Huitongda (9878.HK) Leverages Capital to Accelerate Value Release in Hong Kong Stock Market Debut

On February 18, Huitongda, the "No. 1 stock in the lower-tier markets", officially land on the Hong Kong Stock Exchange.

The importance of the IPO can be seen from the shareholders behind it - Alibaba China, Guotou Chuangye, Huaxia Life, State Transfer Fund, China Renaissance, Green Capital, Jiangsu Coastal Fund and a number of other "star line-ups" are standing for it. According to the company's announcement, Huitongda's public offering was subscribed 1.67 times.

What's more, in the IPO process, Huitongda introduced six cornerstone investors, including Skyworth Group (00751), SenseTime-W (00020), Greenwoods asset, Golden Mantis Construction (002081.SZ), Sand Talk Capital and Heilan Group, adding both industrial and capital support to the company's long-term development. The company's long-term development has added both industrial and capital support. This is also in line with the company's president Xu Xiuxian's consistent judgment: one hand grasps the upstream industry chain, and the other grasps the terminal's digital smart retail.

This "new species" has been a hot topic in the IPO market since the news of its listing, and I think it is necessary to take this opportunity to sort out its core points for reference in measuring its long-term value.

Double-wheel drive of "transaction + service", empowering the retail industry chain

To understand the value of a company, the most important thing is to understand its business model. Focusing on Huitongda, its business model is based on "transaction + service".

In terms of transaction business, Huitongda links upstream suppliers and business customers in the vast downstream market through its own online mall. The business customers in the lower-tier markets are mainly rural mom-and-pop store, which are small offline stores with traditional business models and are in a weak position in the whole industry chain.

Huitongda brings together the needs of a wide range of offline township mom-and-pop store and helps them optimize their supply chains and improve their bargaining power by means of joint procurement, so that they can obtain more high-quality and reasonably priced goods, thus achieving the purpose of cost reduction and efficiency increase and even reverse customization. Huitongda earns the difference in price and commission to achieve growth in the process of "help to buy".

In other words, Huitongda's value is directly proportional to how much it empowers the industry chain. As the retail network it builds grows, the more value it creates. As of September 2021, Huitongda has connected over 160,000 member retail stores, 10,000 suppliers and 20,000 channel partners, covering 21 provinces and more than 20,000 townships in China, with a total of over 175,000 product SKUs.

From the perspective of downstream B-side customers, there is also huge room for improvement in daily marketing operations, and Huitongda's service business is aimed at this pain point. The service business is a one-stop SaaS+ solution to digitally transform business customers, enabling them to connect to the Internet at a lower cost, open up the online and offline transaction chain, and gradually upgrade to smart retail stores, while Huitongda receives service fees in the form of "help to sell".

By September 30, 2021, there were more than 70,000 SaaS product users and more than 15,000 paid SaaS+ users among 160,000 member stores.

The expansion of the service business cannot be separated from Huitongda's strong offline refinement operation capability. Up to now, Huitongda has cultivated a localized service team of nearly 3,000 people. The lower-tier markets itself is very familiar social characteristics, so the team with a high level of understanding of the local market provides offline training and marketing services for offline store owners, which undoubtedly can achieve twice the result with half the effort.

Overall, relying on the "transaction + service" model, Huitongda has connected suppliers, retail stores and C-end consumers, helping to reduce costs and increase efficiency along the entire chain.

Bright financial figures under the flywheel effect, with both growth and certainty

More importantly, Huitongda's two major businesses form a flywheel effect.

On the one hand, the expansion of the trading business enables Huitongda to accumulate a large enough customer base, which can attract traffic for the service business; on the other hand, the improvement of the service business can strengthen customer stickiness, which can feed the trading business.

The rotation of flywheel is difficult to achieve in the early stage because the scale is too small, but once the scale advantage is established, rapid growth can be achieved. After more than ten years of development, Huitongda has gone through the early stage into the harvest period.

Looking at the overall performance: From 2018 to 2020, Huitongda will achieve revenue of RMB 29.802 billion, RMB 43.633 billion and RMB 49.629 billion respectively, with a CAGR of 29%; adjusted net profit will be recorded at RMB 124 million, RMB 250 million and RMB 322 million respectively, with a CAGR of 61%.

The above conclusion can also be verified by dismantling the business structure. From 2018 to 2020, the compound growth rate of the trading business reaches 28.93%, while the service business grows at a compound rate of 210% in the same period. In the first nine months of 2021, the growth rates of the two businesses were 34.9% and 80%, respectively.

If we look at the trading business, it is easy to find that consumer electronics, agricultural production materials, household appliances, etc. occupy the bulk of the business segment, and this is the current focus of consumption in the lower-tier markets, which makes Huitongda's long-term performance growth with high certainty.

The service business has a high gross margin and is an important source of profit for the company. Since users of its SaaS+ solutions can be converted from transactional business, it has much lower customer acquisition costs than general SaaS companies, which means it can enjoy the high growth of SaaS business without bearing the huge costs that often accompany it. In other words, the service business further opens up the imagination of Huitongda's future revenue and profit.

Following the business law of "big fish in big water", Huitongda's space depends on market scale. Huitongda's huge population base, vast geographical area, and rising income of all people are raising the ceiling of the lower-tier retail market. According to Frost & Sullivan, the lower-tier retail market is expected to reach 20.6 trillion yuan by 2025. It is foreseeable that with the further strengthening of internet and logistics infrastructure in the lower-tier markets, the economic dividends of the lower-tier markets are expected to be further released, which will paint a better blueprint for Huitongda's long-term value creation.

(Source: Prospectus)

It is foreseeable that with the combined force of first-mover advantage and scale advantage, Huitongda is expected to expand its penetration rate in the lower-tier markets and further consolidate its leading position today.

Write at the end

The key to Huitongda's achievement today is that it resolutely chose the lower-tier markets as its main battlefield in 2010. After more than ten years of deep cultivation, Huitongda has highly integrated its development with China's vast lower-tier markets. To some extent, Huitongda's long-term value reflects the future development of China's lower-tier markets and symbolizes the important position played by digitalization in the rural revitalization strategy, which is the underlying logic for getting the approval of capital market.

Prospecting for the future, the successful listing of Huitongda will further enhance its capabilities in all aspects and enable it to better empower the lower-tier retail market, strengthening the probability of continuing to lead the industry, and the subsequent performance is worthy of continuous attention.