Escaped the loss quagmire? CHINA YOUZAN leads the SaaS concept stocks

Under the wave of digitalization, domestic SaaS companies are generally in a loss quagmire, and their stock prices are disappointing. Since last year, the Hong Kong SaaS concept stock sector has been falling continuously, with many stocks halved in price. Among them, the stock prices of leading companies in the SaaS marketing service sector Weimob Group (02013.HK), ERP software leader Kingdee International (00268.HK), and e-commerce SaaS leader China Youzan (08083.HK) have all recently hit historical lows. On August 13, China Youzan's stock price hit bottom and rebounded, with a gain of 8.77% as of the time of writing, leading the rise in Hong Kong's SaaS concept stocks, and its market value returned to above HKD 2 billion. On the news front, Youzan's latest interim report shows that in the first half of 2024, revenue decreased by 5.2% year-on-year to HKD 686 million, with a net loss attributable to the parent company of HKD 17.224 million, compared to a profit of HKD 18.114 million in the same period last year. At the same time, China Youzan also disclosed a buyback plan, planning to repurchase up to 10% of the shares, not exceeding 3.298 billion shares. First Operating Profit in Many Years At present, China's SaaS industry is still in its early stages of development and has not yet entered a large-scale commercialization stage, so many SaaS companies are facing difficulties in profitability. Youzan has already shown signs of profitability in the first half of this year, with some netizens even saying that Youzan is the "first stock to run the SaaS logic." The interim report shows that although the company's gross profit slightly decreased to HKD 469 million during the period, benefiting from reduced sales and distribution expenses and other operating expenses, Youzan achieved an operating profit of HKD 2.586 million. According to Wind data, this is the first time Youzan has achieved an operating profit in its interim report since 2013, which is a breakthrough worth celebrating for Youzan. Several other leading companies in the SaaS sector still need to enhance their ability to generate profits. Weimob Group has been continuously losing money for the past four years due to high sales and management expenses, with a loss of over HKD 700 million in 2023, still some distance away from turning a profit; Kingdee International has also been incurring losses for four consecutive years, with the company achieving revenue of over HKD 5 billion in 2023, but total sales and management expenses exceeding HKD 4 billion. Under the strategy of large customers, the number of paying merchants has decreased Youzan turned losses into operating profits in the first half of the year, largely due to cost control. In the first half of the year, Youzan reduced the size of its sales team, leading to a 19.7% year-on-year decrease in sales and distribution expenses to HKD 266 million. In addition, other operating expenses decreased by 11.4% year-on-year to HKD 93.828 million. The company stated that this was due to the reduction in research and development costs resulting from reasonable arrangements for research and development investment and optimization of the organizational structure, leading to a decrease in research and development expenses Over the past decade, the entire domestic SaaS industry has been obsessed with high investment and burning money to expand, blindly pursuing customer numbers at the expense of profits. Recently, due to the macroeconomic impact on corporate digital budgets in China, especially the weakened payment ability of small and medium-sized enterprises for SaaS services, SaaS companies need to transform towards serving large customers while focusing on refined operations and stable investments. Youzan reduced sales and R&D expenses in the first half of the year to align with its strategy of serving large customers, focusing on core clients as stated in its semi-annual report. Youzan's founder, Bai Ya, mentioned in an internal memo that by 2023, the proportion of medium and large merchants among Youzan's paying merchants will increase to 53%. Under this strategy, the number of existing paying merchants at Youzan has been continuously declining since the second half of 2022, with 59,541 in the first half of this year compared to 72,621 in the same period last year. The number of new paying merchants was 9,116, down from 10,863 in the same period last year. The decrease in the number of paying merchants also led to a 10.6% decrease in revenue from subscription solutions business at Youzan to 377 million RMB compared to the previous year. However, the decrease in the number of paying merchants did not affect Youzan's operational performance. In the first half of the year, the total merchandise transaction volume generated by merchants through Youzan's solutions reached approximately 49.9 billion RMB, a 2% year-on-year increase from 2023. The merchandise transaction volume of the store SaaS business was about 25 billion RMB, accounting for approximately 50% of the total merchandise transaction volume, with a year-on-year increase of about 7%. The average sales per merchant in the first half of 2024 was about 840,000 RMB, a 25% year-on-year increase. Not only Youzan, but competitors like Weimob Group and Kingdee International have also enhanced their profitability by focusing on large customers. Huaxing Securities pointed out in a research report that large customers at Weimob Group will remain the main driver for steady growth in the SaaS business in 2024. Participants in the SaaS market generally believe that AI can "reshape" rather than "replace" SaaS, bringing light to the industry in a downturn. Bai Ya, founder and CEO of Youzan, believes that with the help of AI capabilities, the new "AI+SaaS" can significantly reduce the threshold for using SaaS, resulting in more than tenfold efficiency improvement and customer success effect enhancement. Youzan stated in its semi-annual report that it fully embraces AGI, continues to strengthen the capabilities of its AI product "JiaWo Intelligence" to support its use by merchants in more scenarios. However, Youzan did not disclose the operational and financial data related to its AI products, while Kingdee International's large-scale model Kingdee Cloud • Cangqiong has shown strong renewal rates and revenue since its launch. With the strong emergence of the artificial intelligence trend, does Youzan have the strength to boost its profitability with AI and take it to the next level? Only time will tell