Superstar Plus Diet Coffee Equals? For Firm Tied to Singing Idol Jay Chou, It’s an IPO

Star Plus Legend, which sells health products drawing on Chou’s “fan economy,” has made its third application to list in Hong Kong

Key Takeaways:

• Star Plus Legend, with close associates of pop king Jay Chou as major shareholders and diet coffee as its main revenue source, has filed to list in Hong Kong
• Despite having rights to the pop star’s intellectual property, the seller of hip ‘Modong’ products still lacks consistent revenue and profits

By Tina Yip

It was brewed for success when a drink called “Modong Coffee” became a hit by drawing on its association with Jay Chou, one of Greater China’s most popular singers known for his pouting looks and playful style. Now, backers of the coffee’s producer, which is closely tied to Chou and his associates, are hoping to parlay that success to a Hong Kong IPO.

The “Modong” moniker became a hit in its own right in 2020 after the diet coffee was featured in Chou’s show “J-Style Trip”, to the delight of his millions of followers in his native Taiwan, as well as on the Chinese mainland, in Hong Kong and throughout Asia.

Two years later, Star Plus Legend Holdings Ltd. is milking Chou for all he’s worth, making its money on everything from producing shows to selling coffee and other Modong-branded products, mostly aimed at his adoring fans. That “fan economy” strategy may work while Chou is still hot. But honestly speaking, there’s not much left to milk once a star has faded.

Still, Star Plus Legend wants investors to think in the present, focusing on the hundreds of millions of yuan it generates each year by producing shows for Jay, then licensing them to TV stations for fees, while also selling health products such as Modongcoffee, Modong carbonated drinks, and a brand of Modong noodles, just to name a few of its growing line of products.

Jay’s huge regional popularity undoubtedly puts him at the top of the food chain in the entertainment industry. But Star Plus Legend, his commercial baby, has yet to find its legs in the region’s capital markets.

The company applied to list in Hong Kong in September last year, but its prospectus expired six months later without an IPO. It filed again in March, and failed again. Now it’s hoping the third time is a hit with its latest Oct. 5 application, with CMBC Capital as the sole sponsor.

All about coffee

A look at Star Plus Legend’s results shows the company’s revenue comes from two main segments: shows featuring Jay, and sales of Modong products, mostly coffee. According to the preliminary prospectus, revenue from new retail business, one of the company’s core income sources, rose from 80.8 million yuan ($11.3 million) in 2019 to 365 million yuan in 2020, before falling to 301 million yuan last year. Over that time it accounted for between 80% and 90% of the company’s overall revenue. In the first half of this year, the segment’s revenue fell a further 34% year-on-year to 92.02 million yuan due to Covid-19 related lockdown measures.

The revenue volatility owes to uneven sales of its core Modong coffee, which accounted for 62% to as much as 83% of the new retail business over the past three years. Sales of the product, driven by the “J-Style Trip” in 2020, jumped 3.6 times year-on-year that year to 333 million yuan. But as the show receded into history, the product’s sales fell 32% to 228 million yuan last year, and totaled just 70.99 million yuan in the first half of this year.

Such is the nature of hits.

The coffee’s sliding performance hit the company’s profits, which fell from a high of 78.06 million yuan in 2020, to just 43.65 million yuan last year. It returned to growth in the first half of this year, rising more than 50% to 14.51 million yuan. But that was mainly due to 4.76 million yuan in government grants received during the period and 5.08 million yuan in revenue from promotional activities.

More crucially, the company had expected to save on expenses by using Jay’s shows as one of its main promotional channels. But it didn’t turn out that way. To boost its new retail business, Star Plus Legend spent a whopping 93.81 million yuan on sales and marketing last year, up 550% in just two years and accounting for 25.7% of its total revenue. What’s more, the company said it would continue to step up its online and offline marketing to gain more exposure for its existing and new products.

Growing inventory provisions

It’s also worth noting the company’s inventory has increased in recent years due to lower-than-expected product sales. In the past two years the company made impairment provisions of 3 million yuan and 6.2 million yuan for inventory, respectively. The figure looks set to climb further still, with the company taking another 4.62 million yuan in similar provisions in the first half of the year.

The company’s inventory turnover at the end of June reached 211 days, a record high in recent years. Those figures are likely to keep climbing to dangerous levels if China’s strict Covid control measures continue, putting a damper on such products that are often bought on impulse when people are out and about enjoying life.

The company’s other core business, IP creation and operation, has also been less-than-stable. Riding a wave of licensing and advertising fees after the release of “J-Style Trip”, that part of the business recorded revenue of 91.77 million yuan in 2020. But it decreased by 30% to 63.95 million yuan the following year as the show’s impact faded, following a similar track as Modong coffee.

So, why is Jay working so hard for Star Plus Legend? The answer lies in the company’s shareholder structure. His mother, Yeh Hui-Mei, and manager Yang Chun-Jung collectively hold 27.6% of the company’s shares. His longtime business partner Ma Hsin-Ting holds another 27.6%, and his good friend Chen Chung holds 9.2%. The combined 64.4% stake held by those four shareholders virtually guarantees investors need not worry about the superstar suddenly abandoning the company. Chou himself isn’t a major shareholder, and instead works with the company through various contractual relationships.

At the end of the day, Jay is already aging at his current 43 years, and someday a new generation of music fans may no longer be familiar with his work. Thus, if Star Plus Legend wants to maintain its celebrity-driven business model, it will have to find other talent while expanding its product portfolio to meet the tastes of new generations of young people.

The company plans to use its IPO funds both to diversify its products, and also collaborate with more Netflix stars and to strengthen its celebrity IP and related content. According to the prospectus, not only is “J-Style Trip II” currently in production, but the company is also preparing other content, such as a weekly one-hour music talk show centered on famous Taiwanese singer-songwriter Harlem Yu, to diversify its celebrity ties.

The listing’s timing isn’t great, with the Hong Kong market now in one of its worst downturns in recent memory. Against that backdrop, even Jay’s star power may not be enough to fire up enthusiasm for Star Plus Legend’s IPO – if it even makes it to market on its third try.

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