Research published by Blue Lotus Research on April 28, 2022

 

(25 Pages, 25 graphs and tables)
Listen to analyst’s audio summary

• We believe HTD is not a SaaS solution because its prime customers of small offline stores do not need software of meaningful sophistication. We believe it is also not a sourcing platform because its prime merchandise categories have dominant upstream suppliers and efficient distribution infrastructures;
• A successful capital market debut paves the way for HTD to raise secondary and complete its channel consolidation. Question is: for what?
• We initiate the stock with a SELL rating and TP of HK$13.5.

 
Huitongda (HTD) is actually a channel consolidator
HTD’s amazing working capital characteristics can be explained by its corporate structure of a headquarter holding 565 subsidiaries valuing at Rmb1.8bn on its book. Our analysis on the principal subsidiaries suggested that they were formed with offline wholesalers and/or industry veterans. This holding structure led to HTD having inventory and account payable days far superior to much large rivals. It also allows HTD to move Rmb65bn worth of product revenue without a meaningful fulfilment cost, PPE, capex, and warehouse/delivery personnel.
 
Business model transition begets own risks
HTD is transitioning from electronics to a more diversified portfolio of merchandises. It is also transitioning from small offline stores to include larger distributors. Both transitions aren’t easy, in our view, as technology evolution and economic growth cycle aren’t in HTD’s favor.
 
Similar companies do not enjoy as high valuation
HTD needs a strong share price to continue its offline channel consolidation. However, companies with similar business models, whether Yunji, Youzan and Weimob, do not enjoy high valuations. Success of the Mitra business in Indonesia’s Bukalapak isn’t applicable to HTD, in our view.
 
Competition abound…Lack of GMV dominance is the key
In China, SaaS companies often monetize by transactional take rates over subscription. But HTD lacks market dominance in transaction to pursue this route. JD-5STAR, convenience chains and specialty logistics providers are HTD’s most serious competitors.

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