As a retail industry leader in the Chinese domestic lower-tier market, Huitongda Network Co. Ltd (HKG: 9878), which just completed a Hong Kong IPO, is releasing a strong value signal to the market.
On July 14th, Huitongda Network released the profit announcement for the first half of 2022, showing that the company expects to generate a net profit of at least RMB 88 million for the six months ended June 30, 2022. In the meantime, its adjusted net profit is projected to be more than RMB 180 million with a year-on-year increase of over 50%.
According to the announcement, the great performance of the first half of this year benefited from the fact that after the company went public, it no longer incurred interest expenses and successfully converted the callable capital injection into company equity. On the other hand, this ‘Commerce + Service’ twin-driver mode of Huitongda Network has been acknowledged by the market.
Zhitong Finance APP learned that before IPO, interest expenses of the redeemable capital contributions mainly came from the interest of the special rights and terms granted to shareholders in some financing arrangements. Since redeemable capital contributions could not be accounted for as equity, the interest was recorded as a financial cost.
Interest expenses on callable capital injection had always been one of the major costs that affected the company’s profitability. If the impact of interest expenses incurred from redeemable capital contributions were to be excluded, the adjusted net profit of the company from 2019 to 2021 would be RMB 249 million, RMB 322 million and RMB 500 million respectively, with a compound growth rate of 41.63%.
The achievement of double-digit growth in adjusted net profit for three consecutive years proves the excellent growth of Huitongda Network. Most importantly, under the background of the global economic downturn and the repeated waves of Covid-19 epidemics in 2022, despite the rising complexity and uncertainty of the overall environment, Huitongda Network has achieved exceptional business performance against the market trend. The adjusted net profit growth rate of at least 50% further confirms the company’s performance resilience and growth prospects.
Moreover, with the unconditional termination of special rights and terms granted to shareholders after listing, the redeemable capital contributions have been successfully converted from liabilities to company equity. Starting from February 18th, 2022, the company has stopped to incur interest expenses. Therefore, Huitongda Network swung to net profit in the first half of this year, and it is expected to achieve a net profit of at least RMB 88 million.
According to Zhitong Finance APP, the change of interest expenses is merely due to the adjustment of cost recognition in accounting records. However, Huitongda Network’s unique business model of ‘Commerce + service’ is the fundamental drive of the company’s performance growth.
Supply Chain Capabilities Upgraded, Transaction Business Booming
In the commerce business, Huitongda Network has made consistent progress of empowering supply chain brand manufacturers and partners in six categories: household appliances, consumer electronics, agricultural means of production, homebuilding and renovation materials, liquor and beverages, and vehicles.
Furthermore, in the e-commerce industry, Huitongda Network’s subsidiary ‘Jujia Express’ and Apple have completed the construction of over 7,500 OTC stores and the upgrade of 145 ‘Township Selected Stores’ in the lower-tier market.
In the transportation industry, Huitongda Network formed strategic alliances with Skywell (Skyworth Automobile) and Chery (Karry Automobile) on the basis of innovatively exploring the ‘ACN Manager Model’ in the lower-tier market with Hozon (Neta) Automobile. Huitongda Network’s relevant business involvement has covered OEMs and brands such as Neta Automobile, Skyworth Automobile, Karry New Energy, and BYD.
In the beverage industry, Huitongda Network successfully entered a strategic partnership with liquor company Laiguishan. In addition, Huitongda Network is also planning to deepen cooperation with Wuliangye. At present, the company’s own liquor brand ‘Jiupinghui’ is flourishing in the lower-tier market.
With the improvement of the company’s capabilities in the network industry, it has provided more high-quality and stable supply chain products to retail membership stores in the lower-tier market, which has continuously fueled the sales of those retail membership stores.
Zhitong Finance APP was informed that after joining Huitongda Network, a household appliance supermarket in Zhangzhou City, Fujian not only expanded from a single product category all categories of household appliance including Midea large electrical appliances, small household appliances etc., but also successfully expanded the store area by 3 times, up to 400 square meters. Under such influence, the supermarket’s annual sales more than tripled from RMB 1.2 million to RMB 5 million.
The SaaS+ Business Strategy Implemented, The Service Business Well Performed
In terms of service business, with further implementation of the SaaS+ business in the first half of 2022, Huitongda Network’s integrated online and offline services catered better to the lower-tier market in various ways, transforming the traditional retail mode of township into digital mode to promote the continuous increase of service business income.
In the meantime, Huitongda Network and Zhejiang Shengzhou Bureau of Commerce carried out in-depth cooperation on the national comprehensive demonstration project of e-commerce entering rural areas, and further implemented specific projects such as constructing local rural e-commerce service outlets, building talent training systems, introducing industrial products into villages, and e-commerce live broadcasts. In addition, the company undertook the ‘Internet + Agricultural Products From Villages To Urban Project’ in Xuyi County, Jiangsu Province, exploring new directions of selling local agricultural products online in aspects of digitization, standardization and branding. Besides, the company also signed a contract with the Funing County Government of Jiangsu Province to explore the transformation and upgrading of traditional lower-tier market Brick-and-mortar sales through the construction of digitalized villages.
