Preview of US Stocks | Will QMMM, facing the downturn in performance, be able to gain market favor in the digital human industry trend?

In the first half of 2023, AI was the hottest industry topic in the capital market, giving rise to numerous bullish stocks. Digital humans, as a subfield of AI, also attracted investment and speculation. From an industry perspective, the entire digital human industry experienced a major breakthrough with the advancement of AI technology and entered a new stage of development. The scene of virtual digital human "Surfer" at the Asian Games was particularly impressive. At the peak of the industry's rapid growth, a company that has been involved in the virtual embodiment business since 2014 embarked on a journey to be listed in the United States. According to reports, QMMM Holdings Limited, a digital media advertising company based in Hong Kong, submitted an F-1 filing to the SEC on October 6, applying for listing on Nasdaq under the ticker symbol "QMMM." The company plans to issue 960,000 common shares at a price of $5 per share, raising $4.8 million in funds. According to the prospectus, QMMM's development history can be traced back to 2005. It currently operates through its wholly-owned subsidiaries, Quantum Matrix Limited and ManyMany Creations Limited, both registered in Hong Kong. The main business of both subsidiaries is digital media advertising and marketing production services. Among them, ManyMany Creations has innovated traditional advertising forms through digital technology, focusing on combining quality concepts with creative digital media technology to provide one-stop content creation and production services for advertising campaigns, TV commercials, online videos, animations, VR/AR/MR technology, 3D scanning, motion capture, projection mapping, and digital faade production. Another wholly-owned subsidiary, Quantum Matrix, was established in March 2014 and holds two patents in Hong Kong. One patent is for the method of converting three-dimensional (3D) scanned objects into digital humans, and the other patent is for the method of automatically fitting accessories onto digital humans. Based on these two patents, Quantum Matrix has launched the digital embodiment solutions "Quantum Human" and "Quantum Fit," providing world-leading automated digital human creation and real-time virtualization services to clients in various industries. QMMM stated in the prospectus that its subsidiary Quantum Matrix's two major solutions are the only large-scale embodiment technologies in the world that adopt virtual identities. As of October 6, 2023, Quantum Matrix has created over 30,000 digital embodiments. With these two wholly-owned subsidiaries, QMMM has collaborated with major domestic and international banks, real estate developers, world-famous amusement parks, top international sports apparel and footwear brands, luxury cosmetics, and international brands in more than 500 business activities, utilizing interactive design, animation, art technology, and virtual technology. However, QMMM's performance has not been satisfactory. According to the prospectus, in the 2022 fiscal year (ending September 30, 12 months), the company's revenue was $3.396 million, a year-on-year decline of 4.7%, and the net profit for the period was $800,000, a decrease of 24.9%. The decline in revenue was mainly due to the impact of the pandemic and a decrease in income from theme parks and 3D animation/Avatar, leading to a 5.3 percentage point decrease in the company's gross profit margin to 39.4%. However, despite the contraction in business scale, the company's total operating expenses still increased by 10%, resulting in a net profit decline of over 20 percentage points compared to the decline in revenue. In the first half of the 2023 fiscal year (ending March 31, six months), QMMM's performance worsened further. According to the prospectus, QMMM's revenue in the first half of the 2023 fiscal year was $1.8179 million, a year-on-year decline of 26%. This was mainly due to the repeated outbreaks of the pandemic leading to the closure or restricted usage of some public areas, resulting in clients postponing projects and cutting expenses. Although revenue significantly declined during the reporting period, the cost of revenue only decreased by 6.5%, leading to a 16 percentage point decrease in gross profit margin to 24.1%. This dragged gross profit down 55.3% to $324,600. Despite actively controlling operating expenses and reducing sales and marketing costs, the increase in listing expenses put pressure on net profit. The company recorded a loss of $611,900 during the reporting period. Excluding listing expenses, QMMM may achieve breakeven in the first half of the 2023 fiscal year. Based on the above analysis, it can be observed that QMMM's continuous decline in performance is directly related to the repeated outbreaks of the pandemic. However, starting from the second half of the 2023 fiscal year, QMMM's business operations are expected to improve. This is not only due to the elimination of the impact of the pandemic and the gradual recovery of economic activities but also because the digital human industry is expected to accelerate its development with the empowerment of AI. QMMM's accumulation of technology and experience in the digital embodiment industry for many years may benefit from this development. According to data from iResearch Consulting, the virtual human market in China is experiencing rapid growth. In 2022, the virtual human market in China reached a market size of 186.61 billion yuan, with a core market size of 12.08 billion yuan. It is estimated that by 2025, the market sizes will reach 640.27 billion yuan and 48.06 billion yuan, respectively. This indicates that the digital human market in China will be in a period of rapid development over the next few years, and the Hong Kong market also has the potential to catch up. With over 30,000 digital embodiments already created, QMMM has accumulated relevant technology and experience, giving it a certain advantage and the potential to benefit from the development of the digital human industry. However, the challenges faced by QMMM are also worth attention from investors. Firstly, although QMMM has caught the trend of the digital human industry, the company's digital embodiment technology is mainly applied in the advertising market. The advertising industry has numerous competitors and intense competition. Additionally, there has been a proliferation of companies entering the digital human industry this year. In comparison, QMMM is relatively small in scale. Whether the company can rely on its first-mover advantage to build core competitiveness and explore new growth points will be the key to its sustained growth.It means "period" in English.Secondly, QMMM has a high concentration of customers. According to the prospectus, in the fiscal year 2021 and 2022, revenue from the largest client accounted for 30.4% and 34.8% respectively, and the revenue from the top five clients accounted for 76.8% and 77.2% respectively. Clearly, QMMM is highly dependent on a small number of clients, which increases the potential operational risks due to high customer concentration. Furthermore, QMMM has relatively high liabilities. According to the prospectus, as of March 31, 2023, QMMM's total assets were $1.3679 million, total liabilities were $1.6049 million, and the debt-to-equity ratio was 117.33%. Even after excluding contract liabilities of $0.4686 million, the debt-to-equity ratio is still at 83%. Overall, QMMM, which has been deeply involved in the digital human industry for many years, has experienced continuous decline in performance due to the impact of the pandemic. With the advent of the digital human industry boom and the elimination of the impact of the pandemic, QMMM's business operations are expected to improve in the short term. However, the company also faces operational challenges such as intense competition in the advertising industry, small scale, high customer concentration, and relatively high liabilities. Whether it can achieve sustained rapid growth in the medium and long term still needs further observation.