If you want to ask Fenghua Qiushi, how difficult is it to go public?

The act of submitting the form seven times has undoubtedly shown the hardships involved.

On November 8, the official website of the Hong Kong Stock Exchange showed that the music record company Fenghua Qiushi Group Holdings Limited (“Fenghua Qiushi” for short) once again submitted a listing prospectus to the Hong Kong Stock Exchange. According to information, this is the seventh time that the company has launched a listing sprint with the Hong Kong Stock Exchange since the first filing in January 2021.

It has been submitted to the Hong Kong Stock Exchange seven times, and it is conceivable that Fenghuang's determination to go public is evident. However, as the company submitted statements time and time again, “undercurrents” such as shrinking revenue and declining profitability, which were actually hidden behind the prospectus, gradually surfaced.

Profitability has plummeted, and the gold absorption effect is no longer there

Fenghua Qiushi, founded in 2010, was initially popular due to the “rock music” label.

According to information from the Zhitong Finance app, the early days of popularity were actually labeled “rock and roll” due to popular concerts such as the “Blooming” series concert and the “Tree and Flower” series concert. Among them, the rock festival “Bloom” hosted in 2010 brought together famous rock singers such as Cui Jian, Wang Feng, Xu Wei, Zheng Jun, and Park Shu, creating a box office miracle in mainland rock music history at the time.

Time has changed, and as the aura of “rock music” has gradually faded, Fenghua Qiushi has gradually focused on awarding music copyright and music recording services, and is supported by concert hosting, production, and artist management.

At present, Fenghua Qiushi has formed three major business segments. One is music copyright licensing and music recording, which the company regards as their main business segment; the second is concert hosting and production; and the third is artist management. Among them, the biggest highlight is the artists it manages and collaborates with, including popular celebrities such as Luhan, as well as powerful groups such as Black Panthers.

According to the Insight Consulting Report, according to the revenue generated by China's licensing of music copyright and music recording in 2022, the company ranked 14th out of more than 400 music record companies, with a market share of about 0.6%, and ranked 3rd out of more than 200 music record companies headquartered in China, with a market share of about 1.5%.

However, it should be noted that although it is ranked high in the industry, Fenghuaqiu's performance in recent years has not been “strong.”

In terms of revenue, performance has fluctuated quite a bit. From 2020 to 2022, the company achieved revenue of 70.56 million yuan, 81.86 million yuan, and 94.85 million yuan respectively. The next two years increased year-on-year by 16.01% and 15.87%, respectively, and the growth rate declined. As of the first 5 months of 2023, the company's revenue fell 77% year on year to 7.98 million yuan.

Amid a sudden decline in revenue, Fenghuaqiushi's net profit continued to decline. According to prospectus data, from 2020 to 2022, the company achieved net profit of 42.72 million yuan, 33.25 million yuan, and 29.93 million yuan respectively, declining year by year. Compared with the loss of 690,000 yuan in the first five months of 2022, Fenghuaqiu's actual net loss for the same period this year increased to 16.55 million yuan.

At the same time, the company's proud “high gross profit” is also shrinking sharply: as of the first 5 months of 2023, the company's gross profit was only 2.1 million yuan, a sharp drop from 127.32 million yuan in the same period in 2022. Furthermore, the company's gross margin also declined sharply. In 2020, the company's gross margin was still 80.7%, but by the first 5 months of 2023, it had fallen to 26.3%.

The negative effects of shrinking revenue and declining profitability are also reflected in Fenghuaqiu's cash flow.

According to information from the Zhitong Finance app, today, Fenghuaqiu's cash flow is showing the characteristics of a sharp decline. Among them, net cash income from operating activities dropped sharply from $5.879 million in the first 5 months of 2022 to $543 million in the first 5 months of 2023, while cash and cash equivalents at the end of the period also declined, that is, from $31.323 million in the first 5 months of 2022 to $19.592 million in the first 5 months of 2023.

Under the combination of business risks such as shrinking revenue and declining profitability and tight cash flow, it seems that it is not difficult to understand Fenghuaqiu's determination to go public in Hong Kong despite all difficulties.

The market has great potential for development, but growth resistance is looming

Going back to the industry space, there is no doubt that the music copyright industry where Fenghua Qiushi is located still has some imagination.

According to the prospectus, the market size of China's music copyright industry increased from about 3.3 billion yuan in 2017 to about 15.7 billion yuan in 2022, with a compound annual growth rate of about 37.1%. Driven by diverse music distribution channels and increasing demand for music copyright, the market size is expected to maintain a high growth rate and reach about 37.5 billion yuan in 2027, with a compound annual growth rate of about 19.0% from 2022.

Although the scale of the industry is small, the double-digit growth rate can clearly provide a certain development opportunity for Fenghuaqiu.

However, it is worth noting that Fenghua Qiushi's excessive reliance on the performance of the core artist Luhan revealed the shortcomings of the company's insufficient competitiveness.

Specifically, from 2020 to the first 5 months of 2023, Fenghua Qiushi's purchases from Luhan Group accounted for 29.5%, 16.1%, 7.9%, and 4.8% of the company's total purchases, and accounted for about 60.8%, 45.9%, 76.3%, and 19% of the total expenses of artists, music copyright agents, and music creators under Fenghua Qiushi Group's sales costs. At the same time, Luhan's revenue during the period also accounted for 21.2%, 9.3%, 16.2%, and 15.4% of total revenue. The gross profit Luhan contributed to the company accounted for 21.6%, 9.6%, 22.5% and 51.7% of the company's gross profit, respectively.

Therefore, as a popular artist, once Luhan chooses not to renew his contract with the company, it is almost certain that it will have an adverse effect on his performance. In response to this, it also stated in the prospectus that if the company fails to renew its contract with Mr. Luhan, his musical work may be adversely affected, and this will also have a significant adverse impact on the company's business, operating performance and financial situation.

In addition to this, Fenghua Qiushi's revenue is highly dependent on Tencent Music, the main customer, and the singularity of its main customers has also added variables to the company's development. The prospectus revealed that from 2020 to the first 5 months of 2023, the revenue generated by Fenghuaqiu's client Tencent Music (the Group's largest customer throughout the reporting period) accounted for 68.1%, 38.1%, 40.2%, and 24.2% of Fenghua Qiushi's total revenue, respectively.

This is mainly due to the short development period of the domestic record market. Compared with well-known overseas record companies, such as Sony and Warner, etc., there is a large gap in record resources, making Fenghuaqiu actually in a weak position in bargaining with music platforms such as Tencent and NetEase Cloud.

Looking at the above, although Fenghuaqiu is actually ranked high in the industry, in reality, there is a suspicion that “external strength and middle management” are inevitable. After all, the financial absorption effect brought about by Luhan, the core artist, and the benefits brought by the transition from major clients, mean that it is mainly pinning the lifeblood of its growth on the outside world. This not only means that it is difficult for it to actually increase its scale, but it also means that its growth is not stable, and I'm afraid it will be difficult for investors to generate greater investment confidence due to these factors.