Payment transactions increased 29% year over year, and there was an initial breakthrough in overseas payments. In-store business competition was fierce. In 2023, card transfers recorded revenue/net profit to mother of 39.5/012 billion yuan, and net profit to mother fell 92.4% year on year, mainly hampered by payment and transaction fees to clearing agencies. The recovery in offline consumer activity in 2023 contributed to a 29% year-on-year increase in GPV payments. The company achieved a breakthrough in overseas payments business.

The demand for value-added payment services for small and micro merchant operations is gradually improving, driving the growth of the company's merchant solutions business. Competition in the in-store e-commerce industry is still fierce, affecting the pace of moving cards to reach break-even balance, but benefiting from the adjustment of the business model, the loss of the in-store business narrowed drastically in 2023, and we are still optimistic about the profit prospects of the company's in-store business. We basically maintain the 2024/2025/2026 net profit forecast of RMB 3.41/5.57/643 million (previous value: RMB 3.38/5.46/ - RMB 3.38/5.46/ - RMB). Under the SOTP valuation method, we gave the payment/in-store e-commerce and merchant solutions business an expected 14.2xPE/4.6x PS/2.2x PS in 2024 (14.2x PE/4.6x PS/2.2x PS), with a target price of HK$15.5, maintaining a “buy” rating.

The recovery in offline consumer activity is driving the growth of GPV payments. The company actively lays out overseas payments and the total payment volume rose to 2.9 trillion yuan in 2023, an increase of 29% over the previous year, mainly benefiting from the recovery in offline consumer activity. In 2023, at the request of the clearing agency, the company paid it fees related to the transaction fee rate adjustment, totaling RMB 340 million, which dragged down the company's pre-adjusted payment rate and profit for the year.

After excluding the impact of payments to clearing institutions, the total payment rate rose to 13.3 bps (2022:12.3 bps). The main driving force is the increase in the overall rate level of the industry. The previous exploration of overseas payments has begun to bear fruit. Transfer Card has established Yeahpay Singapore and obtained an MPI license in Singapore and an MSO license in Hong Kong, China. The company mainly carries out QR code and bank card billing services overseas, and has now covered more than 5,000 merchants. We believe that with rich industry experience and higher overseas payment service rates, overseas is expected to contribute more to the company.

Merchant solutions are growing rapidly. Competition in the e-commerce industry suppresses the take-rate merchant solutions business and recorded 360 million yuan in revenue in 2023. The main reason is that the demand for value-added payment services by small and micro merchants is increasing, which may reflect on the side that the business conditions of small and micro merchants are gradually getting out of trouble. The number of active merchant customers reached 1.6 million (2022:1.2 million). We believe that in the future, the merchant solutions business will continue to take on merchant resources from the payment business, and the synergy between the two major business lines is expected to increase. In 2023, the GMV of the in-store business reached 4.3 billion, a year-on-year increase of 30%, which is slower than Douyin's 256% year-on-year growth rate of total transaction volume; the take-rate dropped to 2.4% (10.7% in 2022). Fierce competition in the industry has dragged down take-rate and suppressed GMV growth. However, benefiting from reduced KOL cost optimization, gradual increase in cooperation models, gradual expansion of scale effects, progress in the company's multi-platform layout, and the company's net loss in the in-store business narrowed to 44 million in 2023 (2022:210 million), we are still optimistic about the profit prospects of the company's in-store business.

Risk warning: offline consumption falls short of expectations; payment rates are under pressure; in-store e-commerce business and marketing model adjustments fall short of expectations; regulatory changes.