Significantly reducing losses to "find a way out", can diversification save Xingjingweiwu (NIPG.US)?

On July 26th, NIPG.US, known as the "first stock of Chinese e-sports", successfully went public on Nasdaq. However, its stock price only remained "strong" for 6 trading days before entering a downward trend, dropping to a low of $5.4, a 40% decrease from its IPO price of $9. Its stock price has since seen some recovery but as of December 19th, it was trading at $7.08 per ADS, still nearly 20% lower than its IPO price. The weak stock performance of NIPG.US is not surprising, as many e-sports companies worldwide have struggled in the capital markets. For example, Astralis, the world's first e-sports concept stock, went public less than 4 years before delisting. Another former star e-sports company, North American Faze Clan, went public for less than two years before delisting in March this year, with its stock price plummeting by 90%. Overall, e-sports companies that have gone public have shown poor performance. In an attempt to break away from the traditional perception of e-sports companies in the capital markets, NIPG.US told a new story before its IPO. It planned to transition from an e-sports company to a comprehensive gaming company in order to seek a higher valuation in the capital markets. However, based on the current stock price performance of NIPG.US, it seems that the market does not fully endorse the story it presented. This raises the question of whether NIPG.US can find a different path to avoid the fate of Astralis and Faze Clan. Perhaps the answer can be found in the company's first semi-annual financial report released since its IPO. Behind the substantial reduction in losses According to the financial report, NIPG.US had revenues of $39.344 million in the first half of 2024, a 2% increase compared to the same period last year. The net loss for the period was $4.6656 million, a 58.6% decrease from the net loss of $11.2713 million in the same period in 2023. At first glance, this seems like a positive financial report with revenue growth and a significant reduction in net losses, suggesting an improvement in the company's fundamentals. However, upon closer examination, there are some flaws. During the reporting period, NIPG.US was able to achieve revenue growth mainly due to the explosive growth of its event production business. Data shows that, after integrating internal and external resources to host more events, the revenue of NIPG.US's event production business increased by 376.5% to $8.662 million, accounting for 22% of total revenue. However, the significant growth in the event production business also has its flaws, as NIPG.US achieved this expansion by organizing e-sports events with lower profit margins. The gross profit margin of the event production business for the period was 10.5%, a decrease of more than 4 percentage points from 14.7% in the same period in 2023. Furthermore, during the reporting period, revenues from the e-sports team operations and artist management services businesses both declined. The revenue from e-sports team operations decreased by 10.8% to $8.781 million due to a shift in IP licensing income from PC and console games to mobile games. This indicates that NIPG.US's e-sports team may be focusing more on the mobile gaming sector. The revenue from artist management services also declined by 18.6% to $21.901 million, as the platform shifted from low efficiency to high-quality development. This shows that NIPG.US is no longer pursuing rapid growth in artist management services but is emphasizing quality development. In its financial report, NIPG.US stated that its total revenue for the period was impacted by exchange losses, reducing total revenue by about 4%. Diversification indeed made NIPG.US's revenue more stable, as the restructuring of the e-sports team operations and artist management services businesses allowed for more space for event production business development through a "quantity-for-price" approach. However, the diversification of monetization models did not lead to a significant improvement in the profit margin. The financial report shows that the net loss for the period was substantially reduced by 58.6%, mainly due to a decrease in total operating expenses. During the reporting period, total operating expenses of NIPG.US decreased by 48.8%, with sales and marketing expenses down by 26.7% and general and administrative expenses down by 56.6%. The decrease in general and administrative expenses was mainly due to the attribution of stock-based compensation expenses in the first half of 2023. Excluding this impact, general and administrative expenses for the reporting period were relatively unchanged compared to the same period in 2023. This means that the actual reduction in losses for NIPG.US during the reporting period was much smaller than 58.6%. Excluding the impact of stock-based compensation expenses, the actual reduction in losses was about 7%, and it was achieved mainly by cutting sales and marketing expenses, which may not be sustainable as continued reduction in these expenses could affect the expansion of revenue. Continued losses in the largest business become a "burden" In fact, the challenges that NIPG.US faces in reality are more severe than what the numbers in the financial report show, and the key factor affecting its profitability currently lies in artist management services. Public information shows that NIPG.US entered the field of artist management services in 2021, and by 2023, artist management services had become the company's largest business, accounting for 62.9% of