"Micro-Merchants (02013) 2024 interim report: The combination of reducing costs and increasing efficiency has achieved significant results, and the adjusted net loss has narrowed significantly."

Weimeng (02013) is getting closer to achieving comprehensive profitability, as evidenced by the company's latest financial report. On August 21, Weimeng released its performance announcement for the first half of 2024. According to the announcement, Weimeng's revenue for the reporting period was 867 million yuan; gross profit was 576 million yuan; adjusted net loss was -46 million yuan, narrowing by 81.4% year-on-year, and operating cash flow has been positive for two and a half consecutive half-years. Achieving significant reduction in losses during a downturn in the industry is not easy, and this is the result of Weimeng actively promoting its cost reduction and efficiency improvement strategic transformation. By closely monitoring Weimeng, it can be observed that in order to achieve profitability as soon as possible, in the first half of this year, Weimeng implemented a series of cost reduction and efficiency improvement measures, including focusing on core businesses, reducing low-profit businesses, increasing the profitability space of high-gross-margin and mature businesses, controlling personnel and saving labor costs, cautiously investing externally and exploring new businesses, emphasizing the integration and empowerment of new businesses with core businesses. It is under this cost reduction and efficiency improvement strategy that Weimeng has significantly reduced its losses and is now just a step away from achieving comprehensive profitability. More importantly, after "slimming down and building muscle," Weimeng's business structure, revenue model, and profit quality have steadily improved, gradually entering a high-quality, sustainable stage of internal growth, and in the future, will continue to deepen this healthy model, leading to continued improvement in performance. Based on the current rate of loss reduction, Weimeng will soon be able to achieve positive adjusted net profit for the full year. At that time, Weimeng's loss-making cycle since 2021 will end, and correspondingly, the stock price decline that began in 2021 may also come to an end, and may even experience a reversal at a macro level. Significant results in cost reduction and efficiency improvement drive a significant narrowing of losses Behind Weimeng's drive for cost reduction and efficiency improvement is the practical dilemma facing the industry. In the past two years, due to various factors, the macroeconomic environment has continued to slump, with a slowdown in total retail sales of consumer goods, tightened software demand and IT budgets from downstream customers, making it more difficult for SaaS companies to expand, and the industry entering a period of low growth. As a leading SaaS company in the domestic retail and e-commerce industries, Weimeng has realized the necessity of strategic transformation ahead of others, actively seeking changes, not blindly pursuing revenue scale and growth rate, but emphasizing profitability and revenue quality and implementing a cost reduction and efficiency improvement strategy. One of the first things Weimeng did was to proactively cut off low-profit non-core businesses and concentrate resources on high-quality, high-output businesses. Weimeng's subscription solutions (SaaS) and merchant solutions (marketing) businesses have both been adjusted. With regard to subscription solutions, in May of last year, Weimeng divested its smart catering business, no longer included its revenue, and in the first half of 2024, Weimeng further reduced investment in the WeChat Mall and other micro businesses, reduced direct sales cities, reduced the proportion of low-profit customer groups, and focused more on core large customer businesses such as retail. In terms of merchant solutions, Weimeng reduced low-profit TSO and financial businesses and focused more on the delivery business to serve advertisers. After this series of adjustments, Weimeng's business structure has been optimized and revenue quality has improved. For the marketing segment, in the first half of 2024, Weimeng's merchant solutions gross profit margin increased from 69.4% in the same period of 2023 to 74.5%, with average spending per paying merchant increasing by 24.9% to 215,516 yuan, and profitability continuously improving. In addition to adjusting the business structure, Weimeng has continued to improve efficiency and optimize organizational structure, effectively controlling expenses. In fact, the key reason for Weimeng's continued adjusted net loss since 2021 is the decrease in efficiency and increased channel development costs. Starting from 2021, Weimeng recruited a large number of technical personnel for WOS research and development, leading to a decline in efficiency, and after the successful release of WOS in 2022, personnel pressure gradually eased, and efficiency gradually increased as stability was achieved. According to Open Source Securities, because the nature of the SaaS industry is decreasing marginal costs, excellent SaaS companies will significantly reduce operating costs in the later stages, making personnel efficiency a key indicator of operating capacity. With the control of R&D/marketing personnel and increasing revenue, it is expected that Weimeng's efficiency will enter a steady growth period, playing a significant role in controlling expenses. Furthermore, Weimeng is accelerating the empowerment of AI technology for its SaaS and marketing businesses, further reducing operating costs. In the past operations, whether it was content output in private domain operations or creative content and strategic consulting in major promotional operations, Weimeng needed to invest a large amount of manpower to provide services to customers. However, with its AI application product WAI integrated and empowering related businesses, Weimeng's productivity has significantly increased, and input