20140819-新鸿基金融集团-Technology_Sector_Research_Idea-Membership_Has_Its_Privileges_12页_1mb

HC International (8292.HK) Summary

Core Content

HC International (HCI) is a leading China-based B2B e-commerce company that provides a platform for small and medium-sized manufacturers and wholesalers to source and market goods online. The firm's revenue model is primarily based on membership fees, search engine optimization services, and other value-added services. With 165K paying subscribers and 13m registered buyers, HCI has achieved a critical mass of users, which supports a virtuous cycle of growth and user acquisition.

Main Points

1. Industry Growth and Strategic Position

• The B2B e-commerce industry in China is expected to grow at a 20% CAGR through 2017, driven by government support, improved online security, and the shift of marketing budgets to digital platforms.
• HCI is well positioned to outperform the market due to its comprehensive online and offline services and its focus on SMEs.
• The firm is exposed to two key macro themes in China: support for SMEs and new strategic industries.

2. Three Reasons to Buy

• Comprehensive Offerings, Critical Mass of Users: HCI's platform benefits from a large user base, which supports scalability and growth.
• Scalable Business, Rising ROEs: The business model is scalable, with revenue per employee growing at 37% CAGR since 2010 and administrative costs declining to 14% of revenue.
• Differentiated Strategy for Future Monetization: HCI is expanding into micro-credit loans and O2O vertical integration, which will provide additional revenue streams such as interest income and transaction commissions.

3. Valuation and Target Price

• The stock is currently trading at a P/E of 33X (FY2014) and 21X (FY2015), which is below the 0.4X PEG of the 2013-15 consensus earnings growth.
• The firm is rated BUY with a 12-month target price of HK$19, implying a target P/E of 26X on the FY2015 estimate of RMB0.58/HK$0.73.
• The valuation suggests a 24% upside from the current price.

4. Catalysts

• Listing on the Main Board: The company is expected to transfer from the GEM board to the main board by the end of Q3 2014, improving liquidity.
• Launch of Micro-Credit Lending Operations: The firm is launching micro-credit lending in September 2014, which is expected to drive membership and generate interest income.

5. Risks

• Increased Competition: May pressure membership fees.
• Regulatory Changes: Potential impact on micro-credit financing in China.
• High Membership Turnover: Due to a slowing domestic economy.
• Over-Exposure to Small Household Appliances Industry: Could limit diversification.
• Execution Risk: In building HC Appliance City, a key O2O initiative.

Key Financial Data

Revenue Growth

• 2014E Revenue: HK$1,089m
• 2015E Revenue: HK$1,490m
• 2016E Revenue: HK$1,844m
• 2014-16 Revenue CAGR: 30%
• 2013 Revenue: RMB838m

EPS Growth

• 2014E Diluted EPS: HK$0.37
• 2015E Diluted EPS: HK$0.58
• 2016E Diluted EPS: HK$0.76
• 2014-16 EPS CAGR: 43%

Operating Profit and Margins

• 2013 OPM: 20.3%
• 2014E OPM: 25.8%
• 2015E OPM: 29.6%
• 2016E OPM: 30.7%
• 2014-16 OPM CAGR: 42%

Net Profit

• 2013 Net Profit: RMB153m
• 2014E Net Profit: RMB256m
• 2015E Net Profit: RMB408m
• 2016E Net Profit: RMB532m
• 2014-16 Net Profit CAGR: 44%

Cash Position

• Net Cash: RMB400m (excluding micro-credit funds)
• Operating Cash Flow: Over RMB160m annually

Investment Thesis

Monetizing B2B e-Commerce

• HCI has a 22-year history in supply chain expertise and has evolved from traditional trade directories to a digital B2B platform.
• The firm has 165K paying members and 13m registered buyers, with online revenue accounting for 83% of total sales.
• Members pay an upfront membership fee of RMB3,988 and can access additional services such as search promotion and online advertising.

O2O Differentiator

• HCI has a strong vertical focus in the small household appliances and home decoration sectors.
• The firm is investing in HC Appliance City, a wholesale mall in Foshan, Guangdong, which will serve as a centralized offline platform for its online members.
• The mall will begin operations in early 2016, and is expected to generate transaction commission revenue in the future.

Scenario Analysis

Peer Valuation

SWOT Analysis

Financial Services

• HC Pay: Launched in Q4 2013, it allows buyers and sellers to authenticate, settle, and dispute transactions.
• Credit Card Services: A joint project with Minsheng Bank, offering SME credit lines of RMB50-500K.
• Credit Card Usage: By year-end 2013, 30K members had RMB4.2bn in outstanding credit, with an average of RMB140K per member.
• Interest Rates: Between 14% and 18% on credit lines.

Conclusion

HCI is a well-positioned B2B e-commerce company with a growing user base, strong financials, and a clear path to monetization through its online platform, micro-credit lending, and O2O integration. The firm is expected to outperform the industry with a 30% CAGR in revenue and 43% CAGR in EPS through 2016. While there are risks, including intense competition and execution challenges, the potential for growth and improving margins make it an attractive investment opportunity.