This article is part II of our analysis on Weimob (02013:HK), check out part I before you read. 

SaaS products business operating leverage kicked off in 2019E

Targeted marketing is a cash cow for the company; SaaS products business, however, remains the core of the firm’s strategy. 

The company’s SaaS products are categorized into three cloud service offerings, namely Commerce Cloud, Marketing Cloud and Sales Cloud. The first two contributed all SaaS products revenues before 2019H1. 

Commerce Cloud accounted for 72.9% of revenue in 2019. It offers online shopfront setup, WeChat account operation, CRM, Business Intelligence (BI) and marketing add-ons to clients. Marketing Cloud enables marketers to optimize marketing campaigns and manage marketing budgets. To expand its industry coverage, the company has acquired/invested in industry vertical SaaS providers (retail and hotel marketing). To commercialize Sales Cloud from 2019 onwards is a vital focus of the firm’s strategy. 

Apart from SaaS offerings, the company has Platform-as-a-Service (PaaS) to provide more customized products and thus build a better developer ecosystem.

Benefitting from the booming Tencent e-commerce ecosystem, SaaS business saw a strong growth here, with revenue rising 33.4% in 2019H1.

Besides, the health of the SaaS business looks promising: the rising number of large enterprise customers, average revenue per user (ARPU), and a narrowing churn. 

In 2019H1, the number of paying merchants reached 70,006, a 24.3% increase over a year before. We see a slight fall in the growth of paying users due to rising competition and a growing maturity business. 

On the other hand, we see a continuous churn thanks to sound product design and technology input for new features/services/products. 

Revenue outlook

We see the increasing ARPU as a sign of increasing maturity, showing Weimob clients growing with Weimob and producing more value for the platform. 

As such, revenue is expected to reach the CNY 1 billion milestone in 2022, growing at a 34% five-year CAGR with a trailing 5-year growth at 338.3%. As such, forecast customer lifetime value (LTV) will be up 18% (CAGR) from 2018, reaching CNY 42,372.  The major cost of SaaS products business was selling and distribution expenses that comprise of contract acquisition costs and staff costs. 

As of June 30, 2018, Weimob had 917 channel partners for SaaS products. Weimob currently rebates around 30% of the annual subscription fee to distributors, while direct sales are entitled a fixed payroll with a fixed commission (~5%). From 2016 to 2017, channel partners contributed to 86.6%, 71%, 62.1% of revenue. 

We forecast the importance of channel partners to keep decreasing over the forecast period and a more significant contribution from direct sales. Behind this we may note:

Giving a high rebate to channel partners at the beginning of a SaaS business is a common way to acquire customers fast, which may decrease when expanding the customer base; 

Weimob is set to improve revenue driven from direct sales by adding the number of sales, as can be seen from the rapidly growing staff costs. The further increase in staff is mainly direct sales staff – here we see a profit enhancement move. 

The growth of costs of sales and selling and distribution expenses is expected to slow as Weimob’s sales team starts to gain traction from a network effect, and Weimob becomes a household name. 

As a result, the cost of acquiring customers is expected to decrease over the forecast period. 

We expect LTV/CAC to grow to 1.9, 2.0 and 2.2 in 2020E, 2021E and 2022E, respectively. 

(Check out how to assess an SaaS company’s LTV/CAC in EqualOcean’s report on China’s Industry Internet)

Valuation 

Multiples and measures: due to the underdeveloped nature of this sector, we don’t see P/E as a meaningful metric and turn to P/S as the metric to value the SaaS business. In the comparable companies listed on the table below, Youzan, Square and Shopify are all classic SMB SaaS companies. However, Shopify’s multiples are out of line with others in the industry (which the company is famous for). There is a significant concern about the inflation of share prices on the SaaS market. Thus, we adjusted the multiple to 7x (2020) for Weimob’s SaaS business considering the around – a high, ~70% y-o-y growth over the forecast period. 

We see the valuation of targeted marketing is attractive at 5x (2020) revenue multiple, considering a healthy growth (~65% five-year CAGR) and synergies with SaaS products. 

The valuation of Weimob is expected to reach HKD 15.1 billion. We believe the current price has not yet factored in the potential upsides of the company. We initiate our coverage on Weimob (02013:HK) with a Buy, setting a price target for the firm of HKD 6.76, implying an upside of 35%. 

Investment risks

Market. The slowdown in mini-program expansion and penetration: if the mini-program loses momentum (slowing DAU, occupancy rate), it leads to less addition in paying merchants and damage in revenue growth. If Tencent fails to meet its targeted marketing growth expectations, ecosystem partners like Weimob will be influenced accordingly. 

Competition. The ever-increasing competition in the industry, with direct competition coming from Youzan and Tencent’s other advertisement services providers. Indirection competition comes from Taobao and Douyin that allows stores to have access to search results and exposure to a larger customer base. 

In-house management. High churn leads to lower LTV and thus more effort involved in acquiring new customers to maintain revenue growth. Losing larger clients is also a substantial risk for the company. High R&D costs for software development increases downward pressure on the bottom line. 

Short-term impact and underlying long-term risks. The coronavirus outbreak might change SMBs and even large enterprises’ marketing budget conditions.

Analyst Disclosure:

Neither I, Feng Linyan, nor anyone associated with the creation of this article claim that this equity report accurately reflects my (our) current (as of date published) views about the subject security and issuer(s). I (we) were in no way compensated directly or indirectly in relation to the expressed recommendation.