New Stock Preview | Declining revenue, declining profitability - a close look at the difficulties faced by Fantasia Holding Group in its listing on the Hong Kong Stock Exchange.

If you want to ask how difficult the road to listing for Fenghua Qiushi is, the act of submitting the prospectus seven times undoubtedly speaks to the hardships involved. On November 8th, the Hong Kong Stock Exchange website showed that Fenghua Qiushi Group Holdings Limited (referred to as "Fenghua Qiushi"), a music record company, once again submitted its listing prospectus to the Hong Kong Stock Exchange. It is understood that this is the company's seventh attempt to go public on the Hong Kong Stock Exchange since its initial submission in January 2021. Submitting the prospectus seven times to the Hong Kong Stock Exchange demonstrates Fenghua Qiushi's determination to go public. However, as the company submitted the prospectus time and time again, the "undercurrents" of declining revenue and profitability behind the prospectus gradually surfaced. The decline in profitability and loss of appeal for investment Established in 2010, Fenghua Qiushi initially gained popularity due to its association with "rock music." It was reported that in the early stages, Fenghua Qiushi was known for organizing popular concerts such as the "Passion" concert series and the "Trees and Flowers" concert series, which were associated with the label of "rock music." Among them, the "Passion" rock music festival held in 2010 brought together well-known rock singers such as Cui Jian, Wang Feng, Xu Wei, Zheng Jun, and Pu Shu, creating a ticket sales miracle in the history of mainland Chinese rock music at that time. However, over time, as the glory associated with "rock music" faded, Fenghua Qiushi gradually focused on granting music