Soul has lost 2.4 billion yuan in three years and faces the problem of choosing between "performance" and "monthly activity"

China Economic Network Editor's Note: On March 27, Soulmate Inc (hereinafter referred to as "Soul"), the parent company of the social platform Soul, once again submitted a prospectus to the Hong Kong Stock Exchange, and the joint sponsors are China International Capital Corporation Hong Kong Securities Limited and Merrill Lynch (Asia Pacific) Limited. The company first submitted the form on June 30 last year, and the file showed that it was invalid. 

According to the prospectus, Soul is a virtual social platform for China's younger generation, which breaks geographical and social restrictions, allowing people to establish and maintain a wide range of relationships through interests and virtual identities. The company aims to empower self-expression with Soul and promote the establishment of real relationships, so as to form a virtual social amusement park that can iterate on users' creativity. 

According to the prospectus, the founder, chairman, executive director and chief executive officer Zhang Lu holds an interest in the company through trust through Soulgate Holding, a limited company incorporated in the British Virgin Islands and controlled by Zhang Lu. Therefore, after the issuance, Zhang Lu and Soulgate Holding will each become the controlling shareholders of Soul. 

Soul intends to use the proceeds for the following purposes: to facilitate the Company's strategy of continuous development and investment in innovative technologies and the Social Metaverse, it will be used for research and development to improve and upgrade proprietary technologies, enhance data analysis capabilities, and develop technologies (including AI-assisted natural language processing, AI algorithms, and AI-assisted visual and auditory content generation); To promote the Company's user growth and retention strategy, it will be used to further expand and retain the Company's user base and strengthen the Company's brand, thereby promoting sustainable and high-quality user growth; will be used to develop innovative products and features to attract users and further enhance monetization potential; It will be used for working capital and general corporate purposes. 

From 2022 to 2022, Soul's revenue will be 498 million yuan, 1.281 billion yuan and 1.667 billion yuan, respectively, with growth rates of 157.3% and 30.1% in 2021 and 2022, respectively, slowing down; The losses during the year were RMB579 million, RMB1,324 million and RMB508 million respectively. After calculation, Soul has a cumulative loss of 2.412 billion yuan in three years. 

During the same period, Soul recorded net cash outflows from operations of RMB238.2 million, RMB794.0 million and RMB201.3 million, respectively, mainly due to a net loss from the Company's day-to-day operations. 

According to Investor Network, Soul is currently facing a dilemma between "performance" and "monthly activity". Soul's revenue growth slowed to 30%, while losses narrowed significantly. But the most obvious cost is in "people", and Soul's monthly activity declined in 2022, with 20.8 million, 31.6 million and 29.4 million respectively during the reporting period. 

Secondary Schedule HKEx

According to the prospectus, Soul is a virtual social platform for China's younger generation, which breaks geographical and social restrictions, allowing people to establish and maintain a wide range of relationships through interests and virtual identities. Soul is a non-face-based social networking platform where users can socialize and link in the virtual space through various interactive and gamified interaction methods by using virtual identities and owning digital assets. 

According to iResearch, Soul is the first social networking platform in China where all users interact with avatars through virtual identities. The company aims to empower self-expression with Soul and promote the establishment of real relationships, so as to form a virtual social amusement park that can iterate on users' creativity. 

According to the prospectus, the founder, chairman, executive director and chief executive officer Zhang Lu holds an interest in the company through trust through Soulgate Holding, a limited company incorporated in the British Virgin Islands and controlled by Zhang Lu. Therefore, after the issuance, Zhang Lu and Soulgate Holding will each become the controlling shareholders of Soul. 

Soulgate Holding is wholly owned by Zedra Trust Company (Cayman) Limited, with Zedra Trust Company (Cayman) Limited acting as the irrevocable trust trustee (Zhang Lu as the settlor). The beneficiaries of the trust include Zhang Lu and her designated family members. In addition, according to the voting proxy, Zhang Lu has obtained voting rights in the preferred stock held by the Authorized Image Structure equivalent to 36,500,000 ordinary shares of the Company (on a conversion basis). 

Soul intends to use the proceeds for the following purposes: to facilitate the Company's strategy of continuous development and investment in innovative technologies and the Social Metaverse, it will be used for research and development to improve and upgrade proprietary technologies, enhance data analysis capabilities, and develop technologies (including AI-assisted natural language processing, AI algorithms, and AI-assisted visual and auditory content generation); To promote the Company's user growth and retention strategy, it will be used to further expand and retain the Company's user base and strengthen the Company's brand, thereby promoting sustainable and high-quality user growth; will be used to develop innovative products and features to attract users and further enhance monetization potential; It will be used for working capital and general corporate purposes. 

