Incidents:

On March 21, 2024, the company released its 2023 financial report. In 2023, it achieved revenue of 3.95 billion yuan (YoY +16%), gross profit of 740 million yuan (YoY -28.4%), and a non-GAAP EBITDA of 560 million yuan (YoY +160.6%). During the reporting period, the company paid amounts related to transaction fee rate adjustments to its accounts to be processed at the request of the clearing agency, which had a non-recurring impact of about 344 million yuan on overall revenue in 2023.

Investment highlights:

Overall performance: The company's revenue and adjusted profit maintained steady growth in 2023. Among them, the growth in payment business revenue mainly benefited from the recovery of offline consumption driving strong GPV growth and the increase in overall industry rates; the growth rate of in-store e-commerce business was still under pressure in the short term, mainly affected by increased competition among Douyin's local lifestyle service providers, but the gross margin of the business increased significantly, and the trend of turning losses into profits remained unchanged.

The “volume” and “price” of the payment business rose sharply, actively expanding overseas markets: the revenue of one-stop payment services increased 26.5% year-on-year to 3.48 billion yuan in 2023, mainly due to 1) the recovery of offline consumption and the expansion of corporate payment distribution channels driving the payment service GPV increase 29.2% year-on-year to 2,882.9 billion yuan, and the number of active payment service merchants increased 13% year over year to 9.22 million; 2) Benefiting from the improvement of the competitive landscape of the payment industry and the increase in overall rates, the company's 2023 payment rate increased 0.9 basis points to 13.3 billion yuan year on year ( (Excluding the impact of non-recurring revenue adjustments). The gross margin of the payment business fell slightly to 17.8% year-on-year (after excluding the impact of non-recurring revenue adjustments), mainly due to the company's phased increase in the commission ratio of payment distribution channels on the basis of fee increases to promote GPV growth. In 2023, the company actively expanded overseas markets, established Yeahpay Singapore, and obtained MPI licenses and MSO licenses in Singapore and the Hong Kong Special Administrative Region respectively. It has also launched local QR code and bank card billing services, serving more than 5,000 well-known local merchants, which is expected to contribute more revenue growth.

The merchant solutions business is growing strongly, and the e-commerce business is under pressure in the short term, and the trend of turning losses into profits remains unchanged: in 2023, the merchant solutions business revenue increased 17.2% year-on-year to 360 million yuan, mainly due to the improvement in the willingness of offline merchants to pay, which increased the payment penetration rate. In 2023, in-store e-commerce service revenue fell 71.0% year on year to 100 million yuan, GMV increased 30.3% year on year to 4.3 billion yuan, and the take rate fell to 2.4% year on year, mainly due to 1) the increase in the share of GMV in the partner model introduced by the company had a certain dilution effect on the overall take-rate of the e-commerce business; 2) Douyin's direct management model take rate was lowered due to increased competition among local lifestyle service providers. In 2023, the gross margin of in-store e-commerce services increased to 80.3% year on year, and the net loss narrowed sharply by 79.4% year on year to 44 million yuan. Mainly due to the effects of the company's promotion of partner models and direct management models to reduce costs and increase efficiency. It is expected that as the scale of the business continues to grow and the scale effect increases, related losses will narrow further.

Profit forecast and investment rating: Due to factors such as the impact of irregular revenue adjustments in the payment business and increased competition in the e-commerce industry, we lowered the company's revenue and profit forecast. We expect the company's 2024-2026 revenue to be 51/59/6.6 billion yuan, net profit to mother of 3.9/5.7/670 million yuan, corresponding diluted EPS of 1.1/1.5/1.8 yuan, and corresponding P/E is 11X/7X/6X; according to the SOTP valuation method, we have given a total target market value of 7.1 billion yuan for 2024 card transfers The coin, corresponding to the target price of HK$17/RMB 16, maintains a “buy” rating considering the steady growth of GPV in the company's payment business, the rate side is expected to benefit from the industry's clearance, and the in-store business continues to reduce losses.

Risk warning: Competition in the payment industry increases the risk, the risk of industry regulatory policy adjustments, the risk of competition in the in-store e-commerce industry increasing the risk, the risk that in-store e-commerce business development falls short of expectations, the risk that AIGC application is not progressing as expected, etc.