Key points of investment:

The Taotian store logic builds a full SKU ecosystem, covering all consumer demand experiences. Under the current competitive pattern, supporting Taobao's supply chain is the first priority: Taotian has cultivated the most comprehensive shopping experience through a traffic reward mechanism for stores, and has built a brand-centered full SKU ecosystem, and the effectiveness of “search” and “shopping” forms a moat. Pinduoduo uses concentrated traffic to support limited SKUs, but currently the cost advantage of Pinduoduo products is gradually declining, mainly due to 1) rising logistics and commission fees; 2) Taotian comprehensively replicates promotion strategies to support small and medium-sized businesses and build a low-cost supply chain through subsidies and innovation in promotion tools.

On the GMV side, Taotian uses 10 billion subsidies to cultivate user stickiness, and Unicom WeChat Pay is expected to bring new impetus to user growth: in recent years, the penetration rate of e-commerce platforms has reached its limit. In the context of WeChat monthly active users 0.13 billion higher than Taotian, Taotian Unicom WeChat Pay is expected to open up new space for user growth.

The cheaper product supply model will increase order frequency switching, and user stickiness will continue to increase under strong subsidies, and continue to drive GMV growth.

On the CMR side, the company's traffic is skewed towards Taobao, hoping to promote innovation and improve the monetization rate throughout the site: the company charges 0.6% technical service fees for Aotian merchants, essentially forming a new take-rate space. The site-wide promotion tool innovation is beginning to bear fruit. The new tools have played an obvious role in helping small and medium businesses accelerate their turnover and increase advertising ROI. The level of take rate has also increased, which is expected to form a virtuous cycle of increasing GMV and CMR revenue.

Profit forecast and investment rating: Considering that investment in Taotian's business and international business remains at a high level. At a time when GMV's growth exceeds expectations, we believe that FY2025Q1's overall eBitamarin is still recovering. Therefore, FY2025/FY2026/FY2027 EPS was given a profit forecast of 8.07/8.74/9.47, and the corresponding PE was 9.7/8.9/8.2 times (HKD/RMB = 0.91, September 19, 2024). Considering the company's GMV growth and the acceleration of the monetization process, as well as the company's continued repurchase dividends, FY2027 will be given PE 10x, corresponding to the target price of HK$104.07 per share.

Risk warning: Competition in the new retail business intensifies, user retention rates fall short of expectations, regulatory risks such as e-commerce law and antitrust have increased, and the heads of various departments of the company have changed