Anticipating a solid recovery next year
Affected by the lockdown in Mainland China in 1H22, a number of premium and luxury brand events have been put on hold or postponed. However, Activation has successfully engaged in over 100 new projects in the 2H22, with various operating indicators recovering and improving in an orderly manner. According to the management, its business has resumed to normal in July 2022, as compared with the same month in 2021. We have lowered our forecasts on the company for 2022&23E to reflect changes in business outlook and the macroeconomic environment. We reiterate our BUY rating with a revised TP of HK$2.01 based on a 12x 2023E P/E, implying 105% upside potential.
Business in 1H22 was severely affected by the lockdown: 1H22 results were hit by various negative factors, which include: (i) lockdown and a range of social distancing measures implemented in various cities in China; and (ii) temporary suspension of clients’ business causing cancellations or postponements in large scale events and exhibitions, resulting in a 55.1% y/y decrease in revenue to RMB172.8mn. Revenue from experiential marketing services decreased by 61.1% y/y and accounted for 62.3% of the total, while revenue from digital and communication services dropped 33.9% y/y and accounted for 37.7% of the total. Hence, the company reported a net loss of RMB8.5mn for 1H22, compared to a profit of RMB35.5mn in 1H21.
Leading market position unchanged: Activation has accumulated a pool of over 500 renowned global brands, including BVLGARI, CHANEL, DIOR, GUCCI, LOUIS VUITTON, PRADA, VERSACE, AUDEMARS PIGUET, BLANCPAIN, AUDI, BMW, Mercedes-Benz, Tiffany & Co., etc. Looking forward to the 2H22, the company will continue to seize market opportunities aiming to achieve steady progress. Despite the temporary setback, we believe that luxury brands will continue to push massive advertising and promotional activities in China in the upcoming years. As a leading data interactive marketing group for pan-fashion brands in Greater China and offering one-stop data interactive marketing services, Activation is expected to bring extensive online exposure to pan-fashion brand customers and become the world’s leading panfashion brand data interactive marketing group.
Reiterate BUY and adjust TP to HK$2.01: We reiterate our BUY rating for Activation with a revised TP of HK$2.01 based on an unchanged 12x target P/E for 2023E. Despite the setback this year, we believe such valuation is justified as we believe normalization of the Chinese economy would sustain a recovery similar to that of 2021, which would sustain 2022-24E NP CAGR of 71.1%, backed by itsrich customer base and the solid potential of a new livestreaming e-commerce initiative. Nevertheless, we have factored in the slowdown of the global economy and the depreciation of the RMB.
Key catalysts: Faster-than-expected growth on its livestreaming e-commerce GMV; faster-than-expected growth of luxury consumption in Mainland China; higherthan-expected marketing budget of premium brands in Mainland China.
Key risks: Failure to execute its strategic upgrades; slower-than-expected growth on its livestreaming e-commerce GMV; regulation risk on livestreaming e-commerce.
ADJUSTING 2022&23E FORECASTS
In order to reflect the company’s business outlook and the changes in the macroeconomic environment, we have adjusted our forecast on Activation for 2022&23E.
In 1H22, Beijing, Shanghai and Shenzhen have experienced economic downturn due to the worsening of the pandemic outbreak. We have revised down the company’s top-line growth for 2022-23E. In sum, we expect the total revenue of the company to be fully recover in 2023E and outpace the revenue recorded in 2021.
We expect GPM to be stable at around 30% in 2022-24E, as it managed to improve it to 30.5% in 1H22, compared to 28.7% and 29.6% in 2020 and 2021, respectively.
Although its financials would be affected in 2022E, we expect Activation to recover in 2H22 with revenue and earnings in 2023E to exceed the level in 2021. We expect net margin to improve to 10.3% in 2023E, from 10.2% in 2021 and 6.7% in 2022E. Thus, we expect the company to achieve strong growth in net profit (2022-24E CAGR of 71.1%), reaching RMB130mn in 2024E.
VALUATION
Maintain Buy rating with a revised TP of HK$2.01
Maintain Buy rating with a revised TP of HK$2.01 We maintain our BUY rating for Activation with a revised TP of HK$2.01 based on 12x 2023E P/E, as we roll forward our valuation to 2023E based on the same 12x target P/E. Such TP implied 105% upside potential from current levels. Such valuation is supported by our expectation for its NP CAGR of 71.1% in 2022-24E. On the back of our expected earnings recovery, we believe Activation’s share price is heading for a re-rating. We believe such valuation is justified by (i) the company’s leading market position; (ii) the massive potential for its new livestreaming e-commerce business; (iii) the solid growth of consumption power on luxury products in Mainland China in the near future; and (iv) increasing marketing budget of premium brands in Mainland China on the back of the recovery from the pandemic-hit results this year. We assume the payout ratio of Activation to be no less than 20% in the coming few years as the company is expected to generate strong cash flow. This assumption gives us an expected DPS of 3.35 HK cents in 2023E, representing an expected yield of about 3.4% at the current price
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