Guanglian Technology (02531), a smart connected car aftermarket service provider, which officially listed on the Hong Kong stock market on July 15th is currently being hyped up in the secondary market.

Zhongtong Finance APP noted that the distribution results announcement released by Guanglian Technology on July 12th shows that the company sold 63.6 million shares globally with 10% sold in the Hong Kong public offering and 90% sold internationally. The final issue price was HKD 4.7 per share, with a net global issuance of approximately HKD 0.23 billion and 500 shares per lot. Among them, the Hong Kong public offering had a subscription ratio of 2.49 times and the international offering had a subscription ratio of 1.06 times.

Despite not being very hot during the public offering subscription of Guanglian Technology's new shares, its dark market was sought after. Dark market trading showed that the dark market quotation on the 12th reached HKD 5.7 at one point, an increase of 21.28% from the issue price. Without considering transaction fees, HKD 500 could be earned per lot.

Benefiting from the excellent performance of the dark market, the stock price of Guanglian Technology opened high without suspense on the 15th, but a "minute game" situation emerged in the trading. After opening, the stock price quickly rose to HKD 5.6, an increase of 19.15% from the issue price, and then encountered strong selling pressure, pushing the stock price down to HKD 4.79. This round of rise and pressure took only 3 minutes. At the close of the market, the stock price of Guanglian Technology closed at HKD 4.8, with a narrower increase of 2.13%.

Rapid revenue growth but unstable profits.

The market's love-hate relationship with Guanglian Technology's stock price reflects a significant difference in investors' opinions, just like the company's basic situation that is generally good but also unstable.

According to the prospectus of Guanglian Technology, the company is a leading intelligent connected car aftermarket service provider in China, focusing on providing car-mounted hardware products and SaaS marketing and management services for participants in the industry value chain. Among them, car-mounted hardware includes three categories of in-car entertainment systems, in-car safety systems, and smart core boards. SaaS marketing and management services include SaaS subscription services and SaaS value-added services.

Among them, SaaS subscription services refer to the DiJia SaaS marketing products provided to 4S store and channel customers, as well as the HuGe eShield SaaS products provided to automobile finance and leasing companies. SaaS value-added services refer to the sales of automobile trinkets and services to automobile users and the provision of online and offline integrated marketing services to 4S store customers.

In terms of performance, from 2020 to 2023, the company's revenue increased from RMB 0.352 billion to RMB 0.56 billion year by year. According to a report by zhuoshiresearch, based on the 2023 revenue, Guanglian Technology ranked first among SaaS marketing and management service providers in the Chinese smart connected car aftermarket service industry, with a market share of 6.1%; during the same period, the company ranked third among car-mounted hardware providers in the industry, with a market share of 3.4%.

Guanglian Technology's stable revenue growth is mainly due to the improvement of the prosperity of China's smart connected car aftermarket service industry. The report by zhuoshiresearch shows that from 2019 to 2023, the industry scale with a compound annual growth rate of 12.7% increased to RMB 12.2 billion and is expected to further increase to RMB 29.4 billion with a compound annual growth rate of 19.3% from 2024 to 2028.

However, Guanglian Technology's past profitability has been relatively unstable. The gross profits from 2020 to 2023 were approximately RMB 0.11 billion, RMB 94.681 million, RMB 0.173 billion, and RMB 0.252 billion respectively. The net profits were approximately RMB 0.048 billion, RMB 0.035 billion, RMB 0.049 billion, and RMB 0.051 billion respectively. In 2023, the gross profit margin of the company reached 44.9%, an increase of 3.1 percentage points year-on-year, but the net profit margin decreased by 2.3 percentage points year-on-year to 9.2%.

The surge in advertising expenses has suppressed the profit margin.

In recent years, the growth rate of Guanglian Technology's profits has been significantly lower than the growth rate of its revenue, and one of the main reasons is the rapid growth of the company's distribution and sales expenses. In 2022, the company's distribution and sales expenses reached RMB 91.28 million, an increase of 187% year-on-year; in 2023, the distribution and sales expenses further increased to RMB 0.159 billion, an increase of 74.5% year-on-year. Advertising expenses increased 13.5 times in two years.

Zhongtong Finance APP noted that in the distribution and sales expense structure of Guanglian Technology, the proportion of advertising expenses has increased year by year, from 27.7% in 2021 to 80.2% in 2023, and the amount of advertising expenses has increased from RMB 8.812 million to RMB 0.128 billion.

It is reported that the advertising expenses of Guanglian Technology mainly includes user traffic acquisition expenses, marketing service expenses, and sales expenses. User traffic acquisition expenses mainly refer to the expenses incurred by the company when purchasing user traffic from 4S store customers. The company's user traffic acquisition expenses may vary for various reasons, including the location of the 4S store, the expected sales volume of 4S store customers, the expected traffic of automobile user customers at 4S store, and the target customer types. The company's user traffic acquisition expenses account for a large part of the advertising expenses during the reporting period, because the company generally acquires user traffic from the 4S store and is consistent with market practices.

