Easou suffers profit setback, high valuation questioned
The digital entertainment company didn’t bring in cornerstone investors for its IPO, as it seeks a high price-to-earnings (P/E) ratio of 86 times and 118 times based on its 2023 profit
By KGI Asia
The Hong Kong IPO market is heating up again. In May alone, 22 companies submitted listing applications to the Hong Kong Stock Exchange as management at many companies tried to seize on a month-old market rally to raise more funds. One of those, Easou Technology Holdings Ltd. (2550.HK), recently applied a third time to list and was approved in May, officially starting the IPO process. The company will issue about 14.8 million shares at a listing price range of HK$5.80 to HK$8, which would raise up to HK$118 million ($15 million), equating to an entry fee of about HK$4,040.35 for every lot of 500 shares.
Founded in 2005, Easou currently operates four lines of business: online reading platform services, digital marketing services, online games publishing services and other digital content services. Among them, online reading platform services accounted for 44.5% of its revenue in 2023, and advertising under the digital marketing services category accounted for 51.7%.
The company has three major platforms, namely, its Easou reading app, Easou H5 page and Yitui. The digital reading platform provides services using the Easou reading app, targeting users accessing free reading resources with matching advertisements to increase revenue. While doing that, data from the Yitui platform supports the formulation of advertising delivery strategies.
Under its digital marketing services category, which differs from distributed ads in the reading app, Yitui mainly distributes its ads to downstream third-party media platforms to generate revenue. Looking at its performance indicators, the company’s monthly active users for its digital reading platform services increased year-on-year, enabling it to achieve greater exposure for ads on its platform. The annual volume of ads displayed increased by 8.5% year-on-year, and the click-through rate held steady at 0.6%, reflecting stable efficiency of its advertisement delivery.
Falling paying users
It’s worth noting that the number of paying users of its reading services continued to decline, though that’s not the company’s main revenue source. By comparison, the growth rate for annual ad volume displayed under its digital marketing services accelerated, recording 14.4% year-on-year growth, with a click-through rate of 0.9% last year – higher than that for the reading services platform.
In terms of financial performance, although Easou’s revenue increased by 22.4% to 559 million yuan ($77.2 million) last year thanks to growth of its advertising business, its profit did not see similar gains. Its gross margin last year was the lowest in the past three years, only 46.5%, down from a high of 52.3% over the past three years. The company attributed the gross margin decline mainly to the increased share of digital marketing services in its overall profit, and that business’ substantially lower gross margin relative to other business lines.
Excluding other expenses, Easou’s net profit margin fell sharply from 11.5% in 2021 to 4.5% last year, resulting in a 43.7% drop in net profit to 25.01 million yuan in 2023.
Unlike the usual practice with other tech companies, Easou did not bring in any cornerstone investors for its listing. Assuming a listing price between HK$5.80 and HK$8 per share, the company can expect a market valuation of between HK$1.9 billion and HK$2.63 billion. That would make its price-to-earnings (P/E) ratio quite high, somewhere between 86 times and 118 times. We think it will be hard to sustain such high valuation levels if its profit continues to fall despite growing revenue, and thus we are giving the company only a “neutral” rating.
This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works
To subscribe to Bamboo Works free weekly newsletter, click here
