AI And Smart Retail Expansion Will Stabilize Future Performance

Key Takeaways

• Shifting focus to larger customers and AI integration is expected to enhance margins and operational efficiency, stabilizing revenue and boosting profitability.
  
• Expanding into new verticals with strategic partnerships aims to diversify revenue streams, strengthen ecosystem integration, and drive long-term growth.
  
• Reduction in Tencent rebates and strategic exit from low-quality lines negatively impact revenue, with financial adjustments and macroeconomic challenges posing risks to stability and growth.

Catalysts

An investment holding company, provides digital commerce and media services in the People’s Republic of China.

• Weimob's strategic focus on key accounts and high-quality development is expected to stabilize revenue. The shift from small and micro businesses to medium and large customers, particularly in Smart Retail, should enhance margins and improve profitability.
  
• The integration of AI solutions like WAI SaaS and WIME is anticipated to enhance operational efficiency and merchant engagement. This AI deployment could lead to reduced costs, higher subscription renewals, and contribute positively to net margins.
  
• The recovery in Merchant Solutions revenue, after a significant 2024 drop due to a one-off rebate adjustment, is expected as the rebate gap is addressed and stabilized, which should lead to a rebound in revenue and margins in 2025.
  
• Weimob's expansion into new industry verticals (e.g., medical aesthetics, pets) and partnerships (e.g., Alipay, Huawei) aims to grow its revenue streams and customer base, potentially increasing revenue through diversification and stronger ecosystem integration.
  
• Innovating in AI and digital retail solutions promises long-term growth, with enhanced product offerings and services in the WeChat ecosystem positioning Weimob strongly in a growing e-commerce market, likely boosting overall earnings and cash flow.

Weimob Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Weimob's revenue will grow by 17.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -129.1% today to 6.5% in 3 years time.
• Analysts expect earnings to reach CN¥140.2 million (and earnings per share of CN¥-0.01) by about March 2028, up from CN¥-1.7 billion 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 82.2x on those 2028 earnings, up from -3.7x today. This future PE is greater than the current PE for the HK Software industry at 27.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.33%, as per the Simply Wall St company report.

Weimob Future Earnings Per Share Growth

Risks

• The reduction in Tencent rebates had a significant negative impact on Weimob’s Merchant Solutions revenue, which decreased by RMB 170 million, impacting overall revenues and potentially net margins as rebates were not passed on to customers.
  
• The strategic contraction and exit from low-quality business lines led to significant revenue decline, with subscription revenue dropping by 31.9% and Merchant Solutions dropping by 52%, potentially impacting future earnings if not adequately replaced by higher-quality revenue streams.
  
• The company described a challenging macro environment with weak consumption in the retail sector, posing risks to revenue growth and stabilizing net margins, particularly if economic conditions do not improve.
  
• Significant financial adjustments and non-recurring charges such as the RMB 450 million accounting treatment impact due to convertible bonds and RMB 260 million in intangible assets impairment can undermine investor confidence, affecting perceived earnings stability and potential stock price performance.
  
• Efforts to stabilize and improve cash flow, including restructuring measures and reducing debt, highlight concerns about operational cash management; large cash outflows in past periods (e.g., the cash outflow of RMB 550 million in 2024) might strain liquidity if revenue growth does not compensate sufficiently.

Valuation

• The analysts have a consensus price target of HK$2.132 for Weimob 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$3.88, and the most bearish reporting a price target of just HK$1.27.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥2.2 billion, earnings will come to CN¥140.2 million, and it would be trading on a PE ratio of 82.2x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of HK$1.91, the analyst price target of HK$2.13 is 10.4% 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.