costs have correspondingly decreased. In the SaaS scenario, Weimeng's WAI has expanded to 58 real commercial application scenarios, covering many industries including clothing and accessories, beauty and skincare, food and beverages, fresh fruits, and daily necessities, helping tens of thousands of merchants operate smartly. In the first half of 2024, the number of active WAI customers increased by 360% compared to the second half of 2023. In the marketing scenario, based on AIGC's intelligent creative capabilities, Weimeng's coverage of all-domain marketing scenarios, especially text and image capabilities, has matured. During the reporting period, WAI generated over 1,000 images per day, with a content adoption rate of 40%. AI's empowerment of SaaS and marketing businesses not only enhances the market competitiveness of Weimeng's product system and accelerates continuous breakthroughs in commercialization but also plays an important role in improving operational efficiency and reducing operating costs. With the accelerated penetration of AI technology, Weimeng's operating costs are expected to further decrease. From the financial statements, it is evident that Weimeng's expense ratio has been significantly optimized based on the above multidimensional measures. During the reporting period, Weimeng's sales costs were 292 million yuan, narrowing by 25.9% compared to the same period; sales and distribution expenses were 565 million yuan, narrowing by 33.0% compared to the same period; general and administrative expenses were 287 million yuan, a decrease of 24.5% year-on-year. It can be said that effective cost control has become the key to Weimeng's significant reduction in adjusted net loss this time. Regarding the future development trend of Weimeng's expense structure, Open Source Securities has made detailed calculations, indicating that in the next two years.Weimob's expense ratio will continue to improve, with forecasted sales expense ratios of 53.9%/49.1%/45.7% for 2024-2026, research and development expense ratios of 15.0%/13.6%/12.5%, and management expense ratios of 12.0%/11.0%/10.0%. The three expenses are showing a stable downward trend, which will not only enhance Weimob's profitability but also accelerate profit release.Dimensional exploration of income increments and improvement of income quality Through strategic contraction and various cost control measures, Weimob has maintained a streamlined and efficient business structure. At the same time, Weimob is also delving deeper into core businesses, seeking incremental income and profits. This is reflected in the continued development and cultivation of the two core businesses of subscription solutions and merchant solutions, as well as the careful layout of new businesses such as AI. 1. Accelerated penetration of SaaS business into mid-market customers Since initiating the "big customer" strategy, Weimob has continued to deepen its presence in the retail business sector, strengthening its leading position in the big customer segment. In the first half of 2024, Weimob accounted for 47% of the top 100 fashion retailers in China, 43% of the top 100 commercial real estate companies, and 40% of the top 100 chain convenience stores. During the same period, Weimob continued to penetrate and maintain leadership in the apparel, fast-moving consumer goods, and building materials industries, with a 43%, 21%, and 19% share of the top 100 merchants respectively, representing a year-on-year growth of 19%, 163%, and 111%. To explore new growth space in the SaaS business, Weimob has accelerated its penetration into the mid-market, flexibly adjusting product lines and pricing strategies to launch more cost-effective solutions and increase penetration in the mid-market segment. According to Open Source Securities, Weimob has achieved a "super big customer-KA customer-mid-market customer" retail SaaS growth flywheel. Specifically, based on a competitive product matrix, Weimob on one hand leverages its close cooperation with Tencent Smart Retail to acquire super big customers and increase visibility, and on the other hand, with a relatively complete direct sales team, steadily secures key industry and emerging industry KA customers every year, establishes benchmark cases, accumulates industry know-how, launches products tailored to industry needs, and accelerates the speed of connecting with mid-market customers. At the same time, Weimob is focusing on developing solutions for more niche scenarios to explore potential customers. During the reporting period, Weimob developed corresponding scenario solutions around wholesale, local life, and offline store online traffic, which better address the pain points encountered by enterprises in their operational processes and further broaden the types of customers. Thanks to the continued advancement of the big customer strategy and accelerated penetration into the mid-market, the growth space of Weimob's SaaS business has further opened up, especially in retail as a "ballast stone" for the SaaS business, with stable and considerable growth. During the reporting period, Weimob's retail revenue was 304 million yuan, a year-on-year organic growth of 3.1%; Weimob had 8,011 retail merchants, including 1,307 brand merchants, showing steady growth; the ratio of retail income to subscription solution income also increased from 44% in the same period last year to 62.4%. It is worth noting that in the first half of the year, Weimob adjusted the cloud service fees for merchants, interface calls, and message push services, providing a certain amount of free usage to merchants within the ecosystem and charging for excess usage. It is foreseeable that this move will generate long-term stable cash flow and have a positive impact on the company's financial situation. 