The Motley Fool

Why China Youzan Stock is Worth Investors’ Attention

With Tencent Holdings Ltd’s (SEHK: 700) share price skyrocketing to more than HK$500 per share, investors now need more than HK$50,000 to buy one lot of its shares.

The large amount presents a barrier for many early investors who just started and don’t have too much spare cash.

In this article, I’d like to introduce investors to China Youzan Ltd (SEHK: 8083) as an alternative stock.

It presents a much lower entry barrier (in terms of amount for one lot of shares) and also allows investors to tap into the rally of the Internet and e-commerce sectors in China.

Business overview

Youzan is a Software-as-a-Service (SaaS) system provider for social network-based merchants in China.

One of its primary focus areas is to help merchants run their mini-programmes on Tencent’s WeChat, by assisting them in designing and managing the mini-programmes.

Youzan’s SaaS products allow merchants to run different online shops on different social networks by using Youzan’s single platform.

Besides, Youzan also provides extended services to help merchants effectively manage their online businesses, such as Youzan Cloud, Youzan Guarantee, and Youzan Distribution, to name just a few.

Recently, it also provides merchants with live streaming e-commerce solutions, as this has become a significant trend in China.

Seeing such potential, Tencent also invested in Youzan in 2019 and is holding a 6.5% stake in it.

Strong growth potential

Riding the popularity of e-commerce in China, Youzan’s merchants and gross merchandise value (GMV) both had strong growth in 2019.

In 2019, the number of paying merchants Youzan had increased by 40% year-on-year, while its GMV had an explosive growth of 95% year-on-year.

From 2017 to 2019, its revenue has grown by 160% per annum (p.a.). Although it is still loss-making, the net loss has improved significantly in the first quarter of 2020.

With e-commerce set to further grow thanks to COVID-19 and with online shops moving to social networks, Youzan is very well poised to benefit from such trends.

Valuation

Its improving fundamentals and its unique position as a prime beneficiary of e-commerce trends in China are well reflected in its recent share price movement.

Its share price increased by 200% year-to-date, significantly outpacing Tencent. Such outperformance makes sense since Youzan is very much a pure-play e-commerce solution provider.

Amid the backdrop of Covid-19, almost 100% of Youzan’s business can benefit from this. In the case of Tencent, Covid-19 is still a drag to some of its business segments, such as marketing and cloud computing.

On a price-to-sales (PS) basis, Youzan is trading at around 16x while that of Tencent is at around 11x.

Similarly, the above explanation based on Youzan’s “pure-play” e-commerce nature can be used to explain why it now deserves a richer multiple than that of Tencent.

Yet, it is also reasonable for investors to find it difficult to convince themselves that they should buy into something that is less well known but more expensive than Tencent.

Foolish bottom line

Given the pure-play nature and lower trading liquidity of Youzan, as compared to Tencent, its share price movement will likely be much more volatile than that of Tencent.

Nevertheless, the relatively low amount to buy one lot of its shares does give investors a good alternative to tap into the tech rally driven by Covid-19.

In my opinion, it’s always better to be patient and buy into it when the price-to-sales multiple is more reasonable, for example, around 10x. Given its volatility, this window of opportunity for investors might come soon.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung owns shares of Tencent Holdings Ltd.