Starting the race early? Stock price collapsed! What happened before the big release of EASOU TECH (02550)

After a massive 66.62% plunge on November 18th, EASOU TECH (02550) fell over 37% again this morning. At the close, EASOU TECH's decline reached 48.75%, closing at 8.17 Hong Kong dollars, with a turnover of 343 million Hong Kong dollars, and a total market value of less than 2.7 billion Hong Kong dollars. On the news front, the Hong Kong Exchanges and Clearing recently announced the list of securities eligible for short selling adjustments, with a total of 35 stocks included in the short selling targets, effective from November 8th, including EASOU TECH. In addition, approximately 197 million shares held by pre-listing shareholders will be unlocked on December 9th, and the company has experienced several changes in positions since listing. Market value evaporated by over 13 billion Hong Kong dollars in two days According to calculations, from November 18th to 19th, EASOU TECH's total trading volume reached 44.3221 million shares, with a trading amount of approximately 496.5 million Hong Kong dollars. The market value evaporated by over 13 billion Hong Kong dollars in two days. Looking at the trading volume, on November 18th, EASOU TECH experienced a sharp drop in trading volume after the afternoon session opened, with a trading amount of 135 million Hong Kong dollars in the afternoon session alone, accounting for 87.66% of the total trading amount for the day. In the morning of November 19th, EASOU TECH continued its trend of sharp drops in trading volume, especially between 10:30 and 11:30, as trading volume increased and the stock price began to touch the low of 8.17 Hong Kong dollars. It is worth noting that the company had a sharp rise of over 180% in early October, followed by fluctuations and now the massive plunge in these two days, which has completely wiped out the previous gains. Also, since October, the company has experienced several changes in positions. On October 14th, there was a change in positions at EASOU TECH, with the transfer broker being Zhongtai International Securities, and the receiving broker being Yunku Securities, with a transfer ratio of 2.16%. On November 14th, there was a change in positions that involved an increase in positions, with a percentage of 13.65%, and the receiving broker was Zhaojin International Securities. The so-called increase in positions is the act of the issuer or shareholder of the listed company converting their paper stocks into electronic stocks, increasing the freely tradable shares of the company. The meaning of this action by EASOU TECH's shareholders seems quite clear. In fact, the company's stock price fluctuations resemble a roller coaster. The reason behind this is the upcoming large-scale unlock of shares. Public data shows that the controlling shareholder Growth Value LTD. will have unlocks on December 7, 2024 and June 7, 2025, with a lock-up proportion of 32.49%. After the global offering is completed, Wang Xi, Growth Value, Fase Ltd, and Gather Forever will be the controlling shareholders. Investors before the IPO will also face unlocks on December 7, with Estate Success Enterprise Limited and SBCVC FUND III Company Limited unlocking 6.36% and 4.85% respectively, and Jinhe Capital Corporation Limited unlocking 4.76%. In total, these 8 investors will unlock 23.82% of the shares. On December 7th, existing shareholders including Yisou Union Co., Ltd., Shanghai Shanda, and Suzhou Kunyuan Jindu Emerging Industry Investment Enterprise will unlock a total of 36.07% of the shares. If the controlling shareholders are not considered, investors before the IPO and other existing shareholders will unlock a total of 59.89% of the shares on December 7. Profit-taking? Who is the buyer? Such a large amount of unlocking may create some pressure on the market sentiment and may also be partly related to the fluctuations in the company's stock price. In terms of brokerage buy and sell positions, on November 18th, the top five sellers were JPMorgan Chase, Baoshin, Jiehao, Yuexiu, and Zu Cheng, selling 238,500 shares, 48,500 shares, 42,000 shares, 38,500 shares, and 20,000 shares respectively; the top five buyers were HSBC Shanghai, Merrill Lynch, Hong Kong Stock Connect (Shenzhen), Hong Kong Stock Connect (Shanghai), and Morgan Stanley, buying 230,000 shares, 112,000 shares, 37,500 shares, 13,500 shares, and 6,000 shares respectively. On November 19th, the top five sellers were Futu Securities, Victory, Zhongtai International, Jucheng, and Yunku, selling 2,469,000 shares, 1,414,000 shares, 361,500 shares, 326,000 shares, and 274,500 shares respectively; the top five buyers were CITIC Securities (Shanghai-Hong Kong Stock Connect), China Chuangying (Shenzhen-Hong Kong Stock Connect), Bank of China International, Yao Cai, and HSBC Securities (Asia), buying 6,873,500 shares, 3,151,500 shares, 169,500 shares, 82,500 shares, and 73,500 shares respectively. In summary, the brokers with the largest net selling positions in these two days were Futu Securities, VICTORY SEC, Zhongtai Internationale, and Yunku, with the main buyers being CITIC Securities and Chuangying Services through the two Hong Kong Stock Connect channels. Looking at the distribution data, the shares allocated during EASOU TECH's listing were mainly concentrated in Zhongtai International, Jucheng Securities, Huili Securities, Futu Securities, and AAA Securities, holding a total of 14.04 million shares, accounting for 94.87% of the actual circulating shares. In terms of position changes, some of the shares allocated to Zhongtai International and Jucheng Securities have been transferred to VICTORY SEC, and the brokers who were selling today had a presence from these brokers as well. According to the previous distribution results, EASOU TECH globally issued 14.8025 million shares at a price of 5.8 Hong