Generative AI And Asia Expansion Will Shape Our Future

Key Takeaways

• Yeahka's expansion into AI and generative technologies targets product enhancement and efficiency, aiming for increased revenue and net margins through profitable services.
  
• Strategic overseas growth, especially in Asia, and focusing on high-quality clients could boost revenue, net margins, and earnings through expanded market access and improved synergies.
  
• Strategic market expansion and AI investments bring potential growth and efficiency, but execution risks and cost management are critical to avoiding negative impacts on revenue and profitability.

Catalysts

An investment holding company, provides payment and business services to merchants and consumers in the People’s Republic of China.

• Yeahka's expansion into AI and generative technologies aims to enhance product offerings and operational efficiency, potentially increasing revenue and net margins through more profitable services.
  
• The company's strategic overseas expansion, particularly in Asia, aims to increase payment volumes, which could significantly enhance revenue and earnings potential by accessing new markets.
  
• Yeahka's focus on high-quality customers and enhanced cross-selling synergies in payment and merchant solutions could improve net margins and earnings by focusing on more profitable clients and sectors.
  
• The adoption of AI for risk management and customer interaction seeks to reduce operating costs and improve net margins by enhancing efficiency and lowering administrative expenses.
  
• By optimizing its business model in in-store e-commerce, Yeahka is shifting towards distribution channels rather than direct sales, aiming to reduce costs and improve net profit margins while expanding its base of large-scale clients.

Yeahka Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Yeahka's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 7.8% in 3 years time.
• Analysts expect earnings to reach CN¥327.2 million (and earnings per share of CN¥0.84) by about May 2028, up from CN¥82.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, down from 39.5x today. This future PE is greater than the current PE for the HK Diversified Financial industry at 5.4x.
• Analysts expect the number of shares outstanding to grow by 5.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Yeahka Future Earnings Per Share Growth

Risks

• The decrease in total revenue by 21% from RMB 3.9 billion in 2023 to RMB 3.1 billion in 2024 due to a volatile macroeconomic environment poses a risk to future revenue growth.
  
• The company's proactive phasing out of less profitable projects could potentially lead to gaps in the revenue stream if new, profitable projects do not ramp up quickly enough, impacting net margins and earnings.
  
• The reliance on expanding into Asian markets without a proven history of success in these new regions might carry execution risks, potentially affecting revenue and profitability if strategies do not yield expected results.
  
• Significant investments into AI, while promising for operational efficiencies and future profit growth, might introduce increased short-term costs without guaranteed immediate returns, impacting short-term net earnings.
  
• The company's reduction in investment in direct sales teams, focusing instead on distribution channels and networks, could risk losing control over customer experience and service quality, affecting long-term revenue growth and customer retention.

Valuation

• The analysts have a consensus price target of HK$10.644 for Yeahka based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$13.45, and the most bearish reporting a price target of just HK$9.48.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥4.2 billion, earnings will come to CN¥327.2 million, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of HK$7.79, the analyst price target of HK$10.64 is 26.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.