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Equity Bottom-Up

Zall Smart Commerce Group / Equity Bottom-Up

As China and Wuhan rapidly recover and rebound from the COVID-19, Zall Smart Commerce Group [2098_HK; HK$8.13 billion market cap; US$1.05 billion market cap; HK$45 billion average daily value traded] is also seeing a recovery in revenues on its platforms. Its online industrial internet business has been developing steadily since the outbreak of the virus. The Group’s offline flagship project – North Hankou International Trade Center has resumed operations recently. It was the first major business and trading market to resume operation in Wuhan and has attracted attention across the community. With COVID-19 spreading across the world, the global supply chain will be impacted and the risk of fluctuation in prices will increase further. We believe that there is an opportunity in this crisis for the company just as the drastic changes that boosted e-commerce and changed the lifestyle of people amid “SARS” in 2003. The outbreak this time is very likely to result in explosive development of industrial internet which would change the trading and supply chain management systems of companies. The virus has forced people to adopt more contactless trading methods, and therefore more traditional companies will have a stronger focus on internet and information technology for supply chain management. It is expected that companies will actively implement these technologies in developing their businesses to improve their operating efficiency. Digital infrastructure such as artificial intelligence, big data management, industry 4.0 and blockchain will further improve the ability of businesses to survive online. Digital transformation is reshaping the supply chains across the world. We believe Zall has an opportunity at the moment to leverage on the implementation of industrial internet in its business in the global supply chain market.
Short Term Waiver of Rental Income due to COVID-19
The company has recently announced that the North Hankou Trade Market and Zall Investment Group entered into the supplemental agreement with Jiangsu Eastide to waive the rent payable for the period from 1 July 2020 to 31 December 2020 by Jiangsu Eastide. The total rent waived by the company would amount to approximately RMB231.85 million.
Jiangsu Eastide had indicated to the Zall Group that its business operations were not as good as expected and were seriously affected by the outbreak of the COVID-19 pandemic since early 2020, and had expressed its difficulties in fulfilling the original rental payment term of the lease agreement. In light of the challenging business environment resulting from the outbreak of the COVID-19 pandemic, the Zall Smart Commerce Group decided to waive the rental income from Jiangsu Eastide.
The reasons for the decisions were based on the following assessment: (1) The relatively short duration of the rental exemption period compared with the ten-year term of the lease agreement; (2) the assessment of the impact of the rental waiver on rental income of the Group in the long run was relatively minor and (3) it would have become difficult to replace the tenant who would be comparable to the existing one taking into account the large total area of the leased premises and the length of the term under the lease agreement.
We believe that the short-term waiver of the rent for Jiangsu Eastide is fair and reasonable in the current circumstances and it would not have any drastic adverse effect on the business, operations and financial position of the Group in the long run.&nbsp;
Gaining on Strength – North Hankou International Trade Center
After developing for almost 10 years, North Hankou International Trade Center has become the comprehensive standard market in Central China and even the whole country.&nbsp; Compared to the traditional markets, North Hankou has a more comprehensive traffic network and better warehousing and logistics facilities. Its market planning, hardware and facilities and overall environment even demonstrated scientific, rational and advanced features amid the outbreak of COVID-19. North Hankou is expected to step up its connections with e-commerce live broadcast and industrial internet platforms for developing its sales channels. As the old markets in city center are relocating, North Hankou will further develop the wholesale environment in Wuhan, boost the pace of its own trading and form a synergy of markets. North Hankou will deliver satisfactory performance in its general cross-border trading services. It will unblock the channels for inward and outward customs clearance as well as global logistics, and also do its best in countering the damage and impact of COVID-19 on imports and exports. LightInTheBox Holding Co., Ltd. (“LightInTheBox”) will continue its devotion in cross-border e-commerce. It will improve its product offerings and provide timely emergency medical supplies to countries that are its major markets, with an aim to increase its influence in the global emerging markets.
Zall’s Supply Chain Management in Emergency Medical Supplies got widely Recognized
Amid the outbreak of COVID-19, the capability of Zall Smart Commerce in purchasing and pooling emergency medical supplies was widely recognized. In its purchasing for the containment of virus, the supply chains of Zall have demonstrated good value, which further underpinned company’s confidence in further developing supply chains. The company will leverage this opportunity to strengthen its global business, particularly focusing on CIC and ZMA Smart Capital Pte. Ltd.
