Solid recovery in 1H23: Although the economic activities in Mainland China and the operations of the company were severely impacted by the COVID-19 pandemic in 1H22, the mid-range and high-end consumer market has shown a steadily increasing trend, which has been further propelled post-pandemic, leading to strong rebound of the luxury goods marketing industry. Customers’ demand for experiential saw a solid recovery, resulting in a 102.7% y/y increase in revenue to RMB350.3mn. Revenue from experiential marketing services rocketed 160.4% y/y and accounted for 80.0% of revenue. Revenue from digital and communication services dropped 5.5% y/y and accounted for 17.6% of total revenue, as some clients have reallocated more marketing budgets to offline marketing activities after the end of the pandemic. With strict control of operating expenses, the company reported RMB38.1mn of profit for 1H23, compared to a net loss of RMB8.5mn in 1H22. Considering the seasonality effect, its 1H23 results were in line with our estimates.

Leading pan-fashion brand marketing group: Activation is the largest experiential marketing service provider for mid-range to high-end fashion brands in Greater China with a market share of 10.0% in 2022. It has accumulated a pool of over 550 renowned global brands, including BVLGARI, CHANEL, DIOR, GUCCI, LOUIS VUITTON, LOEWE, IWC, AUDEMARS PIGUET, ASTON MARTIN, BMW, Mercedes-Benz, Cartier, etc. Looking into 2H23, the company will continue to monitor market developments and optimise its services to fulfil market demands, while leveraging its competitive advantages to offer one-stop data interactive marketing services and bring extensive online exposure to pan-fashion brand customers.

Reiterate BUY and new TP of HK$2.18: We reiterate our BUY rating with an upgraded TP of HK$2.18 (Previous: HK$2.01) based on an unchanged 12x target P/E for 2024E, as we rolled forward the valuation. We believe the valuation is justified as we believe normalization of the Chinese economy would sustain Activation’s recovery in 2H23 and the years ahead, which would sustain 2022-25E NP CAGR of 84.1%, backed by its rich customer base and its leading data interactive marketing business. An interim DPS of 2.0 HK cents was declared, and we believe Activation will maintain a stable payout policy of no less than 35% per year, backed by its debt-free financial position and net cash of RMB313.2mn on hand (i.e., 37% of market cap).