20180104-东英亚洲证券-中国创新支付-08083.HK-An_Undervalued_Unicorn_16页_1mb

Equity Research TMT Summary

Core Content

This document provides an equity research analysis of China Innovationpay Group Ltd. (8083 HK), focusing on its acquisition of Youzan.com and the resulting transformation into a leading mobile social e-commerce solutions provider. It highlights the company's potential for growth, monetization, and synergies with its payment licensing capabilities.

Main Points

Company Overview

• China Innovationpay Group Ltd. is an investment holding company with subsidiaries in electronic payment tools, computer and communication equipment trading, and prepaid card operations.
• The company has acquired 51% of Youzan.com, a leading mobile social e-commerce platform, for HK$2.1 billion (equivalent to 5.5 billion shares at HK$0.38 per share).
• The acquisition is expected to be completed in 1Q18E, with Youzan's management team holding 42.6% of the enlarged share capital.

Market and Growth Trends

• The Micro-merchant market in China is growing rapidly, with a CAGR of 44% from 2016 to 2019, reaching RMB980.4 billion by 2019.
• Youzan has a strong presence in the mobile social e-commerce space, targeting SMEs and micro-merchants on platforms like WeChat.
• Youzan's GMV grew from RMB260 million in 2014 to RMB10 billion by the end of FY16, with 364,000 active registered merchants.

Valuation and Investment Opportunities

• The acquisition is valued at 0.34x P/GMV (2016), significantly lower than its peers, which are at 0.62x P/GMV.
• This suggests that China Innovationpay is undervalued compared to other major e-commerce platforms.
• The PBOC has limited the issuance of third-party payment licenses, which creates a barrier to entry and strengthens Youzan's position.

Synergies

• The combination of CIP's prepaid card business and Youzan's e-commerce platform opens up opportunities for new revenue streams such as:
  • Interest income from e-commerce prepayments
  • Cost savings from using CIP’s payment gateway
  • Virtual prepaid/membership card business and collective payment services
• The payment license enhances the ability to offer capital management services, leveraging Youzan's GMV.

Short-Term Catalysts

• Completion of the acquisition in 1Q18E
• 2Q18 results
• Special Mandate new share placing to raise HK$150 million to HK$345 million
• The SGM (Shareholders' General Meeting) is scheduled for 26th Jan 2018

Risks

• Slower-than-expected growth in Youzan’s paid user base
• Potential blocking by Tencent of third-party e-commerce channels on WeChat

Key Information

Financial Highlights

• Closing price: HK$0.435 (as of 03/01/2018)
• 12 Months High/Low: HK$0.68 / HK$0.35
• Market Cap: HK$3,035.85 million
• Issue Share: 6,978.96 million shares
• 3M Avg Daily Vol.: 13.94 million shares

Youzan Business Overview

• Youzan provides a range of mobile social e-commerce solutions including:
  • Micro Stores (basic, professional, premium)
  • Youzan Retail, Youzan Catering, Youzan Beauty, Youzan Cashier, Youzan Wholesale, and Youzan Distribution
• Youzan offers annual subscription plans with varying levels of service and cost.
• Youzan’s GMV reached RMB10 billion by the end of FY16, with a 3-year CAGR of 521%.

Acquisition Impact

• The acquisition is expected to narrow net loss and improve GPM (Gross Profit Margin) for both companies.
• Youzan's GPM improved to 70.83% in 10M17, up from 47.60% in FY16, indicating operational efficiency.
• The acquisition valuation is 45% lower than its peers, suggesting undervaluation.

Fund Raising

• CIP plans to raise HK$150 million to HK$345 million through a new share placing.
• The funds will be used for:
  • System maintenance and upgrades
  • New product development
  • Promotion of services
  • General working capital

Conclusion

China Innovationpay Group Ltd. is well-positioned to capitalize on the New Retail and O2O trends in China. The acquisition of Youzan provides a strategic advantage and opens up new monetization opportunities. Despite current losses, the company is expected to turnaround and deliver positive returns in the near future. The low valuation and synergies with Youzan's e-commerce business make it an attractive investment. However, regulatory and competitive risks should be monitored closely.