Property &gt; Market Cap; Supply Chain for “Free”
Zall’s stock is in “deep value” territory, as the stock price does not even fully reflect the current value of hard property assets, so investors are effectively getting the company’s RMB73 billion [US$10.3 billion] in revenues for “free”. &nbsp;The December 2019 balance sheet lists RMB29.1 billion [HK$32 billion] in investment properties, which equates to HK$2.73 per share.&nbsp;&nbsp;
Everything else, and the main Supply Chain business, which represents 97% of revenues, is thus effectively “free”. Of the HK$2.50 per share in investment properties, 85% are fully developed, and only 15% [predominantly Tianjin] are under development.&nbsp;&nbsp;
The fact that vast majority of investment properties are already developed gives investors more confidence in the value and going-concern nature of these assets, as CAPX and development risk no longer exists.&nbsp;&nbsp;
For further clarification and details, and factoring in all property related debt, total property development segment assets as of December 2019 of RMB38.2 billion [HK$42 billion] minus all liabilities/debt of RMB12.8 billion [HK$14 billion] equated to RMB25.4 billion [HK$28 billion, US$3.6 billion], or HK$2.38 per share.&nbsp;This figure is 245% higher than today’s stock price!
Huge “Free” Call Option on Supply Chain&nbsp;
Put in another way, hard investment property assets, which contributes negligibly to the overall revenues of Zall but all of 2019 net income [but less of a percentage of going forward net income], fully explains the current stock price.&nbsp; This implies that small changes in the gross margin and net income contribution from the US$11 billion in Supply Chain revenues can have a huge impact on the stock price going forward.&nbsp; Importantly, investors are not paying anything for this future “call option” on the likely success of the Supply Chain segment in generating positive net income and FCF. The optionality implied in Zall’s stock price is huge, and it is effectively a “free option” given the stock price declines to the current levels.
Metric #1:&nbsp; Price to Book at Absolute Low Levels 
On a price to book basis, Zall is trading at just 0.41x, and on a price to tangible book basis at 0.47x.&nbsp; Given that 95% of Zall’s total assets are comprised of current assets plus investment properties, there is clearly a high percentage of hard property assets plus liquid current assets backing the book value of the company.&nbsp;&nbsp;
In addition, goodwill and intangibles, which is obviously excluded/deducted from the aforementioned tangible book value calculation mentioned, is relatively small for Zall, and comprises only 3% of total assets.&nbsp; In other words, there is strong asset backing for both the company’s balance sheet stated assets and equity values.&nbsp; Trading at just 0.41x price/book, investors are valuing the company at less than liquidation value.&nbsp; The reality is that Zall generates US$11 billion in technology driven Supply Chain revenues [which represents 98% of entire revenues] but only utilizes 10% of the firm’s assets.&nbsp;
The price/book valuation further highlights that the Supply Chain business continues to be effectively ignored by investors, and is hardly reflected in the stock price.&nbsp; Our HK$2.00 price target would suggest a P/B multiple of 1.1x on our 2021 estimate.
Metric #2 and #3 Attractive P/E and P/S&nbsp; 
For rapidly growing revenue companies [read:&nbsp; Tencent, Alibaba, Amazon, Uber, etc] that are still early in its lifecycle in terms of earnings/FCF, investors are focused on revenue growth and price/sales as the principal valuation metric which really determines stock price. The company is currently trading at a price/sales ratio of 0.09x based on our forward 2020 sales estimate, 0.08x on 2021 expected, and 0.10x on actual/trailing 2019 reported. The average 5 year actual price/sales for Zall, excluding the large spike in late 2016, has been 3.0x times.&nbsp;When looking at other rapidly growing revenue stocks in China and globally, which trade at many [2x – 5x price/sales] times sales, Zall’s multiple of less than 1x is extremely low. Our HK$ 2.00 price target would still suggest a 0.22x price/sales multiple based on our 2021 estimate. Also the stock is attractively valued today trading at 8.7x on our 2021 and 5.2x on our 2022 EPS estimates.&nbsp; This level of price/earnings represent a huge discount to the Hang Seng and Mainland Chinese indices, as well as Zall’s own history.
For further details and financial model, please see our attached Business Update Report.

