On January 17, Changjietong (01588), a financial and management service provider for small and micro enterprises in China, staged a “roller coaster” trend.

The company rose more than 2.5% in early trading and fell to 3.96% in the afternoon. As of the closing report, it was HK$2.84, or about 2.16%, with a total market value of HK$925 million.

According to the news, the company announced that Yingxi is expected to achieve revenue of about 789 million yuan to 809 million yuan in 2023, an increase of about 16% to 19% over 2022; achieve net profit of 2 million yuan to 17 million yuan, turning a loss into a profit compared to 2022.

According to the Zhitong Finance App, Changjietong's performance in the secondary market has been sluggish for a long time. Since this year, the company's stock price has dropped 22%. Looking at it over time, the current stock price has fallen by more than 90% from its 2021 high.

What is behind the disinterest in stock prices is related to the company's performance not delivering as well as expected.

Although the company's revenue and net profit all increased in 2023, it is still far from before the pandemic. In the first half of 2019, the company's net profit to mother reached 91.887 million yuan. Today, the highest net profit to mother for the full year of 2023 reached 70 million yuan.

Why are revenue and profit at odds with each other?

Changjietong was founded in March 2010 and is a subsidiary of Yonyou Network. In 2014, the company obtained the “Payment Business License” from the People's Bank of China, and was allowed to carry out nationwide Internet payment and bank card receipt services, and successfully landed on the Hong Kong main board in June of the same year.

Changjietong mainly provides platform services, application services, data services, and financial services with financial services as the core for small and micro enterprises in China. Through a full range of “Digital Intelligence Finance and Taxation” + “Digital Intelligence Commerce” product layouts, it meets the cloud service needs of small and micro enterprises of different types, stages of development, and different sizes.

In the past five years, Changjietong can be described as experiencing repeated declines in terms of operating profit. From 2018 to 2022, Changjietong's net profit attributable to the parent company was: 107 million yuan (unit: RMB, same below), 92 million yuan, 0.3 billion yuan, -186 million yuan, and -212 million yuan, respectively. In 2023, Changjietong finally returned to a positive profit growth trajectory.

Chang Jietong said that the increase in performance is mainly due to the company promoting large-scale and efficient business development, continuously improving product competitiveness, adhering to co-prosperous ecological development, and continuously improving market coverage. In 2023, while revenue continued to grow, Changjietong's gross margin level rebounded from the previous year, reaching more than 65%, while the total R&D costs, sales and distribution expenses, and management expenses decreased slightly compared to the previous year.

Financial reports show that Changjietong's business focuses on the two major fields of digital finance and taxation and digital intelligence commerce for small and micro enterprises. The company's revenue mainly comes from cloud subscription services. Throughout 2023, cloud subscription revenue is expected to increase 27% to 30% over the previous year, accounting for about 60% of total revenue. Driven by this business, Changjietong's total revenue is expected to increase by 16% to 19% during the period.

It is worth noting that unlike profits, which continue to decline, Changjietong's revenue has been growing. From 2018 to 2022, the company's revenue was 429 million yuan, 463 million yuan, 509 million yuan, 590 million yuan, and 680 million yuan respectively. From 2019 to 2022, the year-on-year increase was 8.03%, 9.93%, 15.88%, and 15.22%, respectively, and the growth rate was relatively steady.

The continued high increase in revenue is related to the high growth in the number of cloud service business customers and cloud service revenue.

In 2023, Changjietong's cloud service business added about 130,000 new paid enterprise users, an increase of 23% over the previous year. By the end of 2023, the total number of paid enterprise users in the company's cloud service business reached 633,000.

Why are Changjietong's revenue and profit performance at odds?

If you look at the gross profit and expenses of the financial report, you may be able to see the first clue.

From 2018 to 2022, Changjietong's gross profit was 399 million yuan, 420 million yuan, 426 million yuan, 410 million yuan and 414 million yuan respectively, which remained stable. However, high expenses continue to split profits, particularly sales expenses and administrative expenses.

From 2018 to 2022, the company's sales expenses were RMB 170 million, RMB 208 million, RMB 189 million, RMB 305 million and RMB 308 million respectively; management expenses for the same period were RMB 229 million, RMB 228 million, RMB 227 million, RMB 331 million and $358 million respectively.

It is worth mentioning that in 2019, the company's sales expenses grew by 22.41%, higher than the revenue growth rate of 8.03% during the same period. Coincidentally, the growth rates of the company's sales expenses and management expenses in 2021 were 60.94% and 45.82% respectively, far higher than the 15.88% growth rate of revenue during the same period.

Through the above financial data, it can be seen that the endogenous growth of Changjietong's business is weak. It relies on large-scale marketing and promotion to maintain revenue growth, and there have even been many cases where the cost-side growth rate exceeds the revenue growth rate.

Can it be realized by grasping the “Fourth Phase of Gold Tax” and AIGC's growth momentum?

In recent years, the country has continued to promote the popularization of fully digitized electronic invoices (“digital invoices”). With the full promotion of digital electronic invoices into the fast track, the level of digitalization and electronic invoicing will increase dramatically. At the same time, tax collection and administration will shift from “tax management by ticket” to “digital tax management” classification and precise supervision, and demand for integrated ticketing, fiscal and business finance products will also continue to rise.

In particular, with the official launch of the “Gold Tax Phase IV”, enterprises are expected to increase investment in tax informatization construction to meet compliance management requirements. According to iResearch's data, the digital fiscal and taxation market is expected to reach 70.2 billion yuan by 2025, with an average compound growth rate of about 16.2% from 2021 to 2025. In this context, tax-paying companies are expected to increase their investment in tax informatization. As far as Changjietong is concerned, the company's digital intelligence finance and taxation business is expected to welcome greater market opportunities.

According to the company's semi-annual report, in the first half of the year, Changjietong used the “Fourth Phase of Gold Tax” and the market opportunities of digital electronic ticket promotion to launch a nationwide “Cloud Finance and Taxation Popularity Storm” market campaign, vigorously promoting digital intelligence cloud finance and taxation products. In the first half of the year alone, Changjietong added 395 new channel partners, further expanding the breadth of channel coverage.

On the other hand, the AIGC boom represented by ChatGPT has taken the world by storm. IT technology and industrial innovation have moved from an era centered on cloud computing to a new AI-centered era. Conversational AI has changed the way humans search and generate knowledge through big models.

In this new era, intelligent business operation, natural human-computer interaction, intelligent knowledge generation, and semantic application generation have become the four main directions of AI application in enterprises.

Chang Jietong strives to further improve the level of automation and intelligence of digital intelligence finance and taxation by strengthening the AI capabilities of its products.

In the field of digital intelligence, product development in the fields of new commerce, new retail, new manufacturing, and new services has been optimized, and virtual digital employees such as approval robots and business process robots have been created around sales, procurement, inventory, finance, etc., to help small and micro enterprises improve efficiency and reduce costs through automated means; Xiaochang's AI assistant built based on domain expertise and big model technology helps users to intelligently apply products through natural language to improve product ease of use.

In summary, the “Fourth Phase of Gold Tax” and the advent of AIGC have played a positive role in promoting the development of digital intelligence taxation and digital intelligence commerce for small and micro enterprises, providing them with a long-term and broad market development space. However, it will take time to test whether Changjietong can deliver on its growth. More importantly, it is far lower than the profit level before the pandemic. Can it help the secondary market to “regain popularity”?