Is the ban on restricted stocks about to be lifted on a large scale. The overvalued Quzhi Group stock price (00917) may be “hit hard”?

As two major players in the field of unmanned vending machine operations, Youbao Online (02429) and Quzhi Group (00917) were successfully listed on the Hong Kong stock market in 2023 and 2024, respectively. Judging from the stock price performance, the two have many similarities. They all surged after listing. Youbao Online doubled its stock price compared to the issue price in 58 trading days, and Quzhi Group also achieved this goal within 20 trading days.

However, the difference is that after Youbao's online surge, the current stock price has fallen back to close to the issue price, and the stock price has broken out of the “roller coaster” perception. Although Quzhi Group's stock price is currently in a downward trend, as of September 27, its stock price still had an increase of more than 80% compared to the issue price.

It is worth noting that Quzhi Group was officially included in the “Hang Seng Composite Index” on September 9, but Quzhi Group's stock price continued to fall over the next 6 trading days, with the biggest drop of more than 11%. Obviously, some capital has taken this opportunity to “escape”.

However, what investors are more concerned about is that as of November 26, Quzhi Group will soon usher in the lifting of the restricted stock ban. This will undoubtedly put pressure on the company's stock price. Will Quzhi Group's subsequent stock price trends replicate Youbao Online? This is worth exploring in depth.

The lifting of the ban on large-scale restricted stocks is too concentrated

Judging from the aspect of lifting the ban on restricted shares, the challenges facing Quzhi Group's stock price are insignificant. This is due to the triple pressure of pre-IPO investors, controlling shareholders, and cornerstone investors to lift the ban at the same time.

According to the prospectus, Quzhi Group, which was founded in 2013, experienced a total of 9 rounds of financing, including seed rounds and angel rounds, before the IPO. When Quzhi Group signed a financing agreement with Series F investors on June 29, 2023, Quzhi Group's valuation was approximately RMB 4.159 billion. Series F financing is also divided into F-1 round and F-2 round. The corresponding prices per share were $7.2,805 and $14.6632, respectively, with a discount of about 70.69% and 40.96% compared to the median price of HK$27.35.

If we calculate the closing price of HK$45.35 per share of Quzhi Group on September 24, even the F-2 investors with the highest financing valuation received nearly 3 times the return, which is already very lucrative, then the returns of investors in the previous rounds will be higher, which means that the expectations of such investors to fulfill their profits will also be stronger.

Judging from the equity structure, after experiencing a total of 9 rounds of financing, Quzhi Group's shares are very scattered. The 18 pre-initial public offering investors held a total of 53.23% of the shares in the Quzhi Group, including Shanghai Yuanyu Fun, Xiamen C&D Emerging Industry Equity Investments, Shanghai Hongjiu Fun,

The shares of QFUN, Mr. Liu Xiaoying, QFUN Tech, Shanghai Yuanjizhi, Shanghai Yuanyu Fun, Yuanqu Phase III, etc. will be officially banned on November 22, 2024.

The number of shares held by some pre-sale investors and the date the ban was lifted

Meanwhile, shares of the controlling shareholder of Quzhi Group will also be conditionally lifted from sale on November 26, 2024. According to the sale documents, the controlling shareholder of Quzhi Group consists of 6 concerted actors, holding a total of 39.27% of Quzhi Group's shares. The shares of these six concerted actors will reach the expiration date of the first anti-sale promise on November 26, 2024. Controlling shareholders can sell or transfer their shares after that date, but this must be done on the premise that they are still controlling shareholders. However, by May 26, 2025, the second sales ban period for the controlling shareholder expires. At that time, the controlling shareholder's sale or transfer will not be subject to any conditions. Currently, it is not ruled out that the controlling shareholder will start reducing their holdings after the end of the first sales ban period.

The number of shares held by the controlling shareholder and the date the ban was lifted

In addition, 1.19% of Quzhi Group's shares held by the cornerstone investor Jinli Fortis will also be lifted on November 26, 2024. Jinli Fortis is a limited partnership fund registered in Hong Kong on November 10, 2023, and is mainly engaged in equity investment. The sole general partner of Jinli Fortis is China North Securities Group Co., Ltd., and the only investment manager and fund manager is North China Global Asset Management Co., Ltd.

The reason why Quzhi Group introduced Jinli Fortis as the cornerstone is because a limited partner of Jinli Fortis is the chairman and general manager of one of Quzhi Group's five major customers, and under his coordination, Jinli Fortis was introduced. At the time of Quzhi Group's global sale, Jinli Fortis purchased 10 million US dollars of Quzhi Group shares at a price of HK$25, with a total number of shares of 3.127,600 shares. If calculated at the closing price of HK$45.35 per share of Quzhi Group on September 27, Jinli Fortis's investment has surged more than 80%.