As China and Wuhan rapidly recover and rebound from the COVID-19, Zall Smart Commerce Group [2098_HK; HK$8.13 billion market cap; US$1.05 billion market cap; HK$45 billion average daily value traded] is also seeing a recovery in revenues on its platforms. Its online industrial internet business has been developing steadily since the outbreak of the virus. The Group’s offline flagship project – North Hankou International Trade Center has resumed operations recently. It was the first major business and trading market to resume operation in Wuhan and has attracted attention across the community. With COVID-19 spreading across the world, the global supply chain will be impacted and the risk of fluctuation in prices will increase further. We believe that there is an opportunity in this crisis for the company just as the drastic changes that boosted e-commerce and changed the lifestyle of people amid “SARS” in 2003. The outbreak this time is very likely to result in explosive development of industrial internet which would change the trading and supply chain management systems of companies. The virus has forced people to adopt more contactless trading methods, and therefore more traditional companies will have a stronger focus on internet and information technology for supply chain management. It is expected that companies will actively implement these technologies in developing their businesses to improve their operating efficiency. Digital infrastructure such as artificial intelligence, big data management, industry 4.0 and blockchain will further improve the ability of businesses to survive online. Digital transformation is reshaping the supply chains across the world. We believe Zall has an opportunity at the moment to leverage on the implementation of industrial internet in its business in the global supply chain market.
Short Term Waiver of Rental Income due to COVID-19
The company has recently announced that the North Hankou Trade Market and Zall Investment Group entered into the supplemental agreement with Jiangsu Eastide to waive the rent payable for the period from 1 July 2020 to 31 December 2020 by Jiangsu Eastide. The total rent waived by the company would amount to approximately RMB231.85 million.
Jiangsu Eastide had indicated to the Zall Group that its business operations were not as good as expected and were seriously affected by the outbreak of the COVID-19 pandemic since early 2020, and had expressed its difficulties in fulfilling the original rental payment term of the lease agreement. In light of the challenging business environment resulting from the outbreak of the COVID-19 pandemic, the Zall Smart Commerce Group decided to waive the rental income from Jiangsu Eastide.
The reasons for the decisions were based on the following assessment: (1) The relatively short duration of the rental exemption period compared with the ten-year term of the lease agreement; (2) the assessment of the impact of the rental waiver on rental income of the Group in the long run was relatively minor and (3) it would have become difficult to replace the tenant who would be comparable to the existing one taking into account the large total area of the leased premises and the length of the term under the lease agreement.
We believe that the short-term waiver of the rent for Jiangsu Eastide is fair and reasonable in the current circumstances and it would not have any drastic adverse effect on the business, operations and financial position of the Group in the long run.&nbsp;
Gaining on Strength – North Hankou International Trade Center
After developing for almost 10 years, North Hankou International Trade Center has become the comprehensive standard market in Central China and even the whole country.&nbsp; Compared to the traditional markets, North Hankou has a more comprehensive traffic network and better warehousing and logistics facilities. Its market planning, hardware and facilities and overall environment even demonstrated scientific, rational and advanced features amid the outbreak of COVID-19. North Hankou is expected to step up its connections with e-commerce live broadcast and industrial internet platforms for developing its sales channels. As the old markets in city center are relocating, North Hankou will further develop the wholesale environment in Wuhan, boost the pace of its own trading and form a synergy of markets. North Hankou will deliver satisfactory performance in its general cross-border trading services. It will unblock the channels for inward and outward customs clearance as well as global logistics, and also do its best in countering the damage and impact of COVID-19 on imports and exports. LightInTheBox Holding Co., Ltd. (“LightInTheBox”) will continue its devotion in cross-border e-commerce. It will improve its product offerings and provide timely emergency medical supplies to countries that are its major markets, with an aim to increase its influence in the global emerging markets.
Zall’s Supply Chain Management in Emergency Medical Supplies got widely Recognized
Amid the outbreak of COVID-19, the capability of Zall Smart Commerce in purchasing and pooling emergency medical supplies was widely recognized. In its purchasing for the containment of virus, the supply chains of Zall have demonstrated good value, which further underpinned company’s confidence in further developing supply chains. The company will leverage this opportunity to strengthen its global business, particularly focusing on CIC and ZMA Smart Capital Pte. Ltd.