According to Zhongtong Finance APP's observation, the increase in the cost of purchasing traffic from 4S stores by Guanglian Technology can to some extent be regarded as a leading indicator of the expansion of the company's SaaS+ value-added service revenue scale.

In its prospectus, Guanglian Technology stated that it began providing SaaS subscription services to 4S store customers in 2021, relying on the company. In response to customer feedback, the company found that there were many unmet needs of car users throughout the life cycle of cars under the traditional business model of 4S stores, such as the demand for light modification and accessories for car users, and the demand for loss customers of 4S stores to renew their car insurance. In order to meet these needs, Guanglian Technology used customer flow provided by 4S store customers to provide car light modification and accessories products and services to car users during the record period. At the same time, through DiJia SaaS, the company provides 4S store customers with online and offline integrated marketing services based on customer feedback, business scenarios, and product selection services that meet the individual needs of car users. The company helps 4S store customers accurately match user tags, provide online content planting, live event operations and other confirmation of intention car users, and import online clues into offline conversion services. Therefore, SaaS + value-added business helps 4S store customers generate new transactions while meeting the needs of car users, increasing additional income for 4S store customers, and helping achieve high user stickiness through SaaS subscription services, and achieved success in SaaS + value-added business. In this process, Guanglian Technology charges car users for car light modification and accessory products and services, and subsequently pays 4S store customers for user flow acquisition fees to obtain their private domain user flow.

In view of this, Guanglian Technology provided car light modification and accessory products and services to car users through customer flow provided by 4S store customers during the record period. At the same time, through DiJia SaaS, the company provides 4S store customers with online and offline integrated marketing services based on customer feedback, business scenarios, and products that meet the individual needs of car users. The company helps 4S store customers accurately match user tags, provide online content planting, live event operations, and other confirmation of intention car users, and import online clues into offline conversion services.

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As advertising investment increased, Guanglian Technology's SaaS value-added service revenue increased from RMB 9.314 million in 2021 to approximately RMB 0.2 billion, and the revenue proportion increased from 2.9% to 35.7%.

Since 2021, SaaS value-added services have contributed most of the revenue growth, but relatively limited to profit growth. Moreover, due to the rapid growth of advertising expenses, the net cash flow from operating activities of the company has declined from RMB 57.591 million in 2021 to RMB 26.118 million in 2023.

Nevertheless, Guanglian Technology will continue to focus on SaaS value-added services in the future. According to the forecast of Zhao Shi Consulting, from 2023 to 2028, the market size growth rate of the car-mounted hardware products in the automotive aftermarket is only 2.2%, and the stock competition features are obvious. On the other hand, the compound annual growth rate of the SaaS value-added service market from 2023 to 2028 is expected to maintain at 60.2%.

It should be noted that although the growth rate of the SaaS value-added service market is fast, the growth ceiling is not high. Zhao Shi Consulting predicts that the market size of the service market in 2028 is only RMB 14.1 billion. Even if the SaaS subscription service market is added, the market size of the entire SaaS marketing and management industry will only be RMB 22 billion in 2028.

On the other hand, in 2023, the market share of the top 5 enterprises in the SaaS marketing and management market in the automotive aftermarket was only 21.3%, indicating that the industry competition is dispersed, and also means that there is no absolute leading enterprise in the industry, which requires Guanglian Technology to continue to build differentiated competition capabilities.

According to the information of Zhao Shi Consulting, the emergence of innovative technologies has brought revolutionary changes to the operation mode of the automotive aftermarket industry. Therefore, Guanglian Technology must innovate and develop products and services that customers need to maintain the company's competitiveness without being surpassed by competitors.

Therefore, Guanglian Technology plans to invest in the next five years to enhance and further strengthen research and development capabilities through technological and functional improvements, including developing innovative functions for digital marketing and management solutions, strengthening AI capabilities, upgrading existing digital link solutions, enhancing cloud-native technology in the solution, and increasing investment in cloud infrastructure.

It should be noted that Guanglian Technology's R&D expenses were not superior in the period, and the research and development expenses of the company in 2021 to 2022 were RMB 16.803 million, RMB 16.999 million and RMB 1807.4 million, respectively. If the company strengthens the purchase of traffic on the one hand and significantly increases research and development expenses on the other, the company may continue to face the pressure of net profit margin performance in the short term.

The company also pointed out in its prospectus that although the excess profits from SaaS marketing and management services and SaaS value-added services have increased during the record period, the ability to accurately predict future business performance is limited by the limited history of providing related services with the support of selling car-mounted hardware products. It is also affected by multiple uncertain factors, including the company's planning and simulation of future growth.

In view of Guanglian Technology's relatively weak growth in car-mounted hardware products and the new business represented by SaaS value-added services is still in the investment period, investors may choose to take profits when the company's stock price rises sharply, which may be the best policy.