2. Deep deployment of marketing business across multiple channels While Weimob's SaaS services have been steadily developing, its marketing business has shown stronger growth momentum. In the first half of 2024, precise placements of Weimob's merchant solutions generated approximately 8.342 billion yuan in gross revenue, a year-on-year increase of 19.4%. This is mainly due to Weimob's continued focus on video platforms such as Tencent's ecosystem and its deep integration with platforms such as Kuaishou and Xiaohongshu to explore incremental opportunities. Within Tencent's ecosystem, in the first half of 2024, Weimob's Tencent advertising expenditure increased by 19% year-on-year. Especially in the video platform sector, as the official service provider of WeChat video accounts, Weimob can provide brands with one-stop solutions and has served over 70% of the annual content creators on the platform. For video creators with single live GMV exceeding 20 million yuan, about 60% of the sessions involve Weimob's marketing services. Furthermore, the growth rate of Weimob's marketing services on platforms like Kuaishou and Xiaohongshu has been significant. In the first half of 2024, the annual consumption of Weimob's marketing services for businesses on Kuaishou's platform increased by 78% year-on-year, and the advertising consumption of fashion, beauty, and fast-moving consumer goods brands on Xiaohongshu increased by 152%. In addition, Weimob's marketing business, along with Banfan Technology under Weimob, has made considerable progress in the commercial short video sector. During the 618 promotion period, Banfan Technology collaborated with Kuaishou's short videos to create a custom commercial short video for JD.com called "Rebirth: I Am a Special Agent in the AI World," which has already exceeded 400 million views since its launch on June 1st. It is evident that the diversification of channels and the success of commercial short videos have opened up growth space for Weimob's marketing business. The strategy of tapping into incremental opportunities in the marketing market has shown significant results, and with continued deepening of strategies, the marketing business is expected to sustain high growth. 3. Seizing AI opportunities and cautiously exploring new markets While exploring new growth opportunities in mature areas such as SaaS services and marketing business, Weimob is also seizing the industrial opportunities of AI to open up new markets. On June 25th, Weimob launched the AI application product "WAI Pro" for enterprise clients, which mainly targets brand merchants, 4A advertising agencies, marketing operation teams, and content creation teams, providing them with AI application technology services tailored to their business needs in marketing insights, content creation, and business consulting. It's worth noting that WAI Pro is not a "brand new" product; it is an independent AI application based on the product technology and professional service capabilities that Weimob has accumulated for a long time in its SaaS and marketing business. In other words, the products and functions of WAI Pro have been validated in Weimob's SaaS and marketing business and then productized after helping businesses improve efficiency. This means that the market feedback and commercial prospects of WAI Pro are reliable, making it a low-risk attempt. Moreover, the enterprise-level AI market where WAI Pro operates is vast. According to data from the InfoQ Research Center, the AGI application market is expected to reach 454.36 billion yuan by 2030, with the enterprise market accounting for 67% of the market, dominating the development of AGI applications. The launch of WAI Pro will help Weimob accelerate its presence in the untapped enterprise-level AI application market. In conclusion, by exploring new growth opportunities in SaaS services, marketing business, and seizing AI opportunities, Weimob is strategically expanding into new markets and channels, ensuring continuous growth and quality improvement in its income streams.Stage: From expansion to contraction, from focusing on income to focusing on operational efficiency.An industry consensus is that the development of the Chinese SaaS industry has transitioned from a high-speed expansion phase to a period of contraction, due to both macroeconomic reasons and the industry development cycle. In this context, the business philosophy of SaaS companies is gradually shifting from a focus on revenue scale to a focus on operational efficiency and revenue quality. Weimeng's latest semi-annual report reflects the industry development trends. Looking at this financial report, as a industry leader, Weimeng's strategic transformation has been validated by its performance, bringing it closer to full profitability. It is foreseeable that after honing its skills during the industry downturn, Weimeng will have a solid development momentum during the industry recovery period and upward phase, and once it crosses the break-even point, profit growth will be released at a faster pace. Open Source Securities predicts that Weimeng's revenue for 2024-2026 will be 25.1/29.5/33.9 billion RMB respectively, with corresponding growth rates of 12.8%/17.2%/15.0%, and adjusted net profit for the same period will be 0.5/2.0/3.6 billion RMB respectively. From the perspective of the capital market, Weimeng's stock price is currently at a historically low level since the adjustment in 2021, with a compressed valuation of PB 1.48 times, which does not reflect the market's expectation for Weimeng's net profit growth in the next two years. Once Weimeng releases its performance as expected, it will be a classic turnaround, with the stock price rebounding from a net profit loss to a gain, potentially experiencing a "Davis double-hit", where profit release and valuation expansion will drive Weimeng's stock price in a big cycle-level reversal trend. Therefore, now may be a good time to invest in Weimeng for the long term. With the upward movement of fundamentals driven by profit growth, the downside potential of the stock price, which is still at the bottom, is limited, while the upside potential is multiple times greater, making it a high-reward ratio investment opportunity that investors should pay attention to.