Investment Summary

1Q21 result beat market expectation

According to the company's announcement, the company's revenue from Subscription Solutions in 1Q21 represented an increase of over 100% as compared to 1Q20, which beat the market expectation. Further, as at the end of 1Q21, the number of paying merchants increased by approximately 21.9% as compared to 1Q20. The attrition rate was approximately 4.3%, with corresponding annualized attrition rate at 17.2%, which represented a huge improvement as compared to the 26.1% in 2020. On the other hand, the revenue from Merchant Solutions in 1Q21 was up by over 50% YoY.

Raised up USD 600 million to accelerate the investment ecosystem construction

According to the announcement on 25th of May, the company placed 156 million new shares with placing price at HKD 15.00, which represents a discount of approximately 6.6% to the closing price of 24th of May. The placing has been completed on 1st of June. At the same time, the company has proposed to issue USD 300 million of zero coupon guaranteed convertible bonds due 2026, with initial conversion price of HKD 21.00, which represents a premium of approximately 30.8% over the closing price of 24th of May. The placing and bond issuance will raise USD 600 million for the company and the proceeds will be used for improving the company's comprehensive research and development capabilities, upgrading the company's marketing system, supplementing working capital and general corporate purposes. The new share placing and the bond issuance recorded 8 times and 5 times subscription, respectively and many well-known and long term institution investors have shown interest, which fully demonstrated their recognition of the company's long term value. We believe the company will have sufficient capital for product R&D as well as M&A in various vertical industries, in order to further consolidate its competitive advantages in the market.

Valuation

We continue to be optimistic about the company's 1) the KA customer expansion in various vertical industries 2) three core strategies, 3) TSO (Traffic + SaaS + Operation) operation model. We believe that the TSO model is expected to further increase the ARPU of the KA customers, thereby uplifting the ceiling of the company's future growth.

We maintain our previous forecast on 2021-2023 Subscription Solutions revenue and adjust our forecast on 2021-2023 targeted marketing gross billing to HKD 15.8/20.8/26.9 billion (previous forecast was HKD 15.2/19.9/25.7 million). But since we expect the company to invest in PaaS and TSO continuously in the foreseeable future, we cut our 2021-2023 adjusted Net profit forecast to HKD 55/184/515 million (previous forecast was HKD 184/347/766 million). We maintain our 2022 targeted marketing target PE of 18x and 2022 subscription solution target PS of 23x, adjust TP slightly downward to HKD 26.46 (-0.9%), to reflect our more optimistic view on the company's targeted marketing business and to reflect the dilution effect as a result of the newly issued shares. The TP corresponds to adjusted PE of 966x/290x/103x in 2021/2022/2023, respectively. We maintain Buy rating. (Market closing price as of 8 June) (exchange rate: RMB 0.85/HKD)

Risk

1) The expansion of SaaS customers is worse than expected 2) The increased industry competition 3) Advertising demand is less than expected 4) Targeted marketing business mainly relies on the cooperation with Tencent 5) Valuation of the SaaS sector drops

Financial Statements

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