Investment logic

1. Go deep into the township commercial network and sink deep market barriers

The company has been deeply involved in the sinking market for over 10 years, empowering rural couple stores to improve their procurement channels and digital capabilities, gain deep insight into changes in the business needs of husband and wife stores, and gradually upgrade from “purchase” to “purchase, sale and inventory management” and “customer flow marketing” scenarios. As of 2023H1, there were 217,600 retail stores for registered members, covering 24,000 townships. The company's revenue structure mainly includes trading business and service business. The 2023H1 transaction business accounts for 99%, with revenue reaching 43 billion yuan. The service business accounts for 1%, revenue of 343 million yuan, and the SaaS+ payment rate continues to rise to 30.68%. The company formed a highly localized Tiejun team with in-depth understanding of the sinking market to strengthen interaction with member retail stores, increase the stickiness of member stores, and develop new member stores.

2. Category misalignment competition, increasing the share of procurement in the headquarters supply chain

The company's main categories focus on the “top three” categories with high product value, high offline experience, and high after-sales requirements, which differentiate it from B2C e-commerce, which mainly focuses on FMCG products, and community group buying, which mainly focuses on fresh food. Each category of 2023H1 accounts for 53.28% of the revenue of consumer electronics, 15.57% of agricultural production materials, and 15.12% of household appliances, which together exceeds 80%. Currently, the direct procurement ratio in the company headquarters supply chain has reached 55%, reinforcing the procurement cost advantage.

3. SaaS tools are close to business needs, and payment is flexible to lower the threshold of use. In the company's app matrix, the Super Boss App helps with intelligent purchase, sale and storage management, the Huishang App helps operate member online stores, enriches marketing and promotions, and the Huishang Live Streaming App helps guide live shopping and interact in real time. The company creates a comprehensive solution of “intelligent shopping guide AI+marketing planning AI+digital people” to provide more advantageous “help buy” and “help sell” support. The payment format is gradually lowering the basic fee threshold, shifting from an annual fee to a “low basic fee+payment for marketing effectiveness” format, which is expected to increase the penetration rate of SaaS products in member stores.

4. Pursue high-quality growth, improve profitability, and improve inventory turnover. 2023H1's revenue was 43.377 billion yuan, 6.61% over the same period last year. Gross margin increased to 2.98% (+10bps), non-IFRS net profit of 383 million yuan, 31% YoY, and net profit margin 0.88% (YoY +9bps). The company announced an equity incentive plan on December 27, 2023. The performance target is to increase the net profit attributable to the company's equity holders in 2026 by more than 100% compared to 2023.

Profit forecasts, valuations, and ratings

We forecast that the company's non-IFRS adjusted net profit from 2023 to 2025 will be $447 million, $572 million, and $720 million, respectively. The industry's median PE in 2024 was 15x. We estimated 28x PE in 2024, corresponding to a market value of HK$17.4 billion and a target price of HK$33.67. The first coverage gives a “buy” rating.

Risk warning

Macro consumption recovery falls short of expectations and the risk of changes in market demand, low gross margin or operating risks, supply chain risks, etc.