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Market Report Summary - Pacific Online Limited (543.HK)

Core Content

This report provides an analysis of the financial performance and business outlook for Pacific Online Limited (543.HK) as of 3 June 2015, alongside broader market trends and comparisons with peers.

Key Business Insights

• PCauto:

  • Contributed 57% of total revenue in 2014.
  • Achieved 25.7% YoY growth, surpassing the previous estimate of 25.0% YoY growth.
  • Expected to grow by 28% YoY in 2015 due to enhanced online and offline marketing efforts.
  • Grew traffic acquisition, particularly through investments in Sougou (PC) and UC Shenma (mobile).

• PConline:

  • Expected to see weaker performance in 2015 due to increased competition and reduced ad spending by manufacturers.
  • Management anticipates margin pressure in the first half of 2015 due to higher sales and marketing expenses.
  • Long-term growth potential is still seen despite short-term challenges.

• PCbaby:

  • Showed 80% YoY revenue growth in 2014.
  • Expected to grow by 50% YoY in 2015.
  • Acquired Happy Mam (快乐妈咪) in March 2015 for Rmb50mn to expand into specific user groups.

• New Initiatives:

  • The company is investing in smart hardware and wearable devices.
  • These initiatives are expected to provide long-term growth opportunities and potentially deliver surprises for the company.

Market Trends

• TMT Sector:

  • Didi-Kuaidi launched a carpooling app to compete with Uber.
  • Qunar secured $500M investment and rejected Ctrip's acquisition offer.
  • Leshi Mobile raised USD 400Mln in Series A funding.
  • OnePlus aims to build its own ecosystem.
  • NXP Semiconductors plans to sell its RF business to JAC Capital.

• Stock Market Performance:

  • Hang Seng Index (HSI) closed at 27,467, down 0.5%.
  • H-share Index closed at 14,202, down 0.7%.
  • CSI 300 Index closed at 5,162, up 1.7%.
  • Shanghai Composite Index closed at 17,486, up 3.4%.
  • Shenzhen Composite Index closed at 3,030, up 3.5%.
  • Nikkei 225 closed at 20,543, down 0.1%.
  • Korea KOSPI closed at 2,079, down 1.1%.
  • Taiwan TWSE closed at 9,614, down 0.1%.
  • India Sensex 30 closed at 27,188, down 2.4%.
  • US/European Markets:
    • DJIA closed at 18,012, down 0.2%.
    • S&P500 closed at 2,110, down 0.1%.
    • NASDAQ closed at 5,077, down 0.1%.
    • UK FTSE 100 closed at 6,928, down 0.4%.
    • Germany DAX closed at 11,329, down 0.9%.
    • France CAC40 closed at 5,004, down 0.4%.

Financial Performance

Revenue and Profit Trends

• Total Revenues:

  • Grew from Rmb640.2m in 2011 to Rmb1,177.2m in 2015E.
  • YoY growth: 26% (2011), 12% (2012), 18% (2013), 16% (2014), 19% (2015E).

• Gross Profit:

  • Increased from Rmb442.3m in 2011 to Rmb800.5m in 2015E.
  • Gross Margin: 69% (2011), 71% (2012), 71% (2013), 67% (2014), 68% (2015E).

• Operating Profit:

  • Grew from Rmb282m in 2011 to Rmb224m in 2015E.
  • Operating Margin: 44% (2011), 41% (2012), 37% (2013), 28% (2014), 19% (2015E).

• Net Profit:

  • Grew from Rmb228.9m in 2014 to Rmb182.2m in 2015E.
  • YoY growth: 14% (2011), 3% (2012), 7% (2013), -13% (2014), -18% (2015E).

• Earnings Per Share (EPS):

  • Basic EPS: Rmb21.27 (2011), Rmb21.83 (2012), Rmb23.34 (2013), Rmb20 (2014), Rmb16.48 (2015E).
  • Diluted EPS: Rmb20.65 (2011), Rmb21.38 (2012), Rmb22.83 (2013), Rmb19.63 (2014), Rmb16.17 (2015E).
  • Dividend per share: Decreased from Rmb14.78 in 2014 to Rmb11.48 in 2015E.

Balance Sheet Highlights

• Total Assets:

  • Increased from Rmb871.2m in 2011 to Rmb1,416.7m in 2015E.

• Total Liabilities and Equity:

  • Increased from Rmb871.1m in 2011 to Rmb1,445.1m in 2015E.

• Shareholders' Equity:

  • Grew from Rmb707.9m in 2011 to Rmb1,072.7m in 2015E.

Cash Flow

• Cash From Operations:

  • Increased from Rmb224.3m in 2011 to Rmb223.4m in 2015E.

• Cash From Investing Activities:

  • Decreased from Rmb78.6m in 2011 to Rmb-162.5m in 2015E.

• Cash From Financing Activities:

  • Decreased from Rmb-135.5m in 2011 to Rmb-101.3m in 2015E.

• Net Changes in Cash:

  • Decreased from Rmb167.4m in 2011 to Rmb-40.4m in 2015E.

Valuation and Target Price

• Target Price: HK$4.6.
• Upside: 9.5% from the current price of HK$4.2.
• Valuation: Based on a 28x FY15F PE, comparable to Chinese Internet/portal peers.
• Forward PE: 28x.
• EV/Sales: 10.49x (2014A), 12.91x (2015E), 10.72x (2016E).

Company Outlook

• Rating: HOLD.
• Challenges:
  • Mobile Internet era and e-commerce giants are posing threats.
• Strategies:
  • Adjusting business strategies to maintain competitive advantage.
  • Seeking new growth opportunities through smart hardware and wearable devices.
• Outlook:
  • PCauto is expected to maintain steady growth.
  • PConline may face weaker performance.
  • PCbaby and PClady are expected to continue robust growth.

Peer Comparison (Selected Companies)

Summary

Pacific Online Limited (543.HK) is navigating a competitive market environment, where PCauto is expected to maintain growth, while PConline faces challenges due to the shift in traffic to mobile and reduced ad spending. The company is also exploring new opportunities in smart hardware and wearable devices, which may provide long-term value. Despite the challenges, the company's PCbaby and PClady are expected to grow significantly. The company's target price is set at HK$4.6, based on a 28x FY15F PE, and the rating is HOLD. The company's financial performance has shown mixed results, with revenue growth and margin pressure in certain segments. The peer comparison shows that the company is relatively undervalued compared to other Chinese Internet/portal peers.