased sharply by 195.1% year-on-year to 2.47 billion yuan in 2016. We believe that the company's core competitiveness mainly lies in i) an integrated online retail platform; ii) a convenient offline retail and experience network; iii) data mining and application capabilities; and iv) innovative cross-selling and marketing capabilities. By the end of 2016, the company's self-operated online sales platform “Golden Cat Silver Cat” had recorded more than 4 million registered members, with monthly average PV/UV/IP reaching 370,000/130 million/100 million respectively. Currently, the platform has more than 150 private and third-party brands, providing customers with a diverse range of products. In terms of offline experience stores, by the end of 2016, the company had 110 stores, distributed in 50 cities in 18 municipalities and provinces in China. The company launched the cSmall Gift Program in the fourth quarter of 2016. Customers can exchange gifts of equivalent value in the form of gifts on the company's own online platform or designated offline sales outlets after shopping with the company's cSmall Gift partners. Current partners include Yintai Commercial, etc.
The silver trading business has become a new growth engine. The company's silver trading business revenue reached 166 million yuan in 2016, contributing 97 million yuan to segment profits (excluding a one-time loss of about 17 million yuan from the acquisition of Shanghai Huatong). Shanghai Huatong is an integrated silver trading platform operator in China. It is mainly responsible for providing professional and standardized spot supply, trade, logistics and e-commerce services. Its official website, www.buyyin.com, is one of the authoritative portals for the Chinese white banking industry. The spot silver prices updated daily on its website are reference indicators for the Chinese white banking industry. In 2016, Shanghai Huatong added 26 new settlement members and 39 brokerage members. The average monthly transaction volume growth rate reached 20.4%, and the annual transaction volume reached 740 billion yuan.
Reiterate the “buy” rating. The current 2017 E/18E dynamic price-earnings ratio of the company is only 4.7/3.7 times, respectively. We believe that i) the release of production capacity in the silver business; ii) the development of the O2O business is faster than expected; and iii) the rapid growth of the silver trading business is expected to be a catalyst for rising stock prices. We used the SoTP valuation method to give the company a target price of HK$3.33, reaffirming the company's “buy” rating.
Risk warning: i) silver prices have declined sharply; ii) O2O business development falls short of expectations; iii) Exchange related policy changes.