2013 results beat
Annual revenue rose 52.7% YoY to Rmb838mn (2012: Rmb549mn), beating consensus of Rmb819mn by 2%. Net profit was up 131.6% to Rmb153mn (2012: Rmb65mn), beating consensus of Rmb147mn by 3%. Gross margin increased 4.4ppt to ~91.9% (2012: 87.5%).
Trends to watch
Deepening monetization of online platform: As membership of HC's B2B platform grows, we expect the online service revenue to follow suit through various monetization models including membership subscription, search, online advertising and transactions. The online transaction platform launched in 2013. Payment volume is expected to ramp up in 2014.
Microfinance JV expected to kick off in mid-June: HC announced plans to invest Rmb1bn together with Digital China to set up a Microfinance JV. HC owns 40% of the business. It is applying for an Internet microfinance license which we expect to be issued this half. The JV should boost earnings but we do not price it into our estimate yet.
Closed loop ecosystem gradually completing: HC has already started laying out offline markets by building up exhibition & trade centers allowing direct or online transactions, including one in Shunde, Guangzhou. We also expect closed cooperation between Digital China and HC on supply chain.
Earnings revisions
We lift 2014/15e revenue 0.7%/0.1% to Rmb1.17bn/1.64bn; net profit +4.22%/-3.54% from Rmb240mn/407mn to Rmb250mn/392mn; and EPS +4.05%/-3.83% from HK$0.53/0.93 to HK$$0.55/0.89.
Valuation and recommendation
Reaffirm BUY and lift TP 5.66% to HK$28 based on 50x 2014e EPS.
Risks
Top-line growth disappoints; weakening domestic demand weakens; O2O initiation fails.