1H22 results slightly miss our forecast

Raycloud Technology announced 1H22 results: Revenue fell 5.7% YoY to Rmb251mn, and attributable net profit and recurring net profit came in at -Rmb78mn and -Rmb83mn, both bigger YoY declines compared with 1H21. The firm raised spending on marketing and R&D for its large merchant business in 1H22, and associates incurred investment losses of Rmb21mn, weighing on profit.

In 2Q22, revenue fell 8.5% YoY to Rmb127mn, and attributable net profit and recurring net profit came in at -Rmb47mn and -Rmb50mn. As the COVID-19 resurgence affected business operations, the 1H22 results slightly missed our expectations.

Trends to watch

Core e-commerce SaaS product maintained positive revenue growth; operation and CRM businesses posted revenue declines. In 1H22, revenue from core e-commerce SaaS products rose 2.9% YoY to Rmb200mn, and its proportion in total revenue picked up around 7ppt YoY to 80%. Specifically, revenue from supporting hardware, operation services, and CRM messaging changed by +10%, -69%, and -61% YoY.

Blended gross margin edged down but remained above 60%. In 1H22, blended gross margin fell 2ppt YoY to 62% due to a shrinking gross margin for SaaS products (down 1ppt YoY) and a rising revenue contribution from low-gross margin hardware products. Expense increases and investment losses from associates dragged earnings. In 1H22, Raycloud continued to increase spending on R&D for large merchant SaaS products and strengthened construction of a direct-sale network. R&D, selling and G&A expense ratios picked up 9ppt, 2ppt, and 5ppt YoY in 1H22. Moreover, associates, which are mostly in early stage of business development, incurred investment losses of around Rmb21mn. We expect the firm’s business operation to rebound in 2Q22 as the external environment improves.

Large merchant SaaS business maintained growth momentum despite COVID-19 resurgence. The COVID-19 resurgence disrupted the firm’s offline marketing campaigns in the Yangtze River Delta and Pearl River Delta regions, and e-commerce merchants affected by delayed logistics showed decreased willingness to pay for SaaS products. However, the firm’s large merchant SaaS business recorded revenue growth of 36% YoY despite these negatives in 1H22. Raycloud has since 2020 expedited expansion of small- to medium-sized e-commerce SaaS products on e-commerce platforms other than Taobao. In 1H22, its paying users on Douyin increased 235% YoY and related revenue surged 225% YoY. The overall revenue contribution from multi-platform business rose to 46%. Moreover, revenue from corporate service SaaS grew 41% YoY.

Financials and valuation

Given slowing revenue growth and widening losses amid COVID-19 resurgences in 1H22, we trim our 2022 and 2023 revenue forecasts by 2.6% and 2.3% YoY to Rmb601mn and Rmb698mn. We revise down our 2022 and 2023 earnings forecasts from -Rmb37mn and -Rmb14mn to -Rmb109mn and -Rmb33mn. We maintain OUTPERFORM and a target price of Rmb11 based on 2022 SOTP, offering 21% upside, corresponding to 7x 2022e and 6x 2023e P/S. The stock now trades at 6x 2022e and 5x 2023e P/S.

Risks

Traditional products lose paying users; new product marketing disappoints; higher expenses than we expected.