Company profile
Flo Holdings is the largest third-party virtual goods and service platform operator in China, with a market share of 7.7% (based on 2019 revenue, according to Frost Sullivan). As a SAAS platform to assist virtual goods providers (content providers) to access a variety of consumption scenarios (channel vendors) to sell virtual goods to end consumers, the company not only saves the cost of finding a large number of channels for sales, but also helps downstream channel providers to alleviate the cost of integrating content provider resources. By the end of March 2020, the platform had cooperated with 910 content providers such as Tencent (700HK) and iQIYI, Inc. (IQ US) upstream, with a retention rate of more than 94%; downstream, covering 1450 channel vendors such as Tmall and XIAOMI (1810 HK), had completed more than 115 million orders and contributed to a total GMV transaction of RMB 3.7 billion.
Sino-Thai viewpoint
The scale of the third-party virtual goods and services market is growing steadily: according to Frost Sullivan, the overall GMV of China's third-party virtual goods and services market is expected to reach 625.4 billion yuan in 2024, with a compound annual growth rate of 9% from 2019 to 2024, while its Chinese entertainment sector is growing at a maximum of 18.2%. The average commission rates charged for virtual goods transactions in the entertainment, games, communications and life industries in 2019 range from 5.0% to 20.0%, 1.2% to 2.8%, 0.2% to 0.5%, and 0.5% to 1.3%, respectively. The commission rate provided by virtual commodity providers is expected to remain stable in the next five years.
In terms of operating performance: in the fiscal year from 2017 to 2019 and the first three months of 2020, the company's operating income was 240 million yuan, 210 million yuan, 240 million yuan and 80 million yuan respectively, of which the proportion of services related to virtual goods decreased from 99.9% to 71.1%. The proportion of revenue from value-added services provided by online store operators increased from 0.4% to 26.9%. The gross profit margin is 76.2%, 76%, 80% and 86.3% respectively, the cost of sales accounts for 23.8%, 24.0%, 20.0% and 13.7% of the total revenue respectively, and the R & D cost accounts for 4.1%, 11.7%, 8.5% and 7.2% of the total revenue respectively. The net profit margin is 32.1%, 30.1%, 33.3% and 45.2%, respectively. The advance payments made by the company to virtual goods providers are 130 million yuan, 240 million yuan, 240 million yuan and 280 million yuan respectively, and the net cash flows generated by operating activities are-23.49 million, 39.7 million, 56.69 million and-11.06 million respectively.
Valuation: based on 400 million shares after the global public offering, the company's market capitalization is HK $27.6 billion to HK $3.56 billion. In terms of valuation, the company's price-to-earnings ratio is about 30.5-39.4 times and price-to-book ratio is about 2.39-2.86 times, which is in a reasonable range. This stable person, China Silver International, has a total of 6 projects in the past year, with a performance of 3 up, 1 down and 2 flat on the first day. Cornerstone introduced Successful Lotus, Perfect World (2624 SZ) and other five investors, a total of about HK $170 million subscribed. We believe that the commission rate of the company's four business sectors is generally on the rise (although the commission rate of the cultural and entertainment sector continues to decline, but the overall market size is growing rapidly), the bargaining power is good, and the SAAS industry is a hot sector in the market, which is given 66 points to sum up, rated as "purchase".
Risk tips: (1) market competition risk, (2) commission rate fluctuation risk, (3) technological innovation risk