Key points of investment:
A rapidly growing interactive advertising leader. The company was founded in 2011, launched a user-operated SaaS platform business in 2014, launched an interactive effects advertising business in 2015, and grew rapidly in 2016-2018. It has become the leading interactive effect advertising company in China, with a market share of over 50%. In 2016-2018, the company's main business revenue increased rapidly from $0.5 million to $1.14 billion. The adjusted net profit for 2017-2018 was $119 million and $205 million respectively under the Hong Kong Financial Reporting Standards.
Interactive advertising: A racetrack empowered by technology, with better precise card positions. Interactive performance ads are a better racetrack for future advertising. They should be superior to traditional and streaming ads in terms of user engagement, ad effectiveness, and conversion rates. According to the company's prospectus quoting iResearch, the interactive advertising performance market CAGR is expected to reach 45% in 2019-2023, and by 2023, it will reach 13.5 billion yuan. Dueba is an industry leader. It has great advantages in data accumulation and technical capabilities. Through the underlying platform, big data center, and excellent OCPC system, it also brings precise services and benefits to advertising services and media. Since 2016, the company has achieved explosive growth in revenue, number of daily active users, number of billing hits, etc. In 2018, interactive advertising revenue reached 1.11 billion yuan, and the number of daily active users grew to 20.5 million.
Users operate SaaS: Early accumulation is beginning to show results. Dueba is the absolute leader in the SaaS market operated by online enterprise users in China. As of 2018/12/31, the number of registered mobile apps with more than 1 million daily active users of the company reached 147. Redeem users earn revenue from operating SaaS businesses from fees that help customers redeem prizes, recharges, etc., as well as annual fees for SaaS solutions. We believe that, similar to the company in the field of interactive advertising business, the company has certain advantages in information technology infrastructure, data analysis, etc. At the same time, in the context of vigorous development of the industry, the SaaS platform business operated by the company's users is expected to achieve rapid growth in the next few years.
Looking at the growth space and valuation of Dueba from a TTD perspective: Established in 2009, Trade Desk serves advertising agencies and matches their needs with the supply of available advertising resources in real time. It is the “enabler” of the advertising industry. It also places particular emphasis on data drivers, and is very successful in retaining and generating revenue for old customers. TTD still plans to work in four directions in the future: 1) Internet TV advertising; 2) global expansion; 3) expanding service interfaces to more technology-dominated companies; 4) promoting updated user experiences, tools, and AI to meet the next wave.
Profit forecasts and investment recommendations. We expect revenue of $21.1, 31.0 and $4.22 billion for 2019-2021, net profit of $0.86, $645 and $965 million, adjusted net profit of $384, 645, and 965 million yuan, with growth rates of 87% (compared to adjusted net profit in 2018), 68% and 50%; adjusted EPS of $0.35, 0.58 and $0.87. Considering the unsustainability of the adjusted items and the minimal impact on cash flow, we used the adjusted profit/loss for the year as a valuation and gave 2019 PE 15-17X, corresponding to a reasonable value range of 5.25-5.95 yuan/share; according to HK$1 = 0.88 RMB, corresponding to HK$5.97-6.76 per share, superior to the market rating.
Risk warning: Risk that downstream companies' advertising investment is slowing down and macroeconomic growth falls short of expectations