20220610-招银国际-汇通达网络-09878.HK-An_ecommerce_boutique_surfing_on_lower-tier_retail_digitalization_35页_3mb

Summary of Huitongda Network (9878 HK) Equity Research

Core Content

Huitongda Network (HTD) is an e-commerce and service platform focused on the lower-tier retail market in China. It operates as an O2O (Online-to-Offline) leader, leveraging a highly localized team, deep market insights, and a store-friendly ecosystem to drive growth. HTD's business model is centered around connecting small and medium-sized retailers with suppliers through a robust supply chain and SaaS solutions.

Main Points

• Market Position: HTD ranked first in China's lower-tier market in terms of GTV in 2020 with a market share of less than 1%, according to Frost & Sullivan.
• Growth Drivers: HTD is expected to benefit from the growth of the lower-tier retail market, which is projected to expand at a 6.5% CAGR from 2020 to 2025.
• Revenue Growth: HTD's revenue is forecasted to grow at a 34% CAGR from FY21 to FY24, driven by store expansion and SaaS initiatives.
• Earnings Growth: Earnings are projected to grow at a 57% CAGR in the same period, due to improved gross profit margins and better cost control.
• SaaS Expansion: HTD's SaaS+ service is a key monetization tool, expected to grow at a 67% CAGR in FY21-24E. It provides digital retail management, online storefronts, and data analytics, with a focus on enhancing customer experience and driving recurring revenue.
• Network Expansion: HTD is expanding its network of active member stores and wholesaler customers, with a target of over 140,000 member stores by 2024, implying a 33% CAGR in active stores.
• Strategic Focus: HTD is focusing on increasing its market share in lower-tier cities and expanding its offerings in high-GPM SKUs, such as kitchen and bathroom appliances, smart wearables, and agricultural products.
• Resilience to Risks: HTD is more resilient to regulatory and epidemic impacts due to its focus on rural revitalization and low exposure in high-tier cities.
• Valuation: The target price is set at HK$66, implying a 0.27x FY23E P/S multiple, based on DCF and SOTP analysis. The current price is HK$46.7, indicating a potential upside of +41.3%.
• Customer Base: HTD serves a wide range of customers, including small and medium-sized retailers, wholesalers, and consumers, with a strong emphasis on localized client managers.

Key Financial Projections

Investment Thesis

• Ecommerce Pioneer: HTD is a leading player in the lower-tier retail market, with a strong network and localized team.
• Industry Tailwinds: HTD is positioned to benefit from the growth of the lower-tier retail market, which is fragmented and underpenetrated by digitalization.
• SaaS Initiatives: HTD's SaaS solutions are expected to diversify monetization and unlock synergies between e-commerce and SaaS businesses.
• Resilience: HTD's focus on rural revitalization and low exposure in high-tier cities makes it more resilient to regulatory and epidemic risks.
• Valuation: The target price is based on DCF and SOTP analysis, with a 0.27x FY23E P/S multiple. The stock is initiated with a BUY rating.

Key Investment Risks

• Market Penetration: HTD's market share in lower-tier cities is still below 1%, which may limit its growth potential.
• Regulatory Environment: HTD may face regulatory challenges as the government continues to monitor digitalization in the retail sector.
• Competition: The lower-tier retail market is highly fragmented, and HTD may face competition from other e-commerce and SaaS platforms.
• Economic Conditions: HTD's growth is sensitive to economic conditions, particularly in the lower-tier market where consumers are more price-sensitive.

Strategic Initiatives

• Store Expansion: HTD is expanding its network of active member stores, targeting growth in regions such as Henan, Hebei, and Guangdong.
• SKU Expansion: HTD is diversifying its product offerings, including higher-GPM SKUs such as kitchen and bathroom appliances, smart wearables, and agricultural products.
• SaaS Solutions: HTD is developing SaaS+ solutions to enhance digitalization and provide customized services to its member stores.
• Supply Chain: HTD has built a strong supply chain with over 175,000 SKUs, including six major categories such as household appliances and consumer electronics.

Conclusion

HTD is well-positioned to capitalize on the growth of the lower-tier retail market in China, with a strong focus on store expansion, SaaS initiatives, and supply chain optimization. Its localized team and store-friendly ecosystem provide a competitive advantage, and its financial performance is expected to improve significantly over the next few years. The stock is initiated with a BUY rating, based on a target price of HK$66, which reflects its potential for growth and the current undervaluation.