It can be seen from this that the lifting of the ban on Quzhi Group's shares faced challenges such as the unblocking time being too concentrated, and the number of unbanned shares being huge and scattered. At the same time, investors and shareholders at various stages have already made rich profits. This means that once the ban period is over, it may be urgent for all parties to implement the idea of floating profit, and the sell-off pressure formed at that time may put pressure on the company's stock price.

The industry is picking up, and the three major businesses are working together to drive performance growth

However, the key factor in whether it can resist selling pressure after the ban is lifted is the company's fundamentals. If future development prospects are highly attractive, then there may be relatively less selling pressure, and there will also be relatively more purchases in the market, thus completing the “buffer” against selling pressure. Based on this, it is necessary to conduct an in-depth analysis of the fundamentals of Quzhi Group.

Although both Quzhi Group and Youbao Online are powerful players in the field of unmanned vending machine operations, their strategic direction and business model are clearly different. Youbao Online positions itself as a professional platform service provider for smart retail in China. Its revenue mainly comes from product sales. In the first half of 2024, Youbao Online's unmanned retail products and product wholesale revenue accounted for 86% of the company's total revenue, while revenue from advertising and system support services accounted for only 4.5%.

Quzhi Group positions itself as an interactive machine marketing service provider. It uses unmanned vending machines as marketing carriers and integrates online and offline channels to form a complete ecosystem. While providing consumers with a convenient and fun shopping experience, it also provides brands with efficient and accurate marketing services. Therefore, Quzhi Group's main revenue comes from marketing services.

In the first half of 2024, Quzhi Group's revenue from marketing services reached nearly 80%, while product sales revenue accounted for 15.23%. Other services including IT system development and software development accounted for about 5% of revenue. Therefore, judging from the revenue structure, Quzhi Group is more like a marketing company.

Specifically, Quzhi Group's marketing services are divided into two major parts, namely standardized marketing and value-added marketing services. The former designs and launches customized marketing activities for FMCG brand customers, and publishes and arranges the image and value of FMCG products provided in different types of media to effectively attract and motivate target consumers to pick up goods. Quzhi Group charges related fees for such services.

Value-added services mean that Quzhi Group deepens consumers' impression of the product through interactive and immersive game-themed activities, and provides relevant data to the brand to optimize the brand's marketing strategy and product design.

In terms of performance, Quzhi Group has achieved continuous growth since 2021 and handed over an impressive performance questionnaire in the first half of 2024. In the first half of this year, Quzhi Group's revenue increased by 41.7% to 515 million yuan, and adjusted net profit increased by 48.8% to 80.269 million, achieving both revenue and net profit growth.

Looking at the breakdown, the three major revenue-side businesses have all achieved rapid growth. This is directly related to the continuous recovery of domestic consumer demand since the impact of the epidemic ended, and the overall scale of the consumer market has steadily expanded. Among them, marketing service revenue increased by 41.1%, mainly driven by the company's strategic enhanced use of social media platforms to deliver standardized marketing services. Marketing services were provided to 171 brand customers during the period, an increase of 41 over the same period last year, and the number of major customers served was 30. The average revenue per customer was 10.6 million yuan, and the number of major customers and unit prices increased.

Product sales revenue increased by 48.8%, mainly due to a marked recovery in traffic and consumption during the reporting period, and the year-on-year increase in Quzhi Group's unmanned vending machines. On this basis, the company adopted a more cost-effective pricing strategy, which further boosted the terminal's product sales capacity. Single-terminal product sales revenue increased 25.2% to 58.9 yuan year-on-year during the period. The 30% increase in revenue from other services is mainly due to the continuous increase in IT system and software development projects promoted by industry customer requirements and commissions, which has contributed to the expansion of this business.

It can be seen from this that on the basis of a clear recovery in the industry, the three major businesses of Quzhi Group have made concerted efforts to drive the company's high revenue growth. At the same time, Quzhi Group's gross margin remained stable, and total operating expenses were kept within a reasonable range, thus achieving a rapid increase in net profit during the period.

Overvalued and facing two major operating challenges

It is undeniable that Quzhi Group's interim results are indeed impressive, but it is worth noting that since the release of the results on August 15, Quzhi Group's stock price had fallen by more than 5% as of September 27, while the Hang Seng Index had an increase of 22% during this period. This means that after the release of the impressive results, Quzhi Group's stock price outperformed the market by nearly 30%. Why is this?

According to the Zhitong Finance App, there are two main factors. One is that the continuous rise since its launch made the company's valuation too high and overdraft the stock price increase ahead of time, thus creating a situation where it is “not affected” by outstanding performance.

