Investment highlights

For the first time, consecutive figures were covered (02598) to give the industry an outperforming rating. The target price was HK$11.80, based on the SOTP valuation method, corresponding to 8.8x/7.2x 2024e/2025e P/S. The company is a leading provider of cross-border and domestic digital payment solutions in China. The reasons are as follows:

The digital payment and value-added services market has broad space and strong growth momentum, and even as a leading institution, it has a first-mover advantage. According to Frost & Sullivan data, China's digital payment transaction volume (TPV) is expected to grow from 181 trillion yuan in 2022 to 354 trillion yuan in 2027, corresponding compound growth rate of 14%, while revenue from value-added services provided by digital payment service providers is expected to grow from 33.9 billion yuan in 2022 to 88.3 billion yuan in 2027, with a corresponding compound growth rate of 21%, with revenue from cross-border payment TPV and value-added services increasing The speed is faster. The compound growth rate is expected to reach 25% and 32% in 2022 to 2027. We believe that Lianlian can continue to lead the development of the industry and enjoy the dividends brought by the rapid growth of the industry based on extensive global licenses and business layout, rich business experience and technical accumulation, and deep customer resources and industry partnerships.

Deeply cultivate the digital payment field, establish multiple competitive barriers, and extend value-added services to build a second growth curve. We believe that the company has been deeply involved in the digital payment field for many years and has built three core competitive advantages in terms of licenses, technology, and customer resources: 1) According to Frost & Sullivan, the company has the broadest global business layout and license coverage among all digital payment solution providers in China; 2) The company has developed a proprietary technology platform to address the complexity of global trade, and has maintained high R&D investment and expanded R&D team size to continuously improve technology and product service advantages; 3) Relying on high-quality product services and years of business cooperation, the number of active customers in the company has maintained a high speed Growth and customer stickiness remain high. At the same time, the company continues to expand value-added services, improve the service ecosystem, and deepen competitive barriers. In the future, we think it may be expected to build a second growth curve.

Shareholding connects the company to access scarce license resources and shares development dividends with American Express. Lianlian Digital holds 45.2% of China's shares in China's first Sino-foreign joint venture bank card clearing agency, Lianlian Digital.

Considering the high entry threshold for bank card clearing services, Unicom is expected to rely on American Express to enter China's high-end credit card market and cross-border scenarios. We believe Lianlian is expected to share the potential profit increase and valuation boost brought about by the rapid development of Unicom.

What is our biggest difference from the market? The market believes that the cross-border payment industry is fiercely competitive and that the barriers to business expansion in the Chinese credit card clearing market are high. We believe that the company's leading position in the cross-border market is stable, and that Connect Company is expected to quickly develop the high-end credit card market and give the company a valuation boost.

Potential catalysts: The progress of the digital transformation of offline foreign trade exceeded expectations; the growth rate of Liantong's business exceeded expectations.

Profit forecasting and valuation

We expect the company's 2024/25 EPS to be 0.03 yuan and 0.09 yuan (adjusted), respectively, and a CAGR of 132% (2023-2025e). The company is currently trading at 7.4x/5.9x 2024/25e P/S. Considering that Lianlian Digital's revenue profitability is still in the early stages of release, and that there is a big difference between Liantong's business model and Lianlian Digital, we used the SOTP valuation and gave the company a target price of HK$11.80 based on the company's main business and Unicom's 6.5x and 8.0x 2024e P/S respectively. There is 19% room to rise from the current stock price. For the first time, covering Lianlian Digital gave it a “outperforming industry” rating.

risks

Increased market competition, risk of regulatory compliance, risk of macroeconomic fluctuations, risk of potential trade friction, risk of low stock trading volume, risk of lifting the ban on restricted stocks.