its revenue. It is for this reason that some in the market have accused NIPG.US of "putting a sheep's head on a dog's body," claiming to be the "first stock of Chinese e-sports" while its core business is in MCN, or multi-channel network. The reason NIPG.US ventured into artist management services was out of necessity. Astralis, Faze Clan, and other "predecessors" had proven to the capital markets that e-sports clubs with inherent flaws in their business models are not good businesses. Due to high expenditures on tournament seats, e-sports player transfer fees, or rent, as well as the heavy reliance on tournament results and short monetization cycles of e-sports players, most of the e-sports clubs that have gone public have not achieved sustainable revenue growth and have struggled to escape from losses, leading to persistently low valuation levels in the capital markets. If NIPG.US does not want to follow in the footsteps of Astralis and Faze Clan, it will have to diversify its development. When NIPG.US entered the field of artist management services in 2021, it coincided with the explosion of short video platforms. Seizing this opportunity, NIPG.US quickly rose to prominence and rapidly made artist management services its largest business. To some extent, this was because the company was able to capitalize on the popularity of short video platforms.Previously, the issue of the company's revenue being solely from the gaming industry was resolved. However, it is now discovered that artist management services are also a heavy burden.The outbreak of short videos has brought great opportunities for the development of artist management services, but a large number of institutions and capital have also entered the industry, turning the blue ocean market into a red sea market rapidly, with market competition intensifying continuously. Since 2022, the prosperous artist management services of Star Power have been in a state of gross profit loss, seriously dragging down their net profit release. In the first half of 2024, Star Power began adjusting the development pace of artist management services, aiming to shift from rapid growth to high-quality development in order to improve the profitability of this business. However, this is obviously difficult as the revenue of this business has dropped by 18.6% during the reporting period. What's even more surprising is that the gross profit margin of this business has expanded from -1.8% in the same period of 2023 to -5.9%, raising the gross loss rate by 4 percentage points. Star Power stated that this was due to the weakening of economies of scale after the revenue decline leading to an increase in gross loss rate. In a fiercely competitive market environment, how to balance the relationship between the development scale and profitability of artist management services, which make up the largest proportion of company revenue, is obviously a thorny issue. In October 2024, Star Power acquired Young Will, a leading short video content provider focusing on teenage culture themes, with over 115 million followers on major social media platforms in China. Star Power hopes this acquisition will strengthen its position in the field of artist management. Will this acquisition help Star Power's artist management services overcome the gross loss dilemma? The market still awaits observation. Can diversification be a "panacea"? During the reporting period, Star Power further promoted diversified development. In August 2024, it entered into a strategic cooperation with Homeinns Hotel Group to launch esports themed hotel services. In September, Star Power entered the game publishing market, aiming to create a comprehensive integrated digital entertainment ecosystem. In addition, Star Power signed a terms list with the Abu Dhabi Investment Office (ADIO), marking the company's formal entry into the Middle East region. Obviously, as Star Power runs faster on the path that esports "predecessors" have never taken, there is a trend of "standing out on its own", but can diversification be a "panacea"? History tells us that this is often not the case. Too many listed companies have accelerated their own demise due to diversification, as the faster the diversification, the faster the consumption of funds. If they fail to turn losses into profits, the entire company may face a crisis of fund chain rupture or even bankruptcy. In fact, before going public, Star Power's cash flow was tight. Due to continuous losses leading to a lack of blood-making function, the company's Chairman and Co-CEO, He Youjun, and shareholder Sun Liwei jointly funded the company with $7.2 million (already repaid before the IPO). By the end of 2023, Star Power had less than $7.6 million in cash and cash equivalents. After deducting related debts, it could not survive for more than a year at the past rate of cash consumption. This is also one of the key factors that Star Power completed its IPO in less than 3 months. After going public, Star Power raised over $20 million through the IPO, giving Star Power a longer "breathing" time to continue exploring ways to turn losses into profits on a new path and then strive for a "comeback battle". However, looking at the first half-year report after the company went public, the road to "comeback battle" is long and difficult. Astralis stayed in the capital market for less than 4 years, and Faze Clan for less than 2 years, leaving Star Power with limited time. As the son of Stanley Ho, He Youjun has always been in the spotlight and has garnered market attention. Can he lead Star Power to turn the tables this time? Let us wait and see.