Wen 丨 新声 Pro, author 丨 Lv Sheyu
On March 8, Lok Wah Entertainment Group (hereinafter referred to as "Lo Wah") submitted a prospectus to the Hong Kong Stock Exchange to start the road to IPO sprint. According to the prospectus, Lehua's revenue has grown rapidly, with revenue of 1.29 billion yuan and profit of 335 million yuan in 2021, but its dependence on Wang Yibo's income is too high, and there is considerable risk.
In order to achieve revenue diversification, Lehua has continued to try new directions such as music, film and television investment, virtual idols, derivatives, and live e-commerce, but it has either failed, or the scale is still small, and the uncertainty is very large.
For some time, the Hong Kong stock market has been up and down, and it seems that the current situation is not a good opportunity to go public. Nevertheless, in the context of the continuous tightening of the entertainment industry and the capital market, seizing the time window to list may already be the least bad choice. After all, with abundant cash flow on paper and a complete artist training system, Lehua still has the opportunity to wait for the industry and market to recover and find new growth.
1. Strong revenue and profitability
Founded in 2009, founder Du Hua served as marketing director and general manager of Huayou Century, which was the largest provider of digital music content in China at that time.
After starting his business, Du Hua started from artist management with 2 million angel investment and has developed so far, and its business covers three major business sectors: artist management, music IP production and operation, and pan-entertainment business. According to the survey data conducted by Frost & Sullivan commissioned by Leroy, leroy entertainment is the largest artist management company in China in terms of revenue generated by artist management in 2020, with a market share of about 1.5%.
As a leader in the industry, Lehua has not considered entering the capital market in recent years, but the road to IPO has gone through several twists and turns and has not gone smoothly. This time to hong Kong listing, Lehua showed a number of key data.
In terms of equity structure, before the IPO, Du Huawei, founder and chairman of Lehua Entertainment, was the largest shareholder, holding 50.18% of the shares. Du Hua's spouse, Sun Yiding, who is an executive director and president of the company, holds 3.31% of the shares. Sun Yiding previously served as the executive director and vice president of Gome Electrical Appliances, during which time he participated in promoting gome's listing in Hong Kong, and after leaving Gome, he served as CEO of Ruisi Education for seven years, during which he led Ruisi to list on nasdaq. Among the institutional shareholders, Huaren Culture holds 14.25% of the shares, Ali Pictures holds 14.25%, ByteDance's wholly-owned subsidiary Quantum Leap holds 4.74%, signed artist Han Geng indirectly holds 2.35%, and another 5% of the shares are used as equity incentives.
From 2019 to 2021, the revenue of Leroy's three business segments was approximately RMB631 million, RMB922 million and RMB1.29 billion, respectively, and net profit was approximately RMB119 million, RMB292 million and RMB335 million, respectively.
Lehua has sufficient cash reserves. As of January 2022, the Company's cash and cash equivalents were $530 million. However, after the dividend of $400 million in March 2022 (and also a dividend of $200 million in 2020), Leroy's cash and cash equivalents were about $130 million, and the net current asset value was about $186 million. As of December 31, 2021, Lehua has 58 signed artists, including well-known artists such as Han Geng, Wang Yibo, Meng Meiqi, Wu Xuanyi, Fan Chengcheng and other well-known artists, and has established a talent reserve system including 80 trainees, as well as a total of 195 employees including artist operations (including 20 business agents and 19 executive agents), artist training, and artist promotion (below).
Source: Company Prospectus
After the listing, Lehua will not have major changes in its business direction, and will still focus on artist operations, and will try in many fields such as music IP production, virtual idols, derivatives, live broadcasting, e-commerce, etc., and will also do some business-related investment acquisitions.
2. Relying too much on Wang Yibo, the risk continues to increase
Lehua's biggest potential risk is clear: relying too much on Wang Yibo. Although it is common for artist agencies to derive their income mainly from a small number of artists, Lehua's dependence on Wang Yibo may be too high.
Of Lehua's 1.29 billion yuan in 2021, 91% will come from the artist business, of which Wang Yibo's income may account for more than 50%. Even in Lehua's second-ranked source of income, music IP production and operation, Wang Yibo's contribution accounts for the vast majority. However, Wang Yibo does not have a stake in Leroy, and his contract with Lehua expires in 2024.
