Report summary
The 2016 results were better than expected. Ketong Xincheng announced its 2016 full-year results. The overall GMV increased 55.8% year-on-year to RMB 21.65 billion. Among them, self-operated/third-party platforms/supply chain finance businesses accounted for 59.3%/27.4%/13.3%, respectively. About 36.8%/27.4% of the overall GMV came from blue-chip/SME customers, respectively, and the number of trading customers increased 104.4% year-on-year to 20,705. The company's revenue in 2016 increased 36.8% year-on-year to 12.93 billion yuan; overall gross margin increased slightly by 0.1 percentage points to 8.2%; the sales management expense ratio improved 0.2 percentage points to 3.4% year on year, driven by scale effects. The above led to a year-on-year increase of 36.3% in the company's core net profit (after excluding non-cash expenses such as equity expenses and amortization of intangible assets) to 527 million yuan, while the core net profit margin remained around 4.1%.
Further promote the hard egg monetization model. The company actively promoted the monetization models of its hard-core platforms “Online Diversion” and “Offline Service” in 2016. In terms of online diversion, online platforms bring a large number of customers, needs and data to companies and hard players. Hard Egg's current monetization models include i) monetization through CTM IC component transactions; ii) monetization through other non-IC component supply chain transactions; and iii) monetization through transactions involving other enterprise services. By the end of 2016, the Hard Egg platform had 20,000 smart hardware projects and more than 20 million fans. The platform brought in GMV of 5.18 billion yuan in 2016, accounting for 24%. Ecological fields where the Hard Egg Platform will further develop in the future include robots, smart cars, smart homes, new materials, etc., and future performance is worth looking forward to.
Fully explore IoT opportunities. In the future, the company will use its strong network with global core technology companies to deeply cultivate artificial intelligence, focus on expanding the intelligent voice supply chain, and achieve full coverage of “components-module-terminal brands”. The company has initiated strategic cooperation with Haier, a first-tier home appliance company, to jointly explore smart home appliance upgrades including voice technology in the future. At the same time, the Hard Egg Platform is building a huge and complete supply chain ecosystem in the field of artificial intelligence, including core artificial intelligence software and service providers, as well as a large number of chips, modules, and overall suppliers. On the other hand, through close partnerships with the world's top chip suppliers, the company will continue to increase its market share in the Chinese communications industry and seize a new round of operator investment cycle led by optical transportNetwork (OTN) upgrades and 4.5G/5G construction.
Reiterate the “buy” rating. We believe that Kotong Xincheng is a scarce target in the field of smart hardware. It is expected that i) the O2O expansion of the IC industry will accelerate, ii) supply chain finance promotion faster than expected, and iii) that the monetization of hard egg platforms faster than expected will be a catalyst for rising stock prices. We reiterated the company's “buy” rating and set the 2017 E-19E PEG 0.8 times the price, giving a target price of HK$14.80.
Risk warning: i) the pace of e-commerce in the IC industry is slower than expected; ii) the pace of monetization of hard egg platforms is slower than expected; iii) fierce market competition is dragging down gross margin.