Revenue growth slowed down with a cumulative net loss of 2.4 billion yuan in three years 

From 2022 to 2022, Soul's revenue will be 498 million yuan, 1.281 billion yuan and 1.667 billion yuan, respectively, with growth rates of 157.3% and 30.1% in 2021 and 2022, respectively; The losses during the year were RMB579 million, RMB1,324 million and RMB508 million respectively. After calculation, Soul has a cumulative loss of 2.412 billion yuan in three years. 

Soul said in its prospectus that the company's net loss increased in 2020 and 2021 because the company was in a high-growth phase and strategically focused on expanding its user base by investing in the company's brand. In 2022, the Company's net loss decreased primarily due to lower selling and marketing expenses as part of the Company's strategy to acquire and retain users with high monetization potential to better capitalize on future growth opportunities. 

In 2020, 2021 and 2022, Soul recorded net cash outflows from operations of RMB238.2 million, RMB794.0 million and RMB201.3 million, respectively, mainly due to the Company's net loss in day-to-day operations. 

Specifically, Soul incurred significant sales and marketing expenses as the company strategically invested in the company's brand awareness, user growth and user engagement to capture opportunities and attract a larger user base to generate greater profitability in the future. Soul also invests heavily in R&D activities to improve the company's technology infrastructure and innovate the company's products. The increase in operating cash outflow in 2021 compared to 2020 was mainly due to an increase in losses incurred, mainly driven by higher selling and marketing expenses, partially offset by a decrease in working capital. The decrease in operating cash outflow in 2022 compared to 2021 was mainly due to a decrease in losses incurred (mainly driven by lower sales and marketing expenses), partially offset by higher working capital. 

As of December 31, 2020, 2021 and 2022, cash and cash equivalents were RMB626.0 million, RMB910.4 million and RMB668.4 million, respectively. 

In 2020, 2021 and 2022, Soul recorded gross profit margins of 79.9%, 85.2% and 86.3% respectively. 

According to the prospectus, Soul is mainly monetized through value-added services, including virtual items and membership subscriptions. Soul Coin provides users with the option to purchase a variety of virtual items and privileges to further enhance their experience in the Soul app, including avatars (custom avatars and avatars creation items), virtual gifts, game items, and referral privileges. Most of the company's virtual items and perks are purchased through Soul coins. 

Soul generates the vast majority of its revenue by providing value-added services. During the Business Record Period, revenue from value-added services accounted for 97.4%, 93.9% and 91.1% of the total revenue in 2020, 2021 and 2022 respectively.

Investor Network: Faced with the problem of choosing between "performance" and "monthly activity" 

According to Investor Network, reading through some of the key data disclosed by Soul in the prospectus, it is clear that Soul is currently facing a dilemma between "performance" and "monthly activity". 

On the "money" side, Soul is making good progress. During the reporting period (2020-2022), Soul's revenue maintained growth, with 498 million yuan, 1.281 billion yuan and 1.667 billion yuan, respectively. The adjusted net loss narrowed significantly in 2022 to RMB579 million, RMB1.324 billion and RMB508 million, respectively. The loss in 2022 returned to the level of 2020, but the revenue was 3 times that of then. 

At the same time, the average monthly income (ARPPU) of paying users has also continued to rise, at 43.5 yuan, 60.5 yuan and 75.3 yuan respectively, and the spending power of a single paying user in the app is becoming stronger. User willingness to pay also increased slightly in 2022, with user payment rates of 4.5%, 5.2% and 5.7% respectively. 

Compared with itself, Soul's revenue growth rate has dropped to 30%, and losses have narrowed significantly, but what about the cost? 

The most obvious cost is in "people", and Soul's monthly activity declined in 2022, with 20.8 million, 31.6 million and 29.4 million respectively during the reporting period. Among them, the number of paying users in 2021 and 2022 is almost unchanged, both around 1.7 million. It's clear that Soul 2022 has undergone some changes that have made the data very different from previous years. 

The most obvious change is in marketing expenditure, which fell sharply in 2022, with $621 million, $1,513 million and $844 million respectively at the end of each period. However, R&D and administrative expenses in 2022 will not change much compared with 2021. 

It can be seen that Soul's revenue, monthly activity, and ARPPU trend are quite correlated with marketing expenditure. Soul cut nearly half of its marketing spend in 2022, in exchange for a sharp narrowing of losses. The consequences of this were almost immediately apparent, with the number of monthly active users stopping to grow or even shrinking that year. 

The monthly activity of the two apps of Zhiwen Group, the parent company behind Tantan and Momo, has long reached the ceiling, of which Tantan has only 18.4 million monthly active users in the fourth quarter of 2022, and there has been no significant change in recent quarters, and Momo's monthly activity has been around 100 million in recent years. However, as of the end of 2022, Zhiwen Group has been profitable for 32 consecutive quarters. 

On the other hand, Soul has 10 million more monthly activity than Tantan at the end of 2022, but its annual income is only 22% higher than that of Tantan. Soul has not yet achieved profitability, but its monthly activity has begun to decline, which is quite a bit of "aging before aging".