According to Wind Brokers' consistent forecast, Quzhi Group's net profit for 2024 and 2025 was 199 million and 253 million, respectively, with corresponding growth rates of 51.94% and 27%, respectively. However, the market value of Quzhi Group at the close of trading on September 27 was HK$12.3 billion, corresponding to the 2024 and 2025 PE valuations, respectively. The 2025 valuation multiples were significantly greater than the net profit growth rate. This further highlights the excessive current valuation of Quzhi Group in the Hong Kong stock market where liquidity is discounted. In the Hong Kong stock market where liquidity is discounted, its valuation may experience a round of “squeezing moisture” in the future.

Second, in addition to overvaluation, Quzhi Group's business development faces potential operating challenges. First, you should understand that the key reason why Quzhi Group's performance growth has accelerated since 2023, apart from the recovery of the industry, is that the company has greatly enhanced the use of short video platforms to deliver standardized marketing services to customers since 2023. This is clearly reflected in the prospectus. Revenue from online platforms increased from 654.78 million to 313 million yuan in 2023, an increase of 378%.

Although the short video platform has injected new vitality into the growth of Quzhi Group, this model has certain disadvantages, that is, Quzhi Group needs to purchase traffic resources from third media, which clearly lowers the gross profit margin of the marketing business.

According to the prospectus, in 2023, the gross margin of Quzhi Group's marketing business was 59.4%, down nearly 14 percentage points from the previous year. Among them, the gross margin of standardized marketing services was 55%, down 18 percentage points from the previous year, thus dragging down the company's overall gross margin of about 7 percentage points to 53.2% in 2023.

Although the gross margin of Quzhi Group's marketing services remained stable year-on-year in the first half of 2024, increased market competition and increased traffic costs for short video platforms will have an impact on Quzhi Group's marketing business. What is certain is that from a long-term perspective, the traffic costs of short video platforms will show an upward trend, while the current gross margin of Quzhi Group's marketing services is still above 50%, and there may be room for further compression in the future as traffic costs rise.

Furthermore, the business model of Quzhi Group actually places higher demands on the location of unmanned vending machines. As of December 31, 2023, Quzhi Group has a network of 7,543 vending machines, covering 22 cities in 14 provincial administrative regions in China, and vending machines are mainly located in first-tier and new-tier cities, accounting for 98.4%. There are almost no Quzhi Group vending machines in second- and third-tier cities and sinking markets, and the number of unmanned vending machines in second-tier cities is also gradually decreasing. Conversely, Quzhi Group continues to increase the coverage density of first-tier cities, and the number of unmanned vending machines in first-tier cities continues to grow. Furthermore, Quzhi Group said that the company has now officially launched an internationalization strategy to explore the Middle East market.

Compared with Youbao Online's expansion strategy, Quzhi Group can be described as following a different path. Youbao Online said in the 2024 interim reporting period that it will further penetrate the coverage area of first-tier, new first-tier and second-tier cities, and gradually develop third-tier and lower cities with rapid economic growth.

Obviously, Youbao Online chose to deeply cultivate Tier 1 and 2 cities while penetrating the sinking domestic market, but Quzhi Group chose to expand overseas while deepening in first-tier cities. The different expansion strategies are actually due to differences in business models. In order to expand the basic market coverage of outlets, Quzhi Group's model requires high population density, high consumption levels, and strong liquidity, so that large-scale high turnover with high unit prices can be attracted to brand merchants to purchase and marketing services. Therefore, Quzhi Group's style of play has basically limited the possibility of penetrating the downward market, because in the sinking market, this style of play may fail. Therefore, in order to expand the basic market coverage of outlets, Quzhi Group can only expand to first-tier cities in overseas markets.

In fact, the current business model of Quzhi Group has actually greatly affected the level of penetration of the company's covered outlets in the domestic market. Long-term growth is questionable, and it is still unknown whether it can open up overseas markets to make up for the restrictions on growth space in the business model.

Overall, Quzhi Group achieved rapid growth in performance after the industry recovered and the marketing business increased integration into multimedia channels such as short videos, but due to excessive valuations, the stock price trend diverged from outstanding performance, and the valuation needed to be further digested. From an operating perspective, Quzhi Group faces potential challenges such as continued intensification of competition or rising traffic procurement costs, which affect the company's gross margin level, and its business model limits the expansion of the sinking market. This has undoubtedly discounted the fundamentals of Quzhi Group to a certain extent. On this basis, with the large-scale centralized lifting of the ban on restricted shares of Quzhi Group, the possibility that its stock price will trend downward continues to rise.