The 2023 results are in line with expectations. Revenue in 2023 was RMB 4 billion (same below), up 16% year over year, driven by strong growth in payment business and partly offset by a decline in in-store business. Adjusted EBITDA increased 161% year over year to 550 million yuan, in line with expectations, mainly benefiting from the expansion of profit in the payment business and narrowing of in-store losses.

The payment business supports growth in performance. 1) Payment volume (GPV) /payment revenue in 2023 was 2.9 trillion yuan/3.5 billion yuan, up 29%/27% year on year. Benefiting from the recovery of offline consumption and the expansion of agent channels, the number of active payment merchants increased 13% year over year to 9.2 million, but remained the same as in the first half of 2023. Excluding the impact of non-recurring revenue adjustments, the payment rate remained upward, increasing by 1 basis point to 0.133% year over year. 2) Affected by competition, in-store GMV increased 30% to 4.3 billion yuan (22% month-on-month to 1.9 billion yuan in the second half of the year), and revenue fell 71% year-on-year, all weaker than anticipated at the beginning of the year, mainly affected by platform policy adjustments and increased competition among service providers. The in-store commission rate of 2.4% was basically stable compared to 2.5% in the first half of 2023, and the net loss narrowed to 43.5 million yuan, compared to 210 million yuan in 2022.

Outlook: Management shares medium- to long-term strategic goals, and will focus on: 1) Strengthening AI technology construction for payment scenarios and upgrading merchant service capabilities. 2) Expand monetization models such as monthly/annual fees for in-store merchants to upgrade full-case marketing services. 3) Explore receipt and merchant service opportunities in overseas markets such as Singapore, Indonesia, and the Philippines. Currently, Hong Kong/Singapore has obtained payment licenses. We expect that the transformation of the in-store business and overseas expansion will still take time, and the short-term payment business will still be the main driver of growth. We expect payment GPV/revenue to increase 9%/23% to 3.1 trillion yuan/4.3 billion yuan in 2024, corresponding payment rate 0.137%, and an increase of 1.6 basis points (excluding the impact of non-frequent adjustments to 0.6 basis points). The short-term increase in in-store revenue is limited, but UE is expected to continue to optimize or break even by 2024.

Valuation: Considering personnel costs associated with business transformation and expansion, which may be higher than our previous expectations, we lowered our net profit forecast for 2024. The target price was lowered from HK$16 to HK$14 based on comparable payment companies' price-earnings ratio of 14 times in 2024. There is still potential for growth in the payment business in the local Chinese market, but the growth rate will gradually slow down under a high base. The transformation of the in-store business and the expansion of the overseas payment business have yet to be verified and remain neutral.