The Hong Kong Stock Exchange recently disclosed that Lehua Entertainment announced that it plans to sell 132.56 million shares worldwide from August 24 to August 31, and the shares are expected to be listed on the main board of the Stock Exchange on September 7, 2022, the Hong Kong News Agency reported.
(photo Source: Lehua Entertainment announcement)
The offer price will be set at HK $6.80-HK $8.50 per offer share, with an admission fee of about HK $3434 per lot. Citic Construction Investment International and China Merchants International are co-sponsors.
The announcement shows that Lok Wah Entertainment has entered into a cornerstone investment agreement under which cornerstone investors have agreed to subscribe for a certain number of offer shares that can be purchased at a total price of about HK $275.9 million subject to certain conditions. Cornerstone investors include Castrol, Blue cursor and Cat Eye Entertainment.
According to Frost Sullivan, the company is the largest artist management company in China and one of the most recognized entertainment brands in China in terms of artist management income in 2021, with a market share of about 1.9%.
Lehua Entertainment's main businesses include artist management, music IP production and operation, and pan-entertainment business, which accounted for 91%, 6.1% and 2.9% of the company's total revenue in 2021, respectively.
In terms of business, in terms of artist management business, Lehua Entertainment provides services to customers by arranging contracted artists to participate in commercial activities and arranging contracted artists to appear in films, dramas and variety shows; for music IP production and operation business, Lehua Entertainment licenses music IP in the company's music library to music streaming platform and other music service providers, collects license fees, and sells digital and physical music IP.
According to the prospectus, with its industry experience in artist management market, Lehua Entertainment has actively expanded its pan-entertainment business, including the commercial development of virtual artists, the licensing of variety shows and the sales of artist-related derivatives. The company partnered with a business partner to develop A-SOUL, a popular virtual entertainer group made up of five digitally created members, which made its debut in November 2020. During the business record period, the company cooperated with a business partner on the business development of A-SOUL and engaged a third party to produce and sell artist-related derivatives.
In terms of financial data, in the first four months of 2022, Lehua Entertainment's revenue increased to 352 million yuan from 341 million yuan in the same period in 2021, while its net profit decreased to 81 million yuan from 111 million yuan in the same period in 2021. The company's gross profit margin reached 44.1% in the first four months of 2022.
According to the prospectus, Lehua Entertainment's performance has grown rapidly over the past three years. In 2019, 2020 and 2021, the company's revenue reached 631 million yuan, 922 million yuan and 1.29 billion yuan respectively, with a compound annual growth rate of 43.0%. The net profit for the year was about 119 million yuan, 292 million yuan and 335 million yuan respectively, with a compound annual growth rate of 67.6%.
In 2019, 2020 and 2021, the company's gross profit was 278 million yuan, 493 million yuan and 602 million yuan respectively, and the gross profit margin was about 44.3%, 53.5% and 46.6%, respectively. In 2021, the company's revenue grew by 40% year-on-year, mainly due to an increase in revenue from the artist management business.
According to the prospectus, before the listing, du Hua, the founder and chairman of the company, held 50.18%, BABA Pictures held 14.25% through Interform Construction Supplies Limited, Quantum Jump held 4.74% through Afflatus Limited, and Chinese Culture held 14.25% through CMC Sports Investment Limited.
It is worth noting that byte beat and BABA invested 125 million yuan and 278 million yuan in Lehua Entertainment in 2018 and 2020, respectively.
According to the prospectus, the market size of China's artist management industry has grown steadily, from about 56.6 billion yuan in 2016 to about 68.5 billion yuan in 2018, with a compound annual growth rate of 10.1 percent. The size of the market decreased to about 58.3 billion yuan in 2019, mainly due to regulatory requirements on the proportion of artists' wages to the total investment in films and dramas at the end of 2018.
The market size of China's artist management industry fell to about 52.3 billion yuan in 2020. The industry is expected to reach about 102.5 billion yuan in 2025, with a compound annual growth rate of 14.4% from 2020 to 2025.
According to Frost Sullivan, the Chinese artist management market is highly competitive and highly fragmented. As of December 31, 2020, there were more than 1200 participants in the market. In 2020, the market size of Chinese artist management was about 52.3 billion yuan, and the five major artist management companies generated a total income of 3.2 billion yuan, accounting for about 6.1% of the total market share in the same year.
In terms of revenue generated by the artist management business in 2021, Lehua Entertainment ranks first among all artist management companies in China, with a market share of about 1.9%. According to the prospectus, Lehua Entertainment has 58 contracted artists, including Han Geng, Wang Yibo, Meng Meiqi and Fan Chengcheng.
Lehua Entertainment was listed on the new third board in September 2015, and the company was delisted in March 2018, considering that trading activity, stock liquidity and brand awareness may not meet expectations.
In addition, according to the official website of the China Securities Regulatory Commission, Lehua Entertainment began to receive guidance on the listing of China Merchants Co., Ltd. in April 2018, but terminated the listing guidance after the progress report was updated to issue 16. Lehua Entertainment's plan to list A shares failed.
The bumpy road of Lehua Entertainment listing is related to the volatility of its operating performance. According to the company's financial report, Lehua Entertainment achieved operating income of 79 million yuan in the first half of 2017, down 71.18% from the same period last year, while net profit was 19 million yuan, down 66.55% from the same period last year, mainly due to the lack of film and television investment income.
According to the prospectus, the risks to Lehua Entertainment's future performance include: failure to maintain relationships with artists and trainees or expand the number of artists and trainees contracted by the company; public awareness of the Lehua Entertainment brand; audience preferences and market trends; the overall development and economic situation of China's entertainment industry.