Fulu Network, as China's leading virtual goods service provider, is expected to continue to benefit from the rapid growth of the online entertainment and life services industry after the epidemic. We expect its revenue / adjusted net profit to grow at a compound annual rate of 38% / 34% in 2020-23, driven by an increase in upstream customers, GMV growth in games and entertainment, and value-added services / SaaS realization. It covers for the first time, gives a buy rating, and has a target price of HK $12.0 based on DCF.
Fulu is still in the stage of high growth, and its new SaaS business is expected to further free up potential market space and valuation.
A leading one-stop virtual goods service provider. According to Frost Sullivan, Fulu is the largest third-party virtual goods service provider in China by revenue in 2019. Based on Fulu's close cooperation with upstream and downstream and innovative business operations, we predict that the company's revenue / adjusted net profit in 2020-23 will grow at a compound annual rate of 38% and 34%, thanks to the growth of online entertainment and life service racetracks, and the increased contribution of value-added services.
Benefit from the growth of online entertainment and life service tracks. Given the nature of its online business, we believe that Fulu is resilient to the impact of the epidemic and will benefit from the rapid growth of online entertainment, games and life service tracks. According to Frost Sullivan data, the market of virtual commodity service providers for entertainment / game / life services in China will grow at a compound annual growth rate of 18.2%, 12.1% and 12.9% in 2019-24. We expect Fulu's entertainment and gaming GMV to grow at a compound annual rate of 29% and 46% in 2020-23 as entertainment and consumption shift online.
Innovative business models and value-added services have achieved initial results. Through the innovative business model of "aggregation + service", Fulu has opened up nearly 3000 upstream and downstream channels, aggregating a large number of suppliers and diversified virtual goods sales scenarios. Based on Fulu's high-quality partners and service capabilities, we believe that the company can continue to increase terminal traffic, expand cooperation network and improve consumer efficiency, and then promote GMV growth. In addition, we expect that Fulu will continue to launch new value-added service solutions to help suppliers improve efficiency and GMV. We expect Fulu's value-added services revenue to grow at a compound annual growth rate of 36% in 2020-23, accounting for 21% of total revenue in 2022.
Cover for the first time and give a buy rating. Our target price based on DCF is HK $12.0 (corresponding to 13 times the 23-year forecast price-earnings ratio of 2022), which is slightly lower than the industry average. Potential catalysts: 1) robust earnings performance; 2) strong revenue growth; 3) SaaS new business development.