On the retail side of the lower-tier market, Huitongda Network also has excellent performance. During the first half of 2022, the company helped small business entities in the lower-tier market to expand business locally and built business resilience through digitalization. Taking Jiasheng Electrical Appliances, which opened in May in Heyuan, Guangdong, as an example, the company used a unique SaaS+ transaction empowerment system to act as ‘buying agent’, ‘selling agent’ and ‘managing agent’ and achieved a daily sales record of over 100 orders with over RMB 200 thousand sales on the opening day.
Therefore, through the “Commerce + service” twin drivers which builds momentum for the ‘flywheel effect’, Huitongda Network not only meets various business needs of customers, but also delivers a stunning result.
It is worth mentioning that not long ago, in the 2022 Fortune China 500 list, Huitongda Network was listed for the first time and ranked 209th. Given that this authoritative list takes into account the performance and achievements of the largest Chinese listed companies, Huitongda Network’s listing this time also reflects the recognition of the company’s business model by authoritative institutions.
Zhitong Finance APP noticed that the lower-tier market has grown rapidly in recent years, and the huge market potential may be further released. According to Accenture’s “2022 China Lower-tier Market Consumer Insights” report, with the continuous development of China’s economy, the advancement of urbanization, the improvement of infrastructure construction and logistics systems, and the increase in the disposable income of residents in the lower-tier market, the supply of goods is abundant. Driven by both sides of supply and demand, the lower-tier market has revealed unprecedented consumption potential.
In 2021, the national retail consumption in rural areas exceeded RMB 5.9 trillion, a year-on-year increase of 12.1%, and the growth rate was higher than that in urban areas for eight consecutive years. The number of rural online shopping users nearly reached 200 million, and the rural online retail sales in the first three quarters exceeded RMB 1.4 trillion. Moreover, under the background of the further implementation of the national strategy of expanding domestic demand, the income distribution mechanism will be improved in the future, the regional development level will be more coordinated and balanced, the construction of the county-level business system, rural e-commerce and logistics distribution system will be more mature. Thus, the Consumption potential of the lower-tier market will be released even more.
The Unique Business Model Along with Favorable Policies, Promising Future Expected
Looking ahead, Zhitong Finance APP believes that the influential factors supporting the continuous growth of Huitongda Network are still strengthened: on the one hand, in terms of the overall business model, Huitongda Network has no direct competitors in the current market. The company has been deeply involved in the lower-tier market for ten years and has the advantages of supply chain solutions, service, and full-process digitalization, which has been at the forefront of the country in six major industries, and thus has built a high barrier to competition. Furthermore, different from the e-commerce giants’ ways of controlling, Huitongda Network adopts an empowerment and service model that offers online and offline solutions and services with one-stop integration under its membership system, which has huge expansion room both vertically (category expansion) and horizontally (regional expansion).
The strong supply chain capability has always been a key factor for the company’s performance growth. It can not only improve the stickiness and active use of its members, but also further increase the Pay Users Rate after the company acquires customers. In this regard, Huitongda Network said that in the future, the company will continue to set up efforts on strategic brand collaboration to enhance supply chain capabilities.
On the other hand, the favorable policies are also boosting the development of Huitongda Network. China unveiled its ‘No. 1 central document’ for 2022, outlining key tasks to comprehensively push forward rural vitalization by supporting large-scale enterprises to focus their supply chain on county and central towns to accelerate the implementation of the ‘Internet + Agricultural Products From Villages To Urban Project’. This fits Huitongda’s business model perfectly. Through the transaction and service platform, the company has built an urban-rural circulation ‘highway’ connecting the industry side from the top and the retail side to the bottom. This not only stimulates rural vitality, but also promotes the value of retail membership stores in the lower-tier market.
According to the Zhitong Finance APP, China’s supply chain and industrial chain are currently undergoing profound changes. Factories and brands hope to sink their products into the rural market. The development of the industrial Internet with ‘To Business’ as the core is at an early stage. The Huitongda Network empowers the upstream through the industrial Internet and helps small business to empower service to consumers. With the enhancement of digital business awareness and capabilities of township stores, the future development of the industrial Internet industry looks promising, from which leading companies such as Huitongda Network will benefit over the long-term.
In summary, the profit announcement indicates the excellent growth of Huitongda Network, and the company also has a lot other potential to look forward to. In the lower-tier market with broad market space, Huitongda Network, which has made big strides in this industry over these years, has built up a strong economic moat through its unique business model. It is expected to further expand its business scale through efficient operation and seize more market share.
In addition, it is worth noting that in the process Huitongda’s network speeds up its growth, the company’s stock price also has positive feedback.
Since 2022, under the influence of international geopolitics and inflation, the volatility of global financial markets has increased significantly. Taking the three major indexes of Hong Kong stocks as an example, the declines of the Hang Seng Index, Hang Seng Technology Index and China Enterprise Index in the first half of 2022 are -6.57%, -14.12% and -6.91% respectively. Meanwhile, Huitongda Network in the first half of this year rises by 38.58%, significantly outperforming the broader market. In the depth of the market downturn, the continuous rise of Huitongda’s stock price demonstrates the confidence of mainstream investors in the company’s fundamentals.
This profit announcement shows the company’s exponential growth potential. Investors can be optimistic about the market and performance of Huitongda Network in the second half of the year.