Kong dollars per share. This means that Zhongtai International and Jucheng Securities, as domestic distribution players, had a cost of about 5.8 Hong Kong dollars for their purchases, based on the past two days.With an average price of 11.2 Hong Kong dollars, there is still a profit margin of 5.4 Hong Kong dollars per share. Additionally, the stock has seen significant increases in the past and has been successfully included in the Stock Connect program. If investors who had previously positioned themselves before the Stock Connect program were to sell their holdings now, they would clearly see significant profits.In these two days, Futu Securities, VICTORY SEC, Yuanku Securities, and Jucheng Securities have collectively sold a total of 4,590,500 shares. With this calculation, the top five brokerages still hold 9,451,500 shares, almost two-thirds of the total volume. Currently, EASOU TECH has seen profit-taking leaving the market. Especially, it appears that selling only one-third of the holdings by the top five brokerages caused a sharp drop of 115% in the company's stock price. If the remaining two-thirds are sold off in a clear-out style, EASOU TECH may face even greater pressure. In addition, the company will be unlocked on December 7, with one month left, and is about to be shorted. Let's see how the game between the company and investors unfolds. Weak fundamentals Upon closer examination of its operating data, EASOU TECH's fundamentals are not "outstanding," and can even be described as weak, with many hidden concerns. Firstly, slow revenue growth and declining profitability. As an established domestic internet company, EASOU TECH was founded in 2005, with its origins in mobile search engines. At its peak, it could rival Baidu and Google in the field of mobile search. However, the good times didn't last long, as the company's search business gradually declined. EASOU TECH then entered the digital reading industry and launched its flagship product, the Yisou Novel App, in 2013. Currently, the company operates four main business lines, including digital reading platform services, digital marketing services, online game distribution services, and other digital content services. As of December 31, 2023, the cumulative number of registered users for the Yisou series reading apps was 44.7 million. In terms of user activity, the average monthly active user count on the Yisou platform has been steadily increasing, from 23.9 million in 2021 to 25.6 million in 2022, and further increasing to 26 million in 2023. However, despite the increasing user activity, EASOU TECH's revenue growth has been slow, and profitability has been poor. According to the prospectus disclosed earlier, from 2021 to 2023, the company achieved revenue of 433 million, 456 million, and 559 million respectively, with a compound annual growth rate of 8.9%. During the same period, net profits were 50.01 million, 44.45 million, and 25.01 million respectively, with profits shrinking by nearly half over three years. Furthermore, the company's profitability has also significantly declined, with gross profit margins of 48.2%, 52.3%, and 46.5%, and net profit margins of 11.5%, 9.7%, and 4.5%, all declining year by year. Secondly, the company is "heavy on marketing and light on research and development," with cash flow in a tight situation. In terms of business model, EASOU TECH mainly provides digital reading, advertising, online games, and other digital content (such as music and ringtones) to users on its platform. The Yisou recommendation engine collects and analyzes user behavior data to recommend more relevant content, including literature resources and advertising content, to users, and constantly trains algorithms to improve recommendation efficiency and effectiveness. During the historical period, over 90.0% of the company's revenue came from advertising services provided under digital reading platform services and digital marketing services. In order to serve advertising clients, EASOU TECH has also invested heavily. According to the prospectus, from 2021 to 2023, EASOU TECH's internet traffic costs were 185 million, 185 million, and 266 million respectively, accounting for the highest proportion in operating costs, at 82.5%, 84.9%, and 88.8% respectively. In addition, the company's various expenses have remained high, with sales and distribution expenses totaling 99 million, 134 million, and 154 million respectively, accounting for 22.9%, 29.3%, and 27.5% of total revenue. In contrast, EASOU TECH's research and development investment has been declining. From 2021 to 2023, EASOU TECH's research and development expenditures were 51 million, 39 million, and 38 million respectively, accounting for only 11.8%, 8.5%, and 6.7% of total revenue. The performance of the above data clearly reflects the company's "heavy on marketing and light on research and development" weakness. With a significant expenditure of "financial resources" and the decline in the company's profitability, EASOU TECH's cash flow has been noticeably tight this year: from 2021 to 2023, the net cash flow from operating activities was 50.95 million, 6.07 million, and -29.50 million respectively. The company also stated in its risk warnings that if the company records net outflow in operating cash flow in the future, working capital may be restricted, which may in turn have a negative impact on its liquidity and financial condition. In conclusion, as a well-known domestic internet company, combined with a certain degree of industry leadership, EASOU TECH has advantages in technology, content, and user resources, which is why investors were willing to give it a high valuation on its listing day. However, under the pressure of profit-taking and a wave of large-scale unlocking, can EASOU TECH with its slightly underperforming fundamentals withstand this major test? Only time will tell.