Property &gt; Market Cap; Supply Chain for “Free”
Zall’s stock is in “deep value” territory, as the stock price does not even fully reflect the current value of hard property assets, so investors are effectively getting the company’s RMB73 billion [US$10.3 billion] in revenues for “free”. &nbsp;The December 2019 balance sheet lists RMB29.1 billion [HK$32 billion] in investment properties, which equates to HK$2.73 per share.&nbsp;&nbsp;
Everything else, and the main Supply Chain business, which represents 97% of revenues, is thus effectively “free”. Of the HK$2.50 per share in investment properties, 85% are fully developed, and only 15% [predominantly Tianjin] are under development.&nbsp;&nbsp;
The fact that vast majority of investment properties are already developed gives investors more confidence in the value and going-concern nature of these assets, as CAPX and development risk no longer exists.&nbsp;&nbsp;
For further clarification and details, and factoring in all property related debt, total property development segment assets as of December 2019 of RMB38.2 billion [HK$42 billion] minus all liabilities/debt of RMB12.8 billion [HK$14 billion] equated to RMB25.4 billion [HK$28 billion, US$3.6 billion], or HK$2.38 per share.&nbsp;This figure is 245% higher than today’s stock price!
Huge “Free” Call Option on Supply Chain&nbsp;
Put in another way, hard investment property assets, which contributes negligibly to the overall revenues of Zall but all of 2019 net income [but less of a percentage of going forward net income], fully explains the current stock price.&nbsp; This implies that small changes in the gross margin and net income contribution from the US$11 billion in Supply Chain revenues can have a huge impact on the stock price going forward.&nbsp; Importantly, investors are not paying anything for this future “call option” on the likely success of the Supply Chain segment in generating positive net income and FCF. The optionality implied in Zall’s stock price is huge, and it is effectively a “free option” given the stock price declines to the current levels.
Metric #1:&nbsp; Price to Book at Absolute Low Levels 
On a price to book basis, Zall is trading at just 0.41x, and on a price to tangible book basis at 0.47x.&nbsp; Given that 95% of Zall’s total assets are comprised of current assets plus investment properties, there is clearly a high percentage of hard property assets plus liquid current assets backing the book value of the company.&nbsp;&nbsp;
In addition, goodwill and intangibles, which is obviously excluded/deducted from the aforementioned tangible book value calculation mentioned, is relatively small for Zall, and comprises only 3% of total assets.&nbsp; In other words, there is strong asset backing for both the company’s balance sheet stated assets and equity values.&nbsp; Trading at just 0.41x price/book, investors are valuing the company at less than liquidation value.&nbsp; The reality is that Zall generates US$11 billion in technology driven Supply Chain revenues [which represents 98% of entire revenues] but only utilizes 10% of the firm’s assets.&nbsp;
The price/book valuation further highlights that the Supply Chain business continues to be effectively ignored by investors, and is hardly reflected in the stock price.&nbsp; Our HK$2.00 price target would suggest a P/B multiple of 1.1x on our 2021 estimate.
Metric #2 and #3 Attractive P/E and P/S&nbsp; 
For rapidly growing revenue companies [read:&nbsp; Tencent, Alibaba, Amazon, Uber, etc] that are still early in its lifecycle in terms of earnings/FCF, investors are focused on revenue growth and price/sales as the principal valuation metric which really determines stock price. The company is currently trading at a price/sales ratio of 0.09x based on our forward 2020 sales estimate, 0.08x on 2021 expected, and 0.10x on actual/trailing 2019 reported. The average 5 year actual price/sales for Zall, excluding the large spike in late 2016, has been 3.0x times.&nbsp;When looking at other rapidly growing revenue stocks in China and globally, which trade at many [2x – 5x price/sales] times sales, Zall’s multiple of less than 1x is extremely low. Our HK$ 2.00 price target would still suggest a 0.22x price/sales multiple based on our 2021 estimate. Also the stock is attractively valued today trading at 8.7x on our 2021 and 5.2x on our 2022 EPS estimates.&nbsp; This level of price/earnings represent a huge discount to the Hang Seng and Mainland Chinese indices, as well as Zall’s own history.
For further details and financial model, please see our attached Business Update Report.

Zall [2098]: Unique Biz, "Free" Assets at 0.4x P/B, 0.1x P/Sales - Business Update Note