The Rationality of China Youzan's Current Valuation

 

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White Crow posing

China Youzan has done reasonably well for me so far, currently up almost 40% from my cost. Now lets talk about the rationality of China Youzan's current price.

As of April 23th last week, China Youzan's closing price was 2.76 HKD per share. According to China Youzan's privatization details:

1. 1 share of China Youzan will be converted into 0.05077265 new Youzan Technology shares which will be listed. Which also means 19.69564077 shares of China Youzan will be replaced by 1 share of Youzan Technology.

2. In addition to that, China Youzan shareholders will get HK $ 0.1352 paid in cash per share that they own.

The total number of shares issued by Youzan Technology will be 1.513 billion shares at a price of 42.8 Hong Kong dollars per share, so the total issued market value is 64.783 billion Hong Kong dollars. This is equivalent to the intrinsic value of each share of China Youzan in this conversion process = 0.05077265 x 42.8 + 0.1352 = 2.30 Hong Kong dollars.

The current price of China Youzan, as of last week's closing price on April 23th is 2.76 HKD. Compared with privatization, the premium is 19.86%.

So is the current price of China Youzan reasonable or worth buying? In fact, we need to discuss the following two questions:

1. Understand what is the market value of Youzan Technology waiting to be listed at 2.76 Hong Kong dollars?

2. Is it reasonable to study Youzan Technology's market value of nearly HK$65 billion?

1. The price of 2.76 Hong Kong dollars corresponds to the market value of Youzan Technology: 

Use the following formula to convert (2.76-0.1352)/(2.3-0.1352) x 647.83=2.6248/2.1648 x 647.83, the calculated price already has the market value of Youzan Technology priced at 78.548 billion HKD, which is a premium of 21.2% compared to the planned market value of 64.783 billion;

2. The market value of Youzan Technology should be reasonable

In view of the business similarity between Youzan and Weimob, many people used China Youzan to compare with Weimob, but in fact, in addition to business differences, there are also differences in the equity structure of these listed companies. After the re-listing of Youzan Technology, regardless of business differences, you can compare Youzan Technology's 78.548 billion Hong Kong dollars with Weimob's 40.8 billion Hong Kong dollars on April 23. As for who is more worth buying, it's a matter of opinion.

We only discuss the influencing factors of Youzan’s valuation here.

1. Youzan has achieved its goal of listing on the Hong Kong main board through privatization and re-listing, so it is possible that more than 25% of new funds will be introduced to buy into this company.

2. From the reclassification of revenue in the annual report, it can be seen that, by benchmarking Shopify, and through privatization, Youzan Technology's revenue has fully met the standards of Saas companies, and it should be said that it is a rare Saas target in the Hong Kong stock market.

 According to Shopify’s GMV valuation method, Shopify is 1.2 times GMV. We evaluate Youzan Technology at 1 times. For Youzan Technology’s 100 billion RMB GMV last year, it can be a market value of 100 billion RMB, equivalent to about 120 billion Hong Kong dollars, the price corresponding to the current China Youzan should be: 4.14 Hong Kong dollars (plus privatization cash payment) which is around 51% premium to current price.

3. Youzan Technology will exceed 100 billion GMV in 2020, and it will exceed one trillion in 5 years according to the management goal. Although this goal is very ambitious in the future, it will not be less than 50% continuous high growth every year, but in the future it can be seen that maintaining a continuous growth of 30% should be expected, that is, reaching 200 billion in three years is a relatively conservative goal.

Based on the above analysis and judgment: After the listing of Youzan Technology, the issue price is 42.8 Hong Kong dollars per share. For the current price of China Youzan, there is a high probability that there may be more than 50% upside.

China Youzan is a pure decentralized Saas play. It has the most similarity to Shopify. Both are indirectly or inevitably ambitious in disrupting traditional ecommerce centralized market place like Taobao and Amazon. I will be holding and following the companies financials closely.

Full disclosure, I have vested interest in this stock and I'm currently up 38%. 

Snap shot of my portfolio performance as of today: Total profit for 2021: S$69,864.44



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