Revenue for the first half of fiscal year 2024 was in line with expectations, but adjusted net profit was ~ 13% lower than the consistent forecast.
We expect FY2024 to be a transition year for Oriental Choice to enhance its proprietary products and proprietary application channels, GMV, which may drag down profitability.
Maintaining the “hold” rating, the target price was lowered to HK$23.00 (20 times the FY2025 P/E discount for 1 year).
The English version of the Hong Kong Stock Connect report was released by Huaxing Securities (Hong Kong) at 15:33 p.m. on January 25, 2024. The Chinese version was reviewed by Zhao Bing (Securities Analyst Registration Number: S1680519040001) of Huaxing Securities. If you would like to further discuss the views expressed in this report, please contact your sales representative at Huaxing Securities.
Oriental Selection announced its mid-term results for the 2024 fiscal year, with revenue rising 34% year over year to 2.8 billion yuan (in line with Visible Alpha's unanimous expectations). Adjusted net profit was 509 million yuan (~ 13% lower than the agreed forecast) due to increased marketing expenses. Management stated during the conference call that the total merchandise transaction volume (GMV) from December 2023 to January 2024 remained stable despite the company's turmoil in public opinion. We expect Oriental Selection's revenue to increase 41% year-on-year in the second half of fiscal year 2024, thanks to the strong performance of the new account “Walk with Hui” and the stable performance of the main account. At the same time, we expect adjusted net profit to drop 13% year over year in the second half of fiscal year 2024, mainly due to the company's investment in proprietary products (the company aims to reach 400 proprietary SKUs by the end of 2024), app development (including infrastructure and new user acquisition), and higher employee expenses (the company says employee equity incentives will be increased in the second half of fiscal year 2024). We maintain a “holding” rating for Oriental Selection, mainly because the company is in a transformation phase and is facing pressure on profit margins.
By sector, revenue from proprietary products and live streaming e-commerce increased 37% year-on-year in the first half of fiscal year 2024, reaching 24.1 billion yuan.
GMV increased 19% year over year to 5.7 billion yuan, of which we estimate that our proprietary product GMV increased more than 70% year over year to about 1.9 billion yuan (revenue share increased from 23% to 33% in the first half of FY2023). The number of paid orders on Douyin fell 15% year over year to 59.6 million due to an increase in the share of GMV in its own app channels and a possible increase in average sales prices. In terms of profit margin, the adjusted operating margin for the first half of FY2024 fell from 32.3% in the first half of FY2023 to 20.1% (the ratio of sales and marketing expenses increased from 11% to 20%) due to increased marketing expenses. Adjusted net profit was 509 million yuan, down 15% year over year.
According to Oriental Selection, the company's own app currently has 3.6 million registered users, a net daily increase of about 5,000-8,000 people. Oriental Selection launched a membership system in October 2023 (priced at 199 yuan/year). Currently, there are more than 200,000 members, and each paying member spends 800 yuan per month. At the same time, we have noticed that Oriental Choice has increased subsidies for proprietary products on Douyin and its own apps since December 2023. As of January 24, the company's newly launched Douyin account “Walk with Hui” has 13 million followers (compared to the main name “Oriental Choice”, it has 31 million followers). “Walking with Hui” achieved GMV of over 150 million yuan during its first live broadcast on January 9. The company's other accounts also maintained steady performance. We expect GMV to grow 31%/19% month-on-month in the second half of fiscal year 2024.
Maintaining the “hold” rating, the target price was slightly lowered to HK$23.00 (previously HK$29.00). Based on expectations of strong GMV growth, we raised our revenue forecast for the 2024/25 fiscal year by 15%/26%, respectively. However, considering changes in revenue structure and increased marketing expenses, we will reduce the adjusted net profit margin by 10/8.5 percentage points. We moved from the valuation base year to fiscal year 2025, and we expect Eastern Select to achieve more normalized revenue and profit margins in that year. Our target price is based on 20 times the FY2025 price-earnings ratio (consistent with the average valuation multiples of China's CN, e-commerce service providers, and consumer goods industries), with a 10% discount rate for one year. Risk warning: Downside risk - macroeconomic recovery is slower than expected, marketing expenses are higher than expected, quality control risk; upward risk - macroeconomic recovery is faster than expected, GMV growth rate of proprietary products exceeds expectations, product portfolio and profit margins have improved, and brand awareness has increased.