Rising competition despite booming offline consumption
22.6% topline growth was in line with market expectation thanks to booming offline consumption fuelling the growth of in-store and travel while rising sales and marketing expenses with core local commerce OP margin erosion indicating rising competition. Reiterate BUY, revise down target price from HK$183 to HK$164, as we factor in lower loss from new initiatives while also revised down operating margin from core local services.
Key Factors for Rating
4Q23 revenue increased 22.6% YoY to RMB73.7bn in line with consensus/our estimate thanks to solid growth of in-store, hotel and travel services from booming off-line consumption recovery especially on the year on year basis.
Non-GAAP net profit came in at RMB4.37bn (vs: RMB5.73bn in 3Q23), beating consensus by 50.9% and also ahead of BOCI estimate, thanks to narrow down of new initiative operating loss offset by decline of in-store, hotel and travel operating profit on the year on year basis. Selling and marketing expenses increased by 55% YoY with expense ratio increased by 4.8ppts YoY to 22.7% in 4Q23 due to raising incentives and promotion and advertising expenses.
Core local commerce revenues increased by 26.8% YoY to RMB55.1bn in 4Q23, experiencing strong consumption recovery especially in offline in-store and hotel/travel categories. Operating margin at 14.5% or 2.05ppts lower on YoY basis despite the revenue mix change with high growth from in-store and hotel revenue due to higher marketing incentive offered and lower ARPU from delivery service users.
Earnings revisions: revised up 2024-25E revenues by 0.6%/1.4% to factor in higher offline consumption driven in-store and hotel business but lower operating margin due to expected competition from market new entrant. 2024/25E earnings are revised up by 5.8% and 0.8% as we factor in lower operating loss from new initiatives despite lower operating profit from core local commerce.
Key Risks for Rating
Rising competition in food delivery and in-store market that might need incremental marketing expenditure with margin pressure; regulatory risk relating to social security expenses associated with new type of employment (riders); softer consumer spending due to macro weakness resulted in lower ticket value.
Valuation
We reiterate BUY and revise down our target price from HK$183/share to HK$164/share. For the DCF valuation, we maintained our perpetual growth rate at 2.0% and the WACC assumption at 11.06% as risk free rate maintained at 5.0% while CNY to HKD exchange rate raised to 1.09.