Summary of the report
Company overview
Formula is a major drama producer and distributor in China, covering the investment, development, production and distribution of TV dramas and online dramas. In terms of the number of TV series shown in the first round in 2019, the company ranks fourth among all series producers and distributors in China, with a market share of 6.0%. In 2019, the company also ranked sixth among all series producers and distributors in China, with a market share of 1.8% and 2.1%, respectively.
As of June 30, 2020, the company has invested in a total of 16 dramas, of which 11 are homemade dramas. As of the latest practicable date, the company has 32 shows and three shows, including one homemade series and two customized episodes, will be shown by the fourth quarter of 2021. The company has a strong distribution capacity and maintains friendly and cooperative relations with China's five major television stations and three major online video platforms. In 2019, the company was the only producer and distributor of new episodes in all eight major distribution channels.
From 2017 to 2019 and the first half of 2020, the company realized income of 543 million yuan, 679 million yuan, 765 million yuan and 580 million yuan respectively, with a compound growth rate of 18.7% from 2017 to 2019, and net profits of 64.03 million yuan, more than 10.51 million yuan, 50.4 million yuan and 54.13 million yuan, respectively.
Industry status and prospects
The size of the Chinese drama market grew rapidly at a compound annual growth rate of about 4.5 per cent from 2015 to 2019, from about 83 billion yuan to about 99.1 billion yuan. With the increasing popularity of the Internet (especially mobile terminals), viewers can watch the series freely in their spare time. In this case, the market size of the series is expected to reach about 121.3 billion yuan by 2024, with a compound annual growth rate of about 4.1 per cent from 2019 to 2024.
Riding on the surge in Internet use, online video platforms (especially iQIYI, Inc., Youku and Tencent Video) have rapidly absorbed a large number of users in the past few years. In this case, the online drama market grew rapidly at a compound annual growth rate of about 23.9% from 2015 to 2019, reaching about 18.1 billion yuan in 2019. The online drama market is expected to maintain rapid growth in the next few years, with an estimated compound annual growth rate of about 11.1% from 2019 to 2024.
Advantages and opportunities
The company has good distribution resources and has a close relationship with mainstream TV stations and online video platforms.
The company has more IP resources and now retains a total of 31 IP, including 6 original plays based on preliminary ideas and 25 adapted plays based on licensed IP.
Weakness and risk
A single customer accounts for a high proportion of revenue.
The profitability of the film and television industry fluctuates greatly.
Investment valuation
According to the IPO price (HK $5.10-HK $6.16), the company's IPO market capitalization is HK $3.38 billion-HK $4.08 billion, which is a small-cap stock. This time, IPO brought in Snow Lake Capital, IDG Capital and Vipshop Holdings Limited (VIPS.US) as cornerstone investors, who collectively subscribed for US $50 million or HK $388 million worth of shares, accounting for 38 per cent of the offering size. After deducting the cornerstone investor share, we estimate the current market capitalization of the company to be HK $457 million to HK $632 million.
The main purposes of this IPO financing include: 70% for drama production (including 8 TV dramas), 10% for potential investments and mergers and acquisitions, and 10% for obtaining more IP,10% for working capital and general corporate purposes.
According to the IPO pricing, the post-IPO market capitalization of the company corresponds to the 57x-69x (the scale of income and profit) in 2019, although the company is still valued on the high side considering the strong shareholder background (including iQIYI, Inc., etc.). Give IPO a dedicated rating of "5".