Artist agencies earn income through artists and give artists a share. From 2019 to 2021, overall, the total share given by Lehua to artists will account for 45.4%, 39.4% and 45% of the total revenue brought by artists, respectively. We can roughly think that the income distribution ratio between Lehua and artists is 55:45.
Source: Prospectus
Among them, Wang Yibo's share has soared year by year, and Lehua's dependence on his income has continued to increase. In 2019, Lehua paid 32.274 million yuan to companies controlled by Wang Yibo, ranking first among its artists, but similar to the second place (Han Geng, 24.14 million yuan). In 2019, after Wang Yibo became one of the top artists with the "Chen Qing Ling" fire, his share in 2020 increased to 133 million yuan; in 2021, it increased to 302 million yuan, which is nearly 10 times that of the third place and nominal "Lehua First Brother" Han Geng (31.24 million yuan).
This reflects that Lehua's income is overly dependent on Wang Yibo, and the degree is increasing day by day. If Wang Yibo is compared to a sharp blade, then Lehua's situation seems to be walking on the blade: relying on the blade, you can cut through thorns and win gains; if the blade is inward, there may be a vicious circle and bleeding.
When the overall market environment is not good, the company will concentrate resources on Wang Yibo to quickly increase revenue, and the more it relies on Wang Yibo, it may lead to the tension between the company and Wang Yibo, the company and Wang Yibo fans, and even Wang Yibo and other artists in the company, forming a vicious circle with each other.
Some fans have listed Wang Yibo's workload in 2020, bluntly saying that it is more terrifying than "996", which has caused great dissatisfaction with the company's overload of work. In the "2021 Annual Report" released by Lehua Entertainment on March 4, Wang Yibo's main workload in 2021 was listed, far exceeding other artists in the company. The details are as follows:
At present, Wang Yibo has not yet held shares in Lehua, and the interests of both sides have not yet been firmly bound. From the perspective of contract date, Wang Yibo signed a contract with Lehua in October 2014, the contract period is 10 years, and it will expire in 2024, although it can be automatically renewed for 1-5 years according to the contract, but there are still many variables in it.
It is worth noting that Han Geng, who signed with Lehua in May 2010, the contract should normally expire in May 2021, but the prospectus does not disclose the renewal information between Lehua and Han Geng. In addition to Han Geng and Wang Yibo, the contracts of other Lehua's current head artists, Meng Meiqi, Fan Chengcheng, Huang Minghao, Wu Xuanyi, etc., will expire in 2024.
In addition to the issue of the length of the artist's contract, the potential reputation crisis will also have an impact on Lehua's brand and revenue. Although Lehua has been quite careful in the management of artists, it is still invincible. Some time ago, Meng Meiqi encountered a reputation crisis due to love problems.
Some Lehua artists, source: prospectus
3. Try "Artist Diversification" and "Business Diversification"
In the prospectus, we can also see the path of Lehua to change the status quo. In order to avoid the business continuing to be "top-heavy", Lehua mainly tried to start from the two major paths of "artist diversification" and "business diversification".
For many well-known artists existing under the company, Lehua will continue to support it, and also said that it will strive to adjust the concentration of dependence on artists. For example, Meng Meiqi, who fell into a reputation crisis some time ago, in the "2021 Lehua Annual Report", Lehua fully demonstrated and affirmed Meng Meiqi's past achievements, indicating that she is still one of the artists reused by Lehua.
In terms of talent reserves, Lehua said that it will continue to select and train trainees, including raising funds for new training centers. At the same time, a number of measures will also be taken to increase the selection channels for new trainees, increase the scale and frequency of selection, and increase the selection of overseas trainees to ensure the quality and quantity of reserve artists. However, idol talent shows have been stopped from the policy level, and the export of star-making has been further narrowed, which will slow down the pace of Lehua cultivating new artists.
In terms of business diversification, Lehua has tried to invest in movies, dramas and variety shows in the past two years, but due to serious losses, its investment in this field from 2019 to 2021 was 79.1 million yuan, 20.3 million yuan and 1.8 million yuan, respectively, decreasing year by year. Therefore, Lehua said in the prospectus that it will focus on artist management and music IP development and operation in the future.
However, the income brought by music IP is limited, and in the total revenue of less than 100 million yuan, Wang Yibo also occupies the majority. Its two digital singles "No Sense" and "Minecraft Code" sold more than 17 million copies and 15 million copies respectively at NetEase Cloud Music, far exceeding other artists in the company.
