This article is based on publicly available information and is for information purposes only and does not constitute any investment advice.
At the beginning of 2024, Card You will submit the form to the Hong Kong Stock Exchange. This company may not be known to adults, but it is the favorite of the majority of children - the creator of the Ultraman card epidemic in the field of Chinese teenagers.
In the past, the market has never heard of card games, but has never seen them, and has never had the opportunity to objectively understand this company. Now, with the publication of the prospectus, the image of the "trading card leader" has finally gotten rid of the mystery and become flesh and blood:
Batches of cards sent from Kaihua County, Zhejiang Province to all parts of the country, with an average price of less than 1.8 yuan per unit, easily sold 4.1 billion yuan a year; the other side of the oversale is huge profits, such a cheap commodity still maintains a super high gross profit margin of close to 70%; however, behind the rapid progress, there are also difficult and obscure growth worries, as well as obscure and tortuous development difficulties.
Let's discuss today, what kind of company is card games, what kind of business is trading cards, and what enlightenment can card games give to IP operators?
01 Card games from the perspective of the industry chain
According to the biennial financial report disclosed in the prospectus (2021, 2022 and Q3 of 2023, the same below), its main revenue includes two pieces: toys (trading cards, dolls, other toys) and stationery, and its Chinese trading cards contribute to the total revenue at the level of eight to ninety-fifty percent, which is the root of card games and the foundation of the family, so this report focuses on trading cards.
From the perspective of the industry chain, the monetization process of card games mainly consists of three steps: acquiring IP, designing and producing cards, and selling cards.
1) IP Licensing: Obtain IP Licensing: Obtain IP Licensing/Licensing Agents through Production/Operation/Licensing Agents.
Figure: The main IP situation of card games, source: prospectus
At present, the core IP of card games contributing to revenue is Ultraman, which has launched 274 trading card series and 28 stationery series in five years. Ultraman IP is obtained by authorization, from Shanghai Xinchuanghua, the domestic copyright general agent of Ultraman IP. According to the terms of the disclosed contract, the IP license is generally valid for 1-10 years, after which the two parties agree to renew the contract. In terms of fee arrangement, the card game pays an upfront payment for the license, and then pays royalties based on sales performance or production.
Similarly, Ye Luoli, Douluo Dalu, and Egg Boy Party IP also come from licensing, and the copyright fees of the two-year card game are 166 million yuan, 211 million yuan and 113 million yuan respectively, corresponding to 7.2%, 5.1% and 5.8% of the total revenue. This proportion is not low, and the acquisition method of the core patent of Bubble Mart of the same income level is buyout, so its patent fee is a fraction of that of Card Game (31 million yuan in 2020).
There is no IP operator who does not want to have its own IP, and card games are no exception. However, whether it is Ultraman or Harry Potter, a one-time buyout is obviously unrealistic, and the card game chooses to be self-developed + cooperation, of which the card game Three Kingdoms, which was launched in April 23, is its own IP with high hopes, and it is in cooperation with the Chinese painter Mr. Dai Guobang, which has generated 111 million yuan in revenue in less than half a year, and whether it can be successfully commercialized still needs to be verified.
2) Product design and production: around the IP, extract symbolic symbols (such as character images), design the relationship between symbols (game rules), and attach these symbols to physical cards.
At present, there are three card game production lines, namely: the trading card production base in Kaihua County, Zhejiang Province, which will be put into operation in August 2020, the stationery production base in Yiwu City, Guangdong Province, which will be put into operation in March 2023, and the packaging production base in Dongguan City, Guangdong Province, which will be put into operation in April 2023. At present, the main operation is the Kaihua trading card production base, with a capacity utilization rate of 68.1%, 78.7% and 52.5% in the two-year period, which can fully cope with the current production and sales market.
3) Commodity sales: guide consumers to buy, collect, interact with games, and exchange with each other in a reasonable way. At present, it has 230 dealers covering 30 provinces, contributing 96.8%, 92.7% and 81.2% of the total revenue. However, card games will give dealers a large batch of goods rebates, which is about 1%-2%.
In general, in the card of 1.8 yuan, the copyright owner charges 0.1 yuan copyright fee, and the cost of production links other than the copyright fee is 0.36 yuan, and then 0.2 yuan is distributed to the dealer to do channel fees, and finally after removing the company's daily operating expenses, the remaining 0.79 yuan is the net profit of card games, and a large number of small businesses are bought and sold, counting the sales multiplier of 2.1 billion yuan, that is, the adjusted net profit of 1.6 billion yuan.
Upstream IP relies on licensing, downstream sales rely on distribution, and low-cost, high-return card games have indeed become the most desirable appearance of Pop Mart. However, if you look closely, you will find that everything is very reasonable, after all, just the circle marketing, the card game is much more brilliant than Bubble Mart.
02 Circle marketing to grasp the "child brother"
Thomas J. Murphy, founder of Boston Delphi and adjunct professor at Boston University, M. Kolopolos, in "The Circle Effect", put forward the term "circle effect", which refers to the consumption phenomenon of a group of people with a strong sense of self, who have their own standards for judging things, and who take their own feelings and values as the criterion, and who will get together because of the same hobbies and values.
Later, more and more businesses discovered the huge business opportunities hidden in the circle effect, and developed a series of targeted marketing activities according to the specific interests, needs or purchase behaviors of target customers, so that they can influence, interact and communicate, which is what we often call circle marketing.
Circle marketing is very common, such as various brands of car clubs, golf and tennis competitions, etc., and then compare with Station B, which originally claimed to be a two-dimensional fan community, and TapTap, which claimed to gather game enthusiasts. In the final analysis, the underlying driving force of circle consumption is the search for identity.
