Investment positives
HC has successfully transitioned from an Internet information website to China 2nd largest domestic B2B e-commerce platform. After 2 years' development, HC now has >12mn registered users, 170,000 of which are paying members. There is still great room to grow. We expect revenue from HC members to rise by 30%~50%.
HC adopts a verticals-oriented business model and focuses on development in different verticals. HC has been the most professional B2B e-commerce platform in verticals like home appliances, gifts & souvenirs, construction materials and hardware, etc. There are 800,000 keywords positions available for sale in total. HC currently uses a paid listing model on ~40,000 positions. We expect the business to grow >50% annually.
Starting to lay out offline transaction platforms. HC has ambitions to develop a complete and closed loop ecosystem comprising an online trade platform, payment tools, an offline transaction platform and a supply chain system. It started to build up offline exhibition & trade centers and also has established an Internet microfinance JV with Digital China, looking to become a microfinance provider itself.
Financials
We believe the number of registered users will grow and increase membership subscriptions. In the meantime, subscription fees will increase as HC keeps providing new, value-added services. For keyword paid listings, we think there is great growth potential as the service will become increasingly important for the growing number of sellers coming to the HC platform. We forecast a 30~50% top-line CAGR to Rmb1.17bn/1.64bn in 2014/15 and expect net profit to post a 50%~80% CAGR to Rmb239mn/Rmb407mn in the same period.
Valuation and recommendation
We initiate coverage of HC with a BUY rating and TP of HK$26.50 based on 50x/28x 2014e/15e EPS, with a PEG of 0.7. The stock is trading at 18.4, implying 44% upside.
Risks
Topline growth less than expected; downside risk when domestic demand weakens; O2O initiation fails.