New customers became the cornerstone of growth. In 2016, various indicators exceeded the guidance of GMV of RMB 21.65 billion in 2016, of which self-operated sales, third-party platform transactions and supply chain financing business loans accounted for 59.26%, 27.43%, and 13.31% respectively; revenue reached RMB 12.93 billion, up 36.8% year-on-year, which is about 2% higher than our expectations, including self-operated revenue of 12.83 billion yuan, revenue from third-party platforms of 85 million yuan, and supply chain financing revenue of 119 million yuan. Gross profit was 1.06 billion yuan, up 38.9% year on year, gross margin was 8.2%, which is basically in line with our expected gross margin; profit attributable to equity shareholders was 478.8 million yuan, up 39.6% year on year; net profit attributable to non-GAAP parent was 526.7 million yuan, up 36.3% year on year, up 36.3% year on year, about 1.5% higher than our expectations.
Artificial intelligence injected new growth points, and the small to medium customer base continued to expand. At the end of 2016, the number of online trading customers reached 20,705, an increase of 104.4% over the previous year. Among them, the number of small to medium customers and the share of proprietary revenue increased to 99.1% and 63.25% respectively. Demand in optical communication equipment, data centers, automotive electronics and other fields is expected to continue to increase in 2017. Through close cooperation with the world's top chip suppliers, the company will continue to increase its market share in China's communications industry. The entry of artificial intelligence into the electronics industry will continue to bring new growth areas, attracting a large number of traditional enterprises undergoing transformation to become customers. The company's small to medium customer base will continue to expand. Coupled with the increase in transaction user conversion rate and unit customer purchasing volume, various operating indicators are expected to continue to grow rapidly in 2017. The number of online customers is expected to increase 80% year on year, GMV will increase 50% year on year, and non-GApp net profit will increase 30% year on year.
Hard Egg's ability to monetize continues to increase. Improving the ecosystem to build a moat As of March 15, 2017, Hard Egg has attracted more than 238 million fans and nearly 24,000 IoT projects. Hard Egg's rapid expansion has continuously injected growth impetus into the company. In 2016, it contributed 5.18 billion GMV, increasing its share to 24%. As the platform scale and market share continue to expand, the rate of hard egg monetization continues to increase. It is estimated that 10 billion GMV will be generated in 2017, accounting for more than 30%. Furthermore, the company plans to establish Gravity Financial Services, with supply chain financial products as the core, with the aim of developing it as another platform for rapid growth after hard work. The unique “ecosystem” model that continues to be improved will build a moat for the company, ultimately driving the growth of business volume and the continuous enhancement of monetization capabilities.
The target price is HK$15.80, maintaining the “buy” rating
Based on the company's leading market position, its performance continues to grow steadily, and hard egg monetization has great potential to drive supply chain business development. We expect the company's adjusted net profit attributable to shareholders in 2017-2019 to be 695/99/1,226 million yuan, with a compound annual growth rate of 33%. Reiterate “buy”
The rating does not take into account the hard egg valuation. The target price is RMB 14.06 (about HK$15.80), which corresponds to the 2017/2018 30x/23x PE, which has room for a 31% increase from the current stock price.
Risk warning: Market competition intensifies; hard egg monetization falls short of expectations.
