Dynamic Ecosystem And KA Strategy To Drive Long-term Growth

Weimob recently released strong 1Q21 operating data and a fund-raising announcement. We opine that the recent fund-raising exercise is a timely move for the company, allowing it to build up its warchest as it continues to expand its R&D capacity and new verticals. We remain optimistic on its smart retail/smart caterings as well as relatively strong retention rate, driven by its large customer approach. We maintain BUY on Weimob with
an unchanged target price of HK$25.00.

WHAT’S NEW
• Positive operating statistics. In 1Q21, Weimob’s Subscription Solutions revenue surged over 100% yoy, excluding a one-off impact, while Merchants Solutions registered >50% yoy growth during 1Q21. The number of paying merchants grew 22% yoy with attrition rate low at 4.3%. Both revenue growths came in within our expectations for 1H21 (assuming the
performance were to replicate in 2Q21) as we expect a higher attrition rate of 19% during 1H21. We believe the solid performance was mainly supported by the increasing portion of Key Account (KA) clients such as Starbucks, Mengniu, Purcotton etc, as well as a better-than-expected attrition rate. Churn rate for SMEs was 25-30% vs c.10% for large merchants, and LTV/CAC was 2-3x for SMEs vs 10x for large merchants. KA (key account) revenue contribution for 2021 will be at 30%.

STOCK IMPACT
• TSO strategy over the next five years. Weimob has rolled out its Traffic+SaaS+Operation (TSO) strategy across channels including WeChat, Douyin and Kuaishou and offers the SaaS solution and operational consulting to merchants. We believe that the implementation of the TSO strategy and anticipated launch of Weimob PaaS 2.0 in 2021 will continue to underpin the company KA’s strategy to achieve 50% of total revenue by 2025.


• Strengthening ecosystem. In terms of its internal ecosystem, Weimob had opened up multi-channel integration across essentials platforms such as Baidu, QQ, WeChat Moment, Alipay and Douyin, which aims to diversify its private domain data traffic. At the same time, Weimob and Tencent had also launched “Project Tenmob 2.0”, which will capitalise on Tencent’s advertising platform private domain data and Weimob’s targeted marketing initiatives in order to further optimise the enterprise digitalisation needs. Amid the slower
growth from subscription-based revenue as well as declining margin, we expect the Merchants Solutions segment to be the next key driver moving forward given that the company has diversified footprints across differentiated industry KA as well as seen continued improvement in users’ retention rate following the sabotage event in 1H20.


• Industry outlook. The overall enterprise SaaS market in China remains lucrative, and is estimated at Rmb76b according to iResearch given that the demand for customisation services as well as instantaneous respond are rapidly re-shaping the traditional industry. The company estimates its addressable market in terms of GMV could reach Rmb2.4t in In 2019, China retail sales totalled Rmb40t, of which Rmb10t were online sales, and less than 5% was directly sold to customers (DTC) via social networks. The company
expects the future landscape for e-commerce sales to be transacted via offline/centralised online platforms/DTC channels in a 40%/30%30% proportion. If the China retail sales market grows to Rmb80t by 2030, DTC channels will account for Rmb24t; if Weimob takes 10% of the market share, it would account for Rmb2.4t.


EARNINGS REVISION/RISK
• We maintain our forecasts unchanged.


VALUATION/RECOMMENDATION
• Maintain BUY with unchanged target price of HK$25.00. We apply 20x 2022F EV/sales for the SaaS business and 20x 2022F EV/EBITDA for the TA (targeted advertising) business, in line with peers.


• Fund raising to replenish its warchest. On 24 May, Weimob announced the issuance of US$300m (HK$2.34b) zero coupon convertible bonds (due in 2026, with conversion price of HK$21.00) and conducted US$298.5m (HK$2,315.6m) private placement (exercise at HK$15.00 per share representing 6.9% of its enlarged issued share capital). Its strategic partner Tencent has acquired 20% of the placement. Both corporate exercises had been oversubscribed by 8x/5x for private placement and convertible bond respectively. The proceeds will be used to strengthen its R&D capabilities, expand to new verticals and fund
potential M&A target(s). We believe the fund-raising exercise is timely given the intensified competitive landscape within e-commerce SaaS and also unconventional players such as Douyin and Kuaishou entering offline digitalisation.


• 2021 outlook. The company has reaffirmed its guidance of re-accelerated growth, with subscription revenue expected to grow 70-80% yoy, and merchant solutions to grow at 50% yoy. On the expenses front, Weimob is planning to expand its R&D personnel to 2,400 in 2021, to better support its fast expansion. The strong SaaS revenue will be mainly driven by 20-30% yoy growth in the number of merchants and 15-20% yoy growth in ARPU. By
segment, the company expects a high double-digit growth in e-commerce (WeiMall) revenue growth in 2021, 100% yoy growth in the smart retail sector, with 400 more chain brand customers joining; and re-accelerating growth of 50% yoy in smart catering, thanks to the catering industry recovering from the pandemic.

SHARE PRICE CATALYST
• Strong growth from Wechat mini-programme, growth from e-commerce live streaming and revenue recovery in 2021.


RISK
• Heavy investment in new user acquisitions from marketing activity; low entry barriers for commerce SaaS, and competition from Meituan in O2O commerce.