Similarly, the core of the card game business model lies in circle marketing, but due to the unique "purity" of the core customer group, its business model is much easier than the one mentioned above.
1) The key points of circle marketing: According to the white paper on the circle of interest of Chinese consumers, the circle can be divided into the inner circle and the outer circle, and the success of circle marketing is not limited to the actual participants of the circle activities, but the inner circle and the outer circle are jointly created, that is, the identity of the people in the circle, in addition to the connotation of the IP itself, is actually strongly related to the yearning of people outside the circle for the circle, and it is a further rendering of the added value of the spiritual level of IP outside the circle.
This means that successful circles are characterized by wide spread, low entry barriers, and high difficulty in progression. In this way, Ultraman's audience base is greater than MOLLY, the threshold of the unit price of 1.8 yuan is much lower than 79 yuan, and the trading card gameplay is more complex than the blind box rules of simple collection. At this point, it is not difficult to understand why a card game of eight can sell at the same level as the 79 yuan Bubble Mart.
2) The operation of circle marketing: each circle has a heavyweight (KOC) with a good reputation, high visibility and high appeal, and this figure represents absolute authority. With KOC as the core to mobilize consumer groups and continue to provide IP culture output, like an object falling into water, the influence of IP culture will gradually expand outward, like a circle of ripples.
Therefore, the people in the circle pursue to flow to the center of the circle, infinitely close to the KOC, so as to complete the identity within the circle. The denser the social interaction in the group, the tighter the structure of the circle, and correspondingly, the clearer the chain of contempt between the central layer and the periphery and the inner circle over the outer circle.
Looking at card games again, the main customer group is primary school students, which is a group with a single source of information and high social density. Therefore, once a certain circle is formed, the influence of KOC will be infinite. As described by the media in the card game, the founder Li Qibin is the person who understands children best.
Figure: Dealer cooperation model, source: prospectus
The specific method of card game is to penetrate the dealers (newsstands, commissaries, etc.) distributed around the customer group to grasp the customer group. Judging from the prospectus, the sales process can be summarized as follows: finding dealers with high-quality locations, training dealers on the rules of play, exerting influence on dealers (passing on the rules of the game, building brand awareness), and finally forming sales behavior.
Adults here are not in harmony with consumerism, but children are crazy in the circle of consumption.
The commissary boss said that only the Ultraman cards of the card game are real, and everything else is fake, then they will madly laugh at the children who buy cards of other brands, and laugh until you cry;
After coming and going, under the 360-degree three-dimensional surround publicity of 230 dealers, the brand barriers of card games have been established, the stickiness and rigidity of the circle have been established, and the revenue and profits have been guaranteed.
03 The paradox of the expansion of circle consumption
However, no circle of consumption can escape the paradox of expansion. If identity is the ultimate appeal of circle consumption, then there must be a clear boundary between the core circle and the peripheral circle, and between the inside and outside of the circle, which further determines that once the circle consumption enters the public domain, it will lead to the weakening of the circle attraction.
A common example is luxury consumption, where the purchase of luxury bags is also a form of identity, and as the per capita purchasing power increases, the identity brought by the so-called luxury goods will also decrease. In layman's terms, if everyone uses luxury, then luxury is not considered luxury. Therefore, we will see that in order to maintain the attributes of the circle, the classic models of various luxury brands will often increase their prices.
Looking back on the development of card games, with the advantages of low entry barriers and high-density dealers in the early stage, the influence and revenue of card games are growing wildly, but as the trading card game enters the second half, there are more children with cards/scarce cards, and the coolness emphasized by circle marketing has become less cool.
Figure: Revenue performance of card games in the first two years, source: prospectus
This is very evident in the revenue performance of card games, in terms of revenue in the biennium, card game revenue (especially dealer channel income) began to gradually shrink in Q4 of 2022, and the number of inventory turnover days increased from 85.1 days in 2021 to 128.7 days in Q3 of 2023.
The sales were not smooth, and the number of dealers of card games also changed from a net increase to a net decrease, with a net increase of 94 dealers, a net decrease of 36 dealers and a net decrease of 60 in the first two years.
At present, the way to solve the problem of card games is to increase the difficulty of product upgrades and increase the richness of IP.
First, the low-price strategy has been decided, and the card game chooses to follow the practice of luxury brands and raise the difficulty of obtaining core products. In the prospectus, Card Game says, "Our trading cards can usually be divided into common, regular rare, super rare, super rare, super rare, raster rare, and extremely rare. Some trading card sets introduce more subtle rarity levels, such as Platinum Collector's and Q Rares. ”
Perhaps, in the future, we will see the span of trading cards from common cards to extremely rare cards, and from common cards to super infinite extremely rare cards. However, whether the patience of primary school students can stand the test is a question worth repeating, after all, mobile games and short videos also have their own content aimed at this group.
Second, by enriching the IP library, it can compensate for the cash flow fluctuations caused by a single IP. But who will be the next Ultraman of the card game? It is still difficult to make a conclusion, the revenue scale of authorized IPs such as Douluo Dalu, Ye Luoli and Egg Boy Party does not seem to be enough to be mentioned in the prospectus, and the revenue of 100 million yuan from the three countries of its own IP card game is far enough to support the current revenue decline.
At the end of the day, trading cards are a cash flow management business, which is closely related to the life cycle of IP products. As we can see, no matter how noble the card game is, there will be a day of reconciliation with capital, perhaps the card game that understands children understands, no matter how high-profile Ultraman is, there is also a day of retreat, and the deadline for the realization of the card game is approaching.