Moreover, this kind of income is still essentially from fan-supported idols, which is easily affected by regulatory policies. The risks to the business in this regard come from the impact of regulatory policy adjustments. On the one hand, on August 27, 2021, the Central Cyberspace Administration issued a notice announcing that "fan consumption shall not be induced" and "fan consumption" will not be induced.
"Optimization and adjustment of ranking rules" and other heavy measures. In this context, Lehua said in the prospectus that due to the restrictions imposed by the digital music platform on the purchase of digital albums and singles, the sales of musical works have decreased significantly.
On the other hand, on July 24, 2021, in accordance with the Anti-Monopoly Law, the State Administration for Market Regulation ordered the digital music platform cooperating with Lehua to take measures to restore the state of market competition by canceling exclusive music copyrights within 30 days, stopping the payment of copyright fees such as high advance payments, and not requiring upstream copyright owners to give them conditions that are superior to competitors without legitimate reasons.
It just so happened that Leroy's exclusive license agreement for the platform expired in July 2021, and it took a relatively long time to renegotiate the terms with the digital music platform until a new contract was signed with the digital music platform in December 2021, and revenue had been severely affected.
In the past, digital albums or singles monetized quickly, sales and sales into figures, can more intuitively reflect the purchasing power of fans and support for idols, music platforms spare no effort to launch fancy monetization play, so tens of millions of sales are not uncommon among top artists. But in the future, a considerable part of the income may be difficult to earn.
Under the background of the slowdown in the growth of long video and the rapid rise of short video, Lehua continues to cooperate with long video platforms on the one hand, and on the other hand, it also chooses to deeply bind with ByteDance. ByteDance not only invested in Lehua, but also became one of The five major customers of Lehua from the source of income, and in 2021, the revenue from ByteDance was 63.74 million yuan, accounting for 4.9% of Lehua's total revenue that year.
The two sides also jointly explore the future market represented by virtual idols. At the end of 2020, ByteDance and Lehua jointly launched the virtual female idol group A-SOUL, the former providing underlying technical support, and the latter providing middle-aged people and content planning and operation. The virtual idol group has been widely praised after its launch, but the current income is not high, in 2021, including the virtual artist business, the licensing of the variety show model and the sale of artist-related derivatives of the pan-entertainment business, to achieve 37.87 million yuan in revenue, accounting for 2.9% of the total revenue, of which the virtual artist business income of about 15 million yuan.
According to the understanding of "New Sound Pro", in addition to continuing to make efforts in the fledgling derivative business and virtual idol business, Lehua will also try to live e-commerce and other sections, and is currently recruiting talents for corresponding positions.
Screenshot of Lehua Entertainment recruitment announcement
4. Hong Kong stock listing may be the most practical choice
Although the environment is not good, seizing the time window to go public with Hong Kong stocks may be the most pragmatic choice for Lehua.
At present, the Hong Kong stock market is dismal. Wind data shows that the Hang Seng Index has retreated more than 33% from its February 18, 2021 high, continuing to refresh new lows in more than five years. During this period, the Hang Seng Technology Index fell by as much as 60%, and the Hang Seng Internet Index also fell by nearly 58%.
Based on the 14.25% stake acquired by Dongyang Ali Pictures for 277 million yuan in November 2020, the valuation of Lehua Entertainment reached 1.95 billion yuan. According to the Hang Seng Index price-to-earnings ratio (TTM) of 8.95 on March 11, Lehua's expected market value is about RMB3 billion.
From the perspective of the industry, the film and television entertainment industry has not had a listing case for a long time. Bona Pictures, Canstar Culture and other companies seeking to list on the A-share market have not made further progress for many years, but in fact, many companies have reached the investment exit period of shareholders. In this context, the listing of Hong Kong stocks seems to be the only feasible way. According to the understanding of "New Sound Pro", in addition to Lehua and Lemon Film and Television, which submitted a prospectus at the end of last year, there are also a number of film and television entertainment companies that are promoting the listing of Hong Kong stocks.
In addition, with a number of core artist contracts expiring within 2 years and the increased risk of artists brought about by tighter regulations, "Long Night Dream" will only bring more uncertainties to Lehua's listing.
In this context of multiple intertwining, taking advantage of abundant cash flow, having a complete artist layout from newcomers to head artists, seizing the window period to go public, small steps to try new businesses, and waiting for the market to recover may be a difficult but pragmatic choice.
After all, no one can predict when the wind will come again, but when the wind comes, you'd better be prepared.