Weimeng (02013) is getting closer to overall profitability, as evidenced in the company's latest financial report.

On August 21st, Weimeng released its performance announcement for the first half of 2024. According to the announcement, Weimeng's revenue for the reporting period was 0.867 billion yuan (RMB, the same below); gross margin was 0.576 billion yuan; adjusted net loss was -0.046 billion yuan, a year-on-year narrowing of 81.4%, and operating cash flow has been positive for two and a half consecutive half-year periods.

It is not easy to achieve a significant reduction in losses during a downturn in the industry. This is the result of Weimeng's proactive promotion of cost reduction and efficiency enhancement strategies. If you have been tracking Weimeng for a long time, you will find that in order to achieve profit and loss balance as soon as possible, Weimeng has taken a series of measures to reduce costs and increase efficiency in the first half of this year, including focusing on core business and shrinking low-profit businesses; improving the profit space of high gross margin and mature businesses; strict control over personnel and cost savings; cautious external investments and development of new businesses, emphasizing the integration and empowerment of new businesses with core businesses. It is under this set of cost reduction and efficiency enhancement "combination punches" that Weimeng has significantly reduced its losses and is only one step away from overall profitability.

More importantly, after the "bodybuilding" phase, Weimeng has stabilized and improved its business structure, revenue model, and profit quality, gradually entering a high-quality and sustainable phase of internal growth. In the future, Weimeng will continue to deepen its presence in a healthy and sustainable manner, and its performance will continue to improve.

Based on the current rate of loss reduction, Weimeng will soon be able to achieve positive net adjusted profit for the whole year. At that time, Weimeng's loss cycle that began in 2021 will come to an end. Correspondingly, the stock price decline that began in 2021 may also come to an end, and even usher in a reversal at a macro level.

Cost reduction and efficiency enhancement have achieved remarkable results, driving a significant narrowing of losses.

Behind Weimob's promotion of cost reduction and efficiency improvement is the real dilemma faced by the industry. In the past two years, the macro economy has been continuously weak due to multiple factors, the growth rate of total retail sales of consumer goods has slowed down, the software demand and IT budget of downstream customers have tightened, making it more difficult for SaaS companies to expand, and the industry has entered a period of low development.

As the leading SaaS company in the domestic retail and e-commerce industry, Weimob has taken the lead in recognizing the necessity of strategic transformation, actively seeking change, not blindly pursuing revenue scale and growth rate, but emphasizing profitability and the quality of revenue, and implementing the development strategy of cost reduction and efficiency improvement.

The first thing that Weimob did was to proactively cut off low-profit non-core businesses and concentrate resources on high-quality and high-output businesses.

Weimob has made adjustments to its subscription solution (SaaS) and merchant solution (marketing) businesses. In terms of subscription solutions, in May last year, Weimob divested its smart dining business and no longer included its revenue. In the first half of 2024, Weimob further reduced the investment in Weidian business and other small micro businesses, reduced the number of direct sales cities, lowered the proportion of low-profit customer groups, and focused more on core large-scale retail businesses. In terms of merchant solutions, Weimob reduced low-profit TSO and finance businesses, and focused more on serving advertisers' delivery businesses.

After these adjustments, Weimob's business structure has been optimized and the quality of revenue has improved. In terms of marketing business, in the first half of 2024, Weimob's gross margin of merchant solutions increased from 69.4% in the same period of 2023 to 74.5%, and the average expenditure per paying merchant increased by 24.9% to RMB 215,516, and profitability continued to improve.

In addition to the adjustment of the business structure, Weimob continues to improve labor efficiency and optimize the organizational structure, effectively controlling expenses. In fact, the key reason for Weimob's continuous net loss since 2021 is the decrease in labor efficiency and the increase in expenditure caused by channel construction. Since 2021, Weimob has recruited a large number of technical personnel for the development of WOS, which has led to a decline in labor efficiency. After the successful launch of WOS in 2022, the pressure on personnel gradually eased, and labor efficiency gradually recovered after becoming stable.

Opensource Securities stated that since the essence of the SaaS industry is the decreasing marginal cost, high-quality SaaS companies will significantly reduce the proportion of operating costs in the later stage, so labor efficiency is a core indicator of measuring operational capabilities. With the control of R&D/marketing personnel and the increase in revenue, it is expected that Weimob's labor efficiency will enter a steady growth period, which will play a significant role in controlling expenditure.

In addition, Weimob is accelerating the application of AI technology to empower its SaaS and marketing businesses, further reducing operating costs. In the past operation, whether it's content output in private domain operation or creative content and strategy consulting in large-scale operation, Weimob needs to invest a large amount of manpower to provide services to customers. However, with the integration and empowerment of its AI application product WAI in related businesses, Weimob's productivity has been significantly liberated and the investment cost has also been correspondingly reduced.

