1 Big Threat to China Youzan After Its Latest Blowout Earnings

China Youzan Ltd (SEHK: 8083) had a stellar set of earnings. But there was one key concern that investors should monitor. – Tencent stock

China Youzan Ltd (SEHK: 8083) is a Software-as-a-Service (SaaS) system provider for social network-based merchants (especially WeChat) in China. It announced its first-half results last week.

In this article, I’ll take a look at its latest results, its current valuation, and one key concern the market has on the stock.

Overview of first-half results

Youzan announced a set of robust first-half results. Its first-half revenue grew by 63% year-on-year, driven by a substantial increase (90%) in revenue from SaaS and extended services, which accounted for 70% of the total revenue.

This increase was due to both an uptick in the number of paying merchants, and the launch of a cloud service fee which led to an increase in the amount paid by each merchant.

Gross profit increased significantly by around 90% year-on-year. The gross profit margin improved from about 50% in the first half of 2019 to almost 60% in the first half of 2020.

Although the top line and gross profit increased significantly, operating expenses only increased by around 25% year-on-year. As a result, the net loss in the first half dropped by 26% year-on-year.

For a young company like Youzan, it’s important to gauge its cash flows as well to ensure it won’t have any liquidity issues.

It’s very encouraging to see that Youzan has generated positive operating cash flows in the first half of 2020.

Thanks to this, its liquidity and cash position have been strengthened with the cash balance increasing by 150% since the beginning of the year.

One big concern

WeChat recently rolled out a new mini programme-based shop builder tool “Minishop” (also known as Weixin Xiaoshangdian) to replace the previous version of e-commerce shops on WeChat.

The previous version lacked flexibility and was difficult to use. As such, merchants stuck to Youzan’s solutions to assist them in managing their online shops on WeChat.

The new version, Minishop, is much more user-friendly. It offers functions such as product listings, order management, payments, logistics, and even has built-in streaming features.

This could potentially reduce merchants’ reliance on Youzan and impact its business negatively. In my opinion, it’s still too early to conclude that WeChat’s new feature can completely challenge Youzan.

After all, Youzan provides more value-added solutions than just helping merchants manage their shops on WeChat. But this will be an important area to monitor in the coming quarters for investors.

Share price movement and valuation

Youzan’s share price dropped by almost 3% the day after its result announcements.

This was likely due to the market overhang arising from the concerns on the escalating tensions between the US and China, even though Youzan’s business will unlikely be impacted.

On a price-to-sales (PS) basis, after reaching a yearly high of 20x at the beginning of August, Youzan’s multiple has now come down to 15x as the broader market retreated over the past few weeks.

In my opinion, if the correction continues, it would actually provide a good entry window for potential investors who are seeking to gain exposure to the fast-growing e-commerce sector in China.

Foolish takeaway

The solid first-half results of Youzan further demonstrate that it is a key beneficiary of the shift online amid Covid-19 in China.

One key area investors should focus on in the future is how its business might be impacted by the new Minishop feature on WeChat.

Its current valuation could be a bit rich, but the recent correction in the broader market in Hong Kong could provide an opportune time for investors to buy the stock.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited( 2020

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