The company's recent situation

On September 5, 2024, Weimeng Group issued Announcement 1, announcing that it has completed the issuance of 90 million US dollar guaranteed convertible bonds due in 2029. The net proceeds from this bond issuance are approximately 86 million US dollars, and the main purpose is to refinance existing debts.

Meanwhile, Weimeng Group announced its results for the first half of 2024 in late August: revenue of 0.867 billion yuan, a year-on-year decrease of 28.3%, lower than market expectations, mainly due to the company's reduction in non-core and low-quality businesses, and a decrease in the percentage of rebates received from advertising platforms. The adjusted net loss was 0.046 billion yuan, a year-on-year decrease of 81.4%. The loss margin was slightly larger than market expectations, mainly affected by the decline in revenue exceeding expectations.

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Focus on core business, and revenue is under pressure in the short term. In the first half of 2024, subscription solution revenue fell 31.0% year on year to 0.49 billion yuan. The company divested the smart catering business in May 2023, reducing investment in the WeChat Mall business and other small and micro businesses, and reducing direct sales cities. At the same time, the customer churn rate was affected by the deferred effect of the previous year. On the other hand, under the big customer strategy and focus strategy, smart retail's share of subscription solution revenue increased to 62.4%. Merchant Solution's revenue in the first half of the year fell 24.5% year-on-year to 0.38 billion yuan. The company reduced low-profit TSO services and financial services. At the same time, the rebate ratio received from advertising platforms decreased, and there was a time lag in transmission to downstream advertisers.

The cash flow situation improved by repurchasing convertible bonds due in 2026. In April 2024, Weimeng issued 85 million US dollars of convertible bonds and placed 0.277 billion new shares. The two raised a total of 0.125 billion US dollars, mainly to repurchase the remaining $0.201 billion convertible bonds2 due in 2026. According to the company's semi-annual report results, the company's operating cash flow for the first half of 2024 changed from an outflow of 0.66 billion yuan in the same period last year to an inflow of 29.5 million yuan, which was positive for two and a half consecutive years.

Profit forecasting and valuation

Considering the company's business focus and precise marketing platform rebate policy adjustments, we lowered our 2024 and 2025 revenue forecasts by 28.2% and 32.5% to 1.82 billion yuan and 1.96 billion yuan, and lowered the adjusted net profit forecast for 2024 and 2025 from 52.67 million yuan and 240 million yuan to -33.34 million yuan and 41.08 million yuan, respectively. We are optimistic about the competitiveness and growth prospects of Weimeng's SaaS and precision marketing, maintain an outperforming industry rating, and reduce the target price by 36% to HK$1.8 (based on 2 times the 2024 market sales rate), considering the remaining short-term uncertainty and declining industry valuation center. The company is currently trading at 1.8 times the 2024 market sales rate, and our target price has 38% upside compared to the current stock price.

risks

Competition in the industry has intensified, and macroeconomic prosperity has declined.