Revenue fell short of expectations: 2Q21 revenue in China fell 14.4 per cent from a year earlier to 386 million, below market expectations of 14.5 per cent. In terms of segment business, subscription solutions business fell 4% year-on-year to 250 million, while merchant solutions fell 27% year-on-year to 157 million, mainly due to a decrease in related revenue caused by the suspension of trading services in February. The company's net loss for the quarter reached 110 million yuan.

GMV growth for the whole year was hampered by multiple factors: the company's GMV in the first half of the year was 48.1 billion, up 4% from the same period last year, and the growth rate slowed down, with GMV of 24.5 billion in the second quarter, down 3% from the same period last year.

First of all, as Kuaishou Technology accelerates the construction of his own business closed loop, the contribution of GMV continues to decline, accounting for about 20% in the first half of the year, and we estimate that it is down 40% or 50% from the same period last year. The company expects the impact to last until the end of the year, with Kuaishou Technology's GMV share falling to 10%. Secondly, free shop opening models such as Wechat small stores and the rise of live streaming with goods have also caused the loss of some small and medium-sized businesses, affecting the growth of social e-commerce business. The GMV of non-Kuaishou Technology channels increased by 34% compared with the same period last year, of which the store SaaS performed well, doubling in the first half of the year, and GMV contributed about 25%, which to some extent made up for the weakness of other channels. We expect GMV growth for the whole year to come under some pressure, or slightly higher than last year. In terms of the number of merchants, the number of paid merchants in stock in this quarter was 87500, down 12% from the same period last year and 9% from the previous quarter.

Continue to promote new retail business and help digital upgrade: in the first half of this year, the GMV of SaaS stores doubled compared with the same period last year, increasing its contribution to 25%. The company said that it will continue to strengthen the promotion of the new retail business and provide a variety of combined solutions for different vertical industries.

At the same time, the company further improves its service capacity to large retailers, provides online and offline data fusion services through ONE strategy, and launches K100 program to help 100 industry leaders upgrade digitally.

Downgrade to "hold" rating and adjust target price to HK $1.20: considering some pressure on short-term GMV growth, we cut our revenue forecasts for 2021-2022 by 22% and 26%, respectively. At the same time, the recent sector correction led to a correction in the valuation of the SaaS industry, and we lowered our target price to HK $1.20, corresponding to 9.3x and 6.7x in 2021 and 2022.

Investment risk: over-reliance on traffic platform; customer retention rate is lower than expected; fierce competition may lead to challenges in price increases.