BlueFocus sets sights on Hong Kong IPO as revenue, margins slip

China’s leading provider of marketing services is joining a growing tide of Shanghai- and Shenzhen-traded companies making second listings in Hong Kong

Key Takeaways:

• BlueFocus has filed for a Hong Kong IPO, boasting its status as China’s largest and the world’s 10th biggest provider of marketing services
• The company gets 80% of its revenue from Chinese firms targeting foreign buyers, but that business is undermining its bottom line due to extremely low margins

By Doug Young

Who says only manufacturers can make IPOs in Hong Kong to complement their current listings on China’s domestic A-share markets in Shanghai and Shenzhen?

Such dual listings have become some of Hong Kong’s biggest IPOs this year, led by names like electric vehicle battery (EV) giant CATL, which raised $35.3 billion ($4.5 billion) in May, and top condiment maker Haitian, which raised HK$10.1 billion in June. But now, leading marketing services provider BlueFocus Intelligent Communications Group Co. Ltd. (300058.SZ) is aiming to break that monopoly with its own planned Hong Kong IPO.

BlueFocus is one of China’s oldest providers of marketing services, set up in 1996. It’s also the world’s 10^th biggest provider of such services, making it the lone Chinese company among the global top 10, which includes such powerhouses as WPP (WPP.L) and Omnicom (OMC.US), according to its recently filed Hong Kong listing document.

The company’s financials reveal some notable trends, including the huge amounts of money that Chinese companies are spending on campaigns targeting overseas customers. Such spending accounted for 80% of BlueFocus’ revenue last year, and that part of the business is growing far faster than its business for marketing services aimed at domestic consumers.

The company is also notable for its razor-thin margins that are well below its global peers, which it attributes to its growing focus on the intensely competitive global marketplace. As a result of that operating model, BlueFocus has been drifting back and forth between the red and the black in the last four years – a trend that looks likely to continue unless it can figure out how to operate its global marketing services business more efficiently.

The company is quite well known in Chinese advertising and PR circles, becoming one of the first to list on the Nasdaq-style ChiNext board in Shenzhen in 2010, just a year after the board’s launch. Anyone savvy enough to buy those early shares has done quite well, with the stock up nearly five times since then, currently valuing the company at 23 billion yuan ($3.2 billion).

But even after such gains, BlueFocus’ Shenzhen-listed shares currently trade at a price-to-sales (P/S) ratio of just 0.39 – quite anemic for this kind of industry leader and high-growth company that has averaged nearly 30% revenue growth in each of the last three years. That lack of investor enthusiasm is global, with WPP trading at an even lower 0.31, and Omnicom higher, though still not very impressive at 0.92.

BlueFocus’ fundraising is unlikely to break the $1 billion mark, but could still raise hundreds of millions of dollars, judging from its current market cap and trio of relatively large underwriters including Huatai International, Guotai Junan and China Renaissance.

The company will use part of the funds to accelerate its recent global expansion that has given it offices in U.S., Vietnam, Thailand, Indonesia and Singapore. It will likely use those offices not only to serve its Chinese clients, but also to look for local business as it tries to compete with the global majors. That could become increasingly important as Chinese companies continue to rein in their spending due to a weak domestic economy.

Revenue starts to decline

Despite its less attractive margins and bottom line, there’s no question that BlueFocus’ top line revenue has posted strong growth over the last three years. That includes a 15.6% rise last year to 60.8 billion yuan from 52.6 billion yuan in 2023. But we should point out that rate was down sharply from the 43% growth it reported in 2023. And in a similarly worrisome sign, BlueFocus’ revenue began to contract in the first quarter of this year, falling nearly 10% to 14.3 billion yuan from 15.8 billion yuan a year earlier, according to its filing with the Shenzhen Stock Exchange.

The company didn’t provide any explanation for the decline in its report. But much of the weakness probably came from its home China market, where companies have been curbing their spending as their growth stalls and consumer demand weakens. Reflecting that, the company’s revenue from domestic marketing services tumbled nearly 30% last year to 8.1 billion yuan, though that was partly offset by a slight rise in revenue from domestic advertising services.

BlueFocus’ global revenue breakdown provides an interesting snapshot of what markets Chinese companies are targeting, and helps to explain why Beijing may be eager to avoid an escalation of its trade war with the U.S. BlueFocus said that 42% of its customer spending targeting global markets last year was aimed at the U.S., while the second-largest market was Europe with a far smaller 15%.

The company’s recent slip into revenue contraction is worrisome when you consider BlueFocus’ extremely thin margins, giving it very little wiggle room to operate profitably. Its cost of revenue, mostly from payments to platforms like Google, Facebook and TikTok, equaled 97.5% of its revenue last year, giving it a gross margin of just 2.5% for the year. What’s more, that figure has been coming down steadily lately, falling from 4.7% in 2022 to 3.4% in 2023.

The company blamed the high cost of advertising on major internet platforms for its thin margins. It said the problem was especially acute outside China, where it had very little bargaining power to negotiate better prices with giants like Google and TikTok. Still, we should point out the company’s gross margins are still well below the roughly 17% for WPP and even higher 19% for Omnicom.

The bottom line is that BlueFocus needs to find a way to operate more profitably, though it could have trouble squeezing more money from its core Chinese clients due to the nation’s weakening economy. It could potentially offset some of that weakness by looking for customers outside China, which explains the recent move to open new global offices. But its chances for success in those markets seem relatively small, since it will have to compete against both the global majors and many smaller local players who are far more familiar with local conditions.

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