Multiple bullish announcements from the WeChat ecosystem have been released consecutively, driving a significant increase in the stock price of Youzan (08083). On December 19, the company's stock closed up over 18%, but it still remained below 1 Hong Kong dollar, with the latest stock price as of the 24th being 0.138 Hong Kong dollars.

Six years ago, when it successfully went public through a backdoor listing, Youzan was known as the 'first stock of the WeChat ecosystem.' During the booming era of micro-commerce, Youzan, as a retail Saas service provider, launched the WeChat-based e-commerce platform 'Youzan Weichat Mall,' becoming one of the first companies to benefit from the Internet Plus-Related boom.

However, with the rapid changes in online retail scenarios, Consumer purchasing behavior has gradually shifted from WeChat to short video, live streaming, and Community Group Buying, coupled with platforms and chain enterprises developing their own e-commerce tools like WeChat Stores, Youzan's stock price and performance have similarly 'lost favor.'

At its peak, Youzan's market cap once reached over 70 billion, but currently, it has only over 4 billion left, and its stock price has long been below 1 Hong Kong dollar, categorizing it as a 'penny stock.'

Recently, the WeChat team announced that the WeChat Store has officially launched a gray test for the 'gift giving' feature, and several insiders have disclosed that Apple is negotiating with Tencent and ByteDance to integrate their AI models into iPhones sold in China.

Now that Youzan's stock price has shown unusual movement, does this mean the company has a growth opportunity with a change in valuation logic?

Is the improved profit really just due to "tightening the belt"?

From the recent Earnings Reports, this year in the first half, Youzan's revenue showed a significant decline, and in terms of profit, it changed from profit to loss.

Specifically, in the six months ending on June 30, 2024, the company achieved revenue of approximately 0.686 billion yuan (RMB, same below), a year-on-year decrease of 5.2%; the loss attributable to the parent company’s owners was 17.224 million yuan, a significant decline compared to the profit of 18.114 million yuan in the same period last year. The company stated that the decrease in revenue was mainly due to a reduction in subscription solution revenue, which was partially offset by an increase in merchant solution revenue.

However, it is optimistic that the company's adjusted EBITDA in the first half was approximately 51.22 million yuan, exceeding the total for the year 2023, with a profit margin rising to 7.5%. As of now, Youzan has achieved operational profitability for seven consecutive quarters.

During the reporting period, Youzan's core operational data showed steady growth. According to the Earnings Reports, in the first half, merchants generated GMV of approximately 49.9 billion yuan through Youzan's solutions, a year-on-year increase of about 2%; the average sales volume per merchant was approximately 0.84 million yuan in the first half of 2024, which is a year-on-year increase of about 25%.

At the same time, the number of paid merchants has declined. In the first half of 2024, the number of new paid merchants was 9,116; the existing number of paid merchants was 59,541, a significant decrease compared to 72,621 in the first half of 2023.

Thanks to the continuous progress of the New Retail business and the focus on developing medium and large clients, in the first half, Youzan's GMV from the store Saas business was approximately 25 billion yuan, with its proportion rising to about 50%, a year-on-year increase of 7%.

A deeper analysis of the financial data reveals that the company's adjusted profit improvement is not due to revenue growth, but mainly comes from a decrease in expenses.

Looking at the revenue structure, the subscription solution revenue for the first half of the year was approximately 0.377 billion yuan, a year-on-year decrease of 10.6%, while the merchant solution revenue was about 0.307 billion yuan, which only increased by 2.2%. The growth in the latter's business cannot make up for the overall revenue decline.

During the reporting period, Youzan's sales expenditure was 0.2658 billion yuan, a decrease of about 65.3 million yuan compared to the same period last year, and other expenditures also decreased by 3.1 million yuan to 0.1155 billion yuan, showing a year-on-year reduction.

According to Zhitong Finance APP, in fact, Youzan began optimizing its organizational structure several years ago and has achieved significant results in cost control. Compared to 0.288 billion yuan in sales costs in the first half of 2022, the company's sales cost in the first half of this year has shrunk to 0.217 billion yuan, significantly reducing its proportion of revenue; the number of employees stands at 1582, more than halved from over 4000 in mid-2021.

Clearly, relying on layoffs and cost-cutting to 'squeeze profits' is not sustainable in the long term. So, does Youzan have new highlights in 'expanding sources'?

Can betting on AI become a new growth point?

In recent years, influenced by various factors such as slowing macroeconomic growth and intensified industry competition, the Saas industry has consistently struggled to escape the predicament of 'not making money'.

The '2023-2024 Financial Performance Review and Future Outlook of Chinese Enterprise-Level SaaS Listed Companies' published by Ernst & Young shows that since 2022, the gross margin levels of Chinese enterprise-level SaaS companies have generally declined. Among them, because vertical SaaS companies focus on specific industries, once their products reach a certain level of refinement, they often form significant competitive advantages, leading to higher gross margin levels, while general SaaS companies face more intense competition and have relatively lower average gross margins.

Behind the difficulty in profitability are numerous challenges faced by many SaaS companies: the ongoing loss of users from WeChat to other e-commerce platforms, intensified competition leading to price wars, lack of competitive barriers, and the 'cooling down' of private traffic.

However, as AI applications begin to be implemented across various industries, the SaaS industry has also seen new growth possibilities, with Youzan launching the large model-driven AI application 'Add Me Smart.' As the foundational model for Youzan's product system's intelligence, Add Me Smart can support the intelligence of all Youzan products including Youzan Micro Mall, Youzan Store, Youzan CRM, Youzan Smart Guide, Youzan Enterprise WeChat Assistant, Youzan Beauty, and Group Buying.

According to Zhitong Finance APP, after several upgrades, 'Add Me Smart' has expanded its functionality into five major sectors, including marketing content creation, functional usage assistance, data query analysis, automatic task execution, and business consulting advice.

At the recent 12th Anniversary Conference of Youzan, founder and CEO Bai Ya released new AI products including an intelligent agent and fully managed services. The Youzan intelligent agent generates business opportunity guidance, smart management, marketing expertise, business reports, smart outfit matching, and smart sales; fully managed services include short videos and graphic marketing on Xiaohongshu and WeChat Video Accounts, fan interaction, commodity inventory, order fulfillment, review management, and pre-sale and after-sale services.

Bai Ya believes that with AI capabilities, the new 'AI + SaaS' can greatly lower the usage threshold of SaaS, achieving more than tenfold efficiency improvement and more than tenfold customer success effect enhancement.

However, Youzan's journey with AI may not be so easy. It is well-known that large AI models require significant investments in computing power and data, leading to high trial-and-error costs for enterprises. According to the earnings reports, in the first half of recent years, Youzan's R&D expenditure was only 93.828 million yuan, approximately a 12% decrease compared to the same period last year, with a revenue ratio of 13.68%, which is at a low level.

In addition, some believe that in an era of consumer downgrade, merchants using SaaS software are competing more on cost performance, and as a tool, the conversions that SaaS can bring may be limited.

It can be seen that despite the enhancement from AI, Youzan still faces numerous challenges ahead. Moreover, with poor profit performance and shrinking R&D expenditures, how much of Youzan's AI "aura" can be converted into tangible performance growth remains to be seen over time.