Supply chain technology industry leader, platform link breaks risk control problems

Shengye Holdings is the first supply chain technology platform company listed on the Hong Kong Main Board. Shengye continues to focus on inclusive finance and digital finance businesses, closely following the “Five Big Articles” policy direction proposed by the Central Financial Work Conference. The Group has served national pillar industries such as infrastructure, pharmaceuticals and commodities, and is also actively developing more strategic emerging industries, such as new energy and cross-border e-commerce. The Group integrates technology into the industrial supply chain to help micro, small and medium-sized enterprises in the chain obtain more convenient inclusive financial services. At present, the company has obtained 68 national invention patents and computer software copyrights, cooperated deeply with 10+ core enterprises, and served 16,000+ customers. Among them, micro, small and medium-sized enterprises account for more than 97%, and forward factoring business accounts for 96%. With the support of fintech, the company's non-performing rate was 0 and the overdue rate was 0.03% in 2023. It already has strong risk control capabilities and sustainable profitability.

Strong growth in scientific and technological services, remarkable results in R&D investment

With the increase in supply chain assets brought about by state-owned cooperation and the increase in the number of capital and asset sides linked to supply chain technology platforms, the company has achieved steady growth in digital finance business and rapid growth in technology revenue represented by platform service business. The company's total revenue growth rate in FY2023 was high, mainly due to the 65% year-on-year increase in technology revenue. In terms of expenses, due to the increase in financing needs of micro, small and medium-sized enterprises and the expansion of the company's business, the company's FY2021-FY2023 financial expenses rose, but cost reduction and efficiency increased significantly, the share of management expenses declined, and adjusted net profit continued to rise. The company attaches importance to R&D investment and technology application, and has invested a total of 0.2 billion yuan in R&D. The R&D results are remarkable, and the capitalized amount of FY2021-FY2023 R&D costs is close to or greater than the R&D expenses of the current year. In the future, the company is expected to drive technology revenue to achieve better results through more supply chain technology.

The financing problem needs to be solved urgently, and the financial potential of supply chain is limitless

The number of micro, small and medium-sized enterprises in China has continued to grow in the past five years, and has played an important role in overall economic and social development, leading to an increase in their financing needs. The commercial factoring market volume reached 2.7 trillion yuan in 2023, an increase of 20.5% over 2022. The business volume is expected to exceed 3 trillion yuan in 2025; in 2022, the balance of China's supply chain finance industry reached 36.9 trillion yuan, and the CAGR in 2018-2022 was 16.8%. It is expected that the size of China's supply chain finance industry will continue to grow at a CAGR of 10.3% in 2022. By 2027, the scale will exceed 60 trillion yuan, and China will become one of the largest supply chain finance markets in the world. From the demand side, total accounts receivable from industrial enterprises above the size of China increased from 17.4 trillion yuan at the end of 2019 to 23.72 trillion yuan at the end of 2023, with a compound annual growth rate of 8.05%. The supply chain finance industry has a broad market space. In the future, the company is expected to rapidly expand its business and increase its penetration rate.

Profit forecasting and valuation

Considering that the company's supply chain technology platform penetrates deep into the supply chain, has good customer acquisition and risk control capabilities, and the number of linked capital and asset parties has repeatedly reached new highs, the company's performance is expected to continue to grow in the future. We forecast total revenue of FY2024-FY2026 to be 0.753/0.875/1.057 billion yuan, respectively, and net profit to mother of 0.31/0.41/0.51 billion yuan, respectively. Considering the company's business attributes, we selected Tianyang Technology, Yuxin Technology, Nantian Information, and Bairongyun as comparable companies. The average PE of comparable companies in FY2024 was 20.81. Considering the Hong Kong stock liquidity discount, the company was given a PE of 20 times the average in 2024, corresponding to a market value of 6.256 billion yuan, and a target share price of HK$6.93, giving it a “buy” rating.

Risk warning: Supply chain asset size growth falls short of expectations, risks related to regulatory policies, growth in the number of platform customers falls short of expectations, level of own capital falls short of expectations, foreign exchange risk, risk of differences in valuation systems, or Hong Kong stock market liquidity falls short of expectations