In the SaaS scenario, Weimob's WAI has expanded to 58 real commercial application scenarios, covering many industries including fashion accessories, beauty and skincare, food and beverages, fresh fruits, and daily necessities. It has improved the intelligent management of tens of thousands of merchants. 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, Weimob's intelligent creation capability based on AIGC has covered the entire marketing scene, especially in text and image generation capabilities. During the reporting period, WAI generated an average of more than 1000 images per day, and the content adoption rate reached 40%.

The empowerment of AI in SaaS and marketing businesses not only improves Weimob's product system's market competitiveness and accelerates continuous breakthroughs in commercialization, but also plays an important role in improving Weimob's operational efficiency and reducing operating costs. With the accelerated penetration of AI technology, it is expected to further reduce Weimob's operating costs.

From the financial report, based on the implementation of the above multidimensional measures, Weimob's expense ratio has been significantly optimized. During the reporting period, Weimob's sales cost was 0.292 billion yuan, narrowing by 25.9% year-on-year; sales and distribution expenses were 0.565 billion yuan, narrowing by 33.0% year-on-year; general and administrative expenses were 0.287 billion yuan, decreasing by 24.5% year-on-year. It can be said that effective control of expense expenditure has become the key to Weimob's significant reduction in net loss after adjustment.

As for the development trend of Weimob's future expense expenditure, Open Securities has made detailed calculations and predicts that Weimob's expense ratio will continue to improve in the next two years. They forecast that Weimob's sales expense ratio for 2024-2026 will be 53.9%/49.1%/45.7%, research and development expense ratio will be 15.0%/13.6%/12.5%, and management expense ratio will be 12.0%/11.0%/10.0%. The stable downward trend of the three expenses will not only improve Weimob's profitability but also accelerate the release of profits.

Exploring multiple dimensions to increase revenue and improve revenue quality.

Through strategic contraction and measures to control expenses, Weimob has maintained a streamlined and efficient business structure. At the same time, Weimob is also digging into its core business and seeking incremental revenue and profits. This is reflected in the deep cultivation of the two core businesses, subscription solutions and merchant solutions, as well as the cautious layout of new businesses such as AI.

SaaS business accelerates penetration into the middle-aged customer base.

Since the introduction of the "large-scale customer" strategy, Weimeng has continued to deepen its retail operations, and its leading position in the large customer domain has continued to strengthen. In the first half of 2024, Weimeng accounted for 47% of China's top 100 fashion retailers, 43% of the top 100 commercial property companies, and 40% of the top 100 convenience store chains. During the same period, Weimeng continued to penetrate and maintain its lead in the clothing, fast-moving consumer goods, and building materials industries. The proportion of top 100 cooperative merchants increased by 43%, 21%, and 19% respectively, with year-on-year growth of 19%, 163%, and 111%.

To tap into the new growth space of the SaaS business, Weimeng is accelerating penetration into the middle-aged part of the industry, flexibly adjusting product lines and pricing strategies, and launching more cost-effective solutions to increase its market penetration in the middle-aged market.

Open Source Securities pointed out that Weimeng has achieved a "super large customer - KA customer - middle-aged customer" retail SaaS growth flywheel. Specifically, based on a competitive product matrix, Weimeng, on the one hand, leverages its close cooperation with Tencent Smart Retail to attract super large customers and increase its visibility; on the other hand, it has a relatively complete direct sales team, which stably obtains advantageous industries and emerging industry KA customers every year, establishes benchmark cases, accumulates industry Know-How, launches products that meet industry individualization, and accelerates the speed of middle-aged customer connections.

At the same time, Weimeng is focusing on developing more segmented scene-specific solutions to tap into potential customers. During the reporting period, Weimeng developed corresponding scene solutions around wholesale, local life, and online-to-offline store traffic to better address the pain points that businesses face in their operations, thereby further diversifying the customer base.

Thanks to the continuous advancement of the large-scale customer strategy and the accelerated penetration into the middle-aged market, Weimeng's SaaS business has further expanded its growth space, especially in retail, acting as the "ballast" of the SaaS business, with stable and considerable growth. During the reporting period, Weimeng's retail income was 30.4 billion yuan, with internal growth of 3.1% year-on-year; the number of retail merchants was 8,011, including 1,307 brand merchants, showing continuous and stable growth. The proportion of retail income to subscription solution income also increased from 44% in the same period last year to 62.4%.

It is worth mentioning that in the first half of the year, Weimeng adjusted the cloud service fees, interface call fees, and message push service fees for merchants, with a certain amount being exempted for within the ecosystem, and the group charging fees for the excess. It is foreseeable that this move will generate long-term stable cash flow, also having a positive impact on the company's financial situation.

2. Deepening the marketing business layout across multiple channels.

While the SaaS service continues to develop steadily, Weimeng's marketing business has shown even stronger growth momentum. In the first half of 2024, Weimeng's merchant solution accurately delivered gross revenue of approximately RMB 8.342 billion, a year-on-year increase of 19.4%. This is mainly due to Weimeng's continuous deep cultivation of Tencent's ecosystem, and in-depth layout on platforms such as Kuaishou (快手) and Xiaohongshu (小红书) to explore new growth opportunities.

Within Tencent's ecosystem, in the first half of 2024, Weimeng's consumption of Tencent advertisements increased by 19% year-on-year. Particularly in the field of video accounts, Weimeng, as the official operation service provider for WeChat video accounts, can provide brands with a one-stop solution. It has provided services to more than 70% of annual video account celebrities, and about 60% of live broadcasts by video account celebrities with a GMV exceeding 20 million have Weimeng's marketing involvement.

On platforms such as Kuaishou and Xiaohongshu, Weimeng's growth rate is also remarkable. In the first half of 2024, Weimeng's marketing services for merchants on the Kuaishou platform increased by 78% year-on-year. Weimeng's marketing services for brands in the fashion, beauty, and fast-moving consumer goods industries on the Xiaohongshu platform achieved efficient seeding and saw a 152% year-on-year increase in advertising consumption.

In addition, Weimeng's marketing business and Banfan Technology, a subsidiary of Weimeng, have made significant progress in the business short drama field. During the June 18th promotion period, Banfan Technology collaborated with Kuaishou to create a customized business short drama called "重生之我在AI世界当特工" ("Reborn as a Secret Agent in the AI World") for JD.com. Since its launch on June 1st, the total number of views has exceeded 400 million.

From this, it can be seen that the layout of diverse channels and the successful development of business short dramas have opened up growth opportunities for Weimeng's marketing business. Weimeng's strategy of tapping into incremental growth in the marketing market has achieved significant results, and with continuous expansion of the layout, the marketing business is expected to continue to experience high growth.

3. Seizing the opportunity of AI and cautiously exploring new markets

While exploring new growth opportunities in the two mature sectors of SaaS services and marketing business, Weimeng has also seized the industrial opportunity of AI to explore new markets. On June 25th, Weimeng launched the AI application product "WAI Pro" for enterprise customers. This product is currently mainly targeted at enterprise-level customers, including brand merchants, 4A advertising companies, marketing agency teams, and content creation teams. It provides AI application technology services that correspond to the three major business needs of "marketing insights, content creation, and business consulting".

It is worth noting that WAI Pro is not a "brand new" product. It is an independent AI application based on the long-standing product technology and professional service capabilities of WAI in Weimeng's SaaS services and marketing business. In short, the products and functions of WAI Pro have been validated in Weimeng's SaaS services and marketing business, and they were productized after helping improve business efficiency. This means that WAI Pro has reliable market feedback and commercial prospects, making it a low-risk investment attempt.

Moreover, the enterprise AI market where WAI Pro is located is broad. According to the data from the InfoQ Research Center, the scale of the AGI application market will reach 454.36 billion yuan by 2030, with the enterprise market accounting for 67% of the scale and leading the development of AGI applications. The launch of WAI Pro will help Weimob accelerate its capture of the blue ocean market of enterprise AI applications.

China's SaaS has entered a new stage: from expansion to contraction, from focusing on revenue to focusing on operational efficiency.

An industry consensus is that China's SaaS industry has been developing for many years and has currently transitioned from a high-speed expansion phase to a period of tight growth due to both macroeconomic reasons and the natural development cycle of the industry. Against this backdrop, the business concept of SaaS companies has gradually shifted from focusing on revenue scale to prioritizing operational efficiency and revenue quality. Weimob's semi-annual report is the best reflection of the industry's development trends.

Viewing this financial report, as an industry leader, Weimob's determination and patience in strategic transformation have been validated by performance, and full profitability is getting closer. It can be foreseen that after honing its internal strength during the industry downturn, Weimob will have a more solid development momentum during the industry recovery and upswing period. Once it crosses the breakeven point, profit growth will also be released at a faster rate.

Open Source Securities predicts that Weimob's revenue for 2024-2026 will be 2.51/2.95/3.39 billion yuan, with corresponding growth rates of 12.8%/17.2%/15.0%, and the net profit after adjustment for the same period will be 0.05/0.2/0.36 billion yuan respectively.

From the perspective of the capital market, Weimob's stock price is still at an absolute low since the adjustment in 2021, and the valuation has been compressed to a low level of 1.48 times PB, failing to reflect the expected net profit growth of Weimob in the next two years. Once Weimob's performance is released as expected, it will be a classic reversal situation, where the stock price drop caused by the change from profit to loss will be ended by the change from loss to profit, and its stock price may experience a 'double-click', driven by both profit release and valuation expansion, to start a major cyclical reversal trend.

Therefore, now may be a good time for long-term layout of Weimob. With the premise of net profit growth driving the fundamentals upwards, the downward adjustment space for the still bottomed stock price is limited, while the upward potential is several times larger, making it a high-value and worthy investment for investors to focus on.