Investment Summary

Take Private Proposal of China Youzan, Proposed Listing of Youzan Technology on HKEX Main board

The company has announced on the 28th of February, 2021, that the Offeror Betacafe and the company proposed to distribute stocks of Youzan Technology and cash to China Youzan's shareholders. Youzan Technology will be listed on the main board of HKEX by way of introduction. After the distribution of stocks and cash, China youzan will be taken private. According to the proposal, each stock of China Youzan will have the right to claim HKD 0.1352 cash (corresponding to the RMB 2.334 billion valuation of the company's payment and other business) and 0.0508 stocks of Youzan Technology.

According to the valuer JLL, as of 30th of November, 2020, the estimated value of Youzan Technology was RMB 54.1 billion (HKD 64.8 billion), with respective stock price at RMB 35.73 (HKD 42.81). Based on the estimated value of Youzan Technology, the intrinsic value of China Youzan should be HKD 2.3088, which represents a discount of 30.2% comparing to the closing price of 26th of February 2021 (the previous trading day on announcement date), but represents a premium of 12.6% comparing to the closing price of 30th November 2020 (the valuation reference date). We believe that the intrinsic value of China Youzan (HK$2.3088) calculated based on the valuer's valuation is not the actual transaction and market-recognized price. Therefore, the intrinsic price is not very informative. In general, we believe that this transaction solves the company's two major problems, namely 1) the company is listed on the GEM and hence lacks stock liquidity 2) the company is only the controlling shareholders of Youzan Technology (The operating company of the SaaS business, formerly known as Qima Holdings), hence there might potentially be a certain discount on the valuation.

The potential positive factors of Youzan Technology being listed on HKEX main board

1) After Youzan Technology is listed on the main board, the stock liquidity will greatly improve. In addition, based on the current market cap of China Youzan, Youzan Technology is expected to be included in multiple indexes and stock connect trading list soon after its IPO on the main board. The inclusion in the stock connect is likely to introduce mainland investors to contribute the company's revaluation and drive the company's valuation even higher.

2) As of December 31, 2019, the asset value of China Youzan's payment and other business segment was RMB 4.8 billion, while the revenue generated from this segment was only RMB 170 million. The corresponding revenue/asset ratio was 3.6%, which is much lower than the revenue/asset ratio of 31.7% for the company's SaaS business. Therefore, the operating efficiency of Youzan Technology (SaaS business) will be significantly higher than that of China Youzan. On the other hand, despite the separation of the payment business from the listed entity, Gaohuitong, which holds the payment license, will continue to serve Youzan Technology's merchants.

Valuation and Investment Thesis

According to F&S, as of end of 2019, the company has the highest market share among all cloud-based commerce service provider in China, with a market share of 6.3%. We continue to be optimistic about the rapid growth of the cloud-based commerce service sector of China and the company's leading position in the sector.

We maintain our previous financial forecasts of the company and maintain the 2022 target P/S of 27.5. We maintain the target price at HKD 4.23, with respective 2020/2021/2022 P/S at 65.6x/39.9x/27.5x (51.9% of revenue). We maintain the Buy rating. (Market closing price as of 10th March) (exchange rate: RMB 0.85/HKD)

Risk

1) The delay in Youzan Technology listing and take private of China Youzan

2) The expansion of SaaS customers is worse than expected

3) The increased industry competition

4) GMV increase less than expected

5) Merchants renewal rate less than expected

Financial Statements

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