1Q14 results in-line with our forecast
1Q14 revenue was up 38.8% YoY from Rmb161.3mn to Rmb223.9mn, net profit attributable to shareholders up 108.5% YoY from Rmb20.3mn to Rmb42.3mn. The company released a positive profit alert back in April, and the results are in line with both our forecast and market consensus.
Revenue growth was mainly driven by online service segments (+40.7% YoY), seminars and other services (+61.9%). Benefiting from the increase in paying accounts and raised subscription fees, subscription revenue saw strong growth and paid listing revenue was also higher on the enlarged paying accounts base. Trade catalogs & yellow pages (a profit losing segment) continued to decline.
Scale effect is showing up as SG&A grew at a much lower rate than top-line growth. As a result, operating margin was up from 13.9% in 1Q13 to 19.6%; and net profit margin increased from 12.4% in 1Q13 to 18.3%.
The new version of MMT has added mobile Internet features such as micro-shop, a WeChat-based service, to keep up with rapidly developing mobile Internet technology.
Trends to watch
We expect HC's transfer to the main board and approval of its Internet micro finance license to make substantial progress in 2Q14.
Revenue is expected to maintain the growth trend with online services as a % of total revenue continuing to increase due to the rapid organic growth of paying accounts and paid listing revenue growth, as well as management's efforts to develop online transactions.
Cost advantages will become more apparent. The sale effect will continue to help improve operating & net profit margin.
Valuation and recommendation
We maintain our BUY rating and TP of HK$28 based on 50x 2014e EPS. The stock is trading at 28.7x EPS, implying 74% upside. Risks: top-line growth disappoints; domestic demand weakens; O2O initiation fails.