Reborn as leading cloud-based e-commerce solution provider

Tue, 06 Feb 2018 E q u i t y R e s e a r c h China Innovationpay (8083 HK) T M T/ C h i n a Reborn as leading cloud-based e-commerce solution provider  China Innovationpay (CIP) announced acquisition of 51% of stake in Youzan, a leading e-commerce SaaS vendor specified in Fast Moving Consumer Goods.  We expect CIP to turn around in 2H18E thanks to (1) surging Youzan GMV, (2) synergies from acquisition of third party payment licence and (3) operating leverage.  We initiate our BUY rating on CIP with TP HK$0.68 based on 25x FY20E PE or 0.24x PEG, representing a potential upside of 89%. Transforming into a leading social e-commerce Saas vendor in China by acquiring 51% stake in Youzan, completion expected by end of 1Q18E. On 20th Mar 2017, China Innovationpay (CIP) announced to acquire 51% of Youzan (YZ) at a consideration of HK$2.1bn, settling by 5.5bn new consideration shares at HK$0.38 per share. After the acquisition, YZ and its associate will be the single largest shareholder of CIP with 42.6% shareholding. We expect the acquisition to be completed in 1Q18E. Riding on the rise of new retail and surging demand for O2O solutions. New Retail advocates such as Alibaba and JD are turning offline battlefields to seek further penetration into decentralized retailing segments especially in the Fast Moving Consumer Goods (FMCG). We see both online and off-line merchants are ready to adopt O2O strategies for better user experience, omni-channel mgmt and agility in Customer Relationship Mgmt (CRM). YZ is well-positioned to reap the trend by providing one-stop packaging for retailers to set up and manage online stores on social platforms and offers seamless vertical solutions to integrate online CRM channels into offline operations. We expect 82%/91%/94% revenue contribution from YZ e-commerce business, or HK$661mn/HK$1,263mn/ HK$2,057mn in FY18/19/20E. Breakeven is expected in 2H18E thanks to the synergies from 3rd party payment licences, operating leverage and monetization of YZ’s active merchants’ base. The acquisition makes YZ the 7th e-commerce player with third party payment licence, we estimate a potential HK$155mn new revenue stream from interest income and third party payment levy on YZ’s GMV, representing 19% of our estimated consolidated revenue in FY18E. Given (1) 74% CAGR of YZ GMV from RMB19bn in FY17 to RMB100bn in FY20E and (2) 56% CAGR of YZ paid merchants from 46k in FY17E to 174k in FY20E, we expect CIP to break even in 2H18E with 217% net profit CAGR during FY18E to FY20E. Initiate BUY. We initiate our BUY rating on CIP with TP HK$0.68, representing 25x FY20E PE or 0.24x PEG, indicating a potential upside of 89% given (1) breakeven in 2H18E, (2) 65% revenue CAGR from FY18E to FY20E driven by growing YZ’s paid merchants base and (3) 217% net profit CAGR in same period driven by operating leverage. We believe the current share price has not yet factored in the potential upsides from the acquisition on a fully diluted basis Risks: (1) The acquisition may be delayed; 2) slower ramp up of new paid merchant base of YZ; 3) WeChat may block third party e-commerce API. E x h i b i t 1: F o r e c a s t a n d Va l u a t i o n Year to Dec (HK$ mn) FY16 FY17E FY18E FY19E FY20E Revenue 80.2 163.8 808.3 1,394.9 2,195.7 Growth (%) (17.4) 104.3 393.4 72.6 57.4 Net Profit (210.1) (116.6) 34.8 231.6 357.8 Growth (%) 58.5 (44.5) (129.8) 565.4 54.5 Diluted EPS (HK$) (0.035) (0.016) 0.003 0.018 0.027 EPS growth (%) 48.5 N/A N/A N/A 54.5 Change to previous EPS (%) 0.0 0.0 Consensus EPS (HK$) 0.000 0.000 ROE (%) (22.3) (14.9) 1.3 4.8 7.0 P/E (x) (10.4) (21.9) 135.2 20.3 13.2 P/B (x) 2.6 3.5 1.0 0.9 0.9 Yield (%) 0.0 0.0 0.0 0.0 0.0 DPS (HK$) 0.000 0.000 0.000 0.000 0.000 Source: Bloomberg, OP Research Yuji Fung +852 2135 0236 yuji.fung@oriental-patron.com.hk Dallas Cai +852 2135 0248 dallas.cai@oriental-patron.com.hk Initial Coverage BUY Close price: HK$0.36 Target Price: HK$0.68 (+89%) Key Da t a HKEx code 8083 12 Months High (HK$) 0.68 12 Month Low (HK$) 0.35 3M Avg Dail Vol. (mn) 14.00 Issue Share (mn) 6,978.96 Market Cap (HK$mn) 2,512.42 Fiscal Year 12/2016 Major shareholder (s) Director Guan Gui Sen Source: Company data, Bloomberg, OP Research Closing price are as of 06/02/2018 Pr i c e Ch a r t 1mth 3mth 6mth Absolute % -20.0 -16.3 -14.3 Rel. MSCI CHINA % -22.6 -25.5 -36.3 C o m p a n y P r o f i l e China Innovationpay Group Ltd. is an investment holding company. The Company's subsidiaries are principally engaged in the development and operation of electronic payment tools, the trading of computers and communication equipment, and the operations of prepaid card business, including the issuance of various prepaid cards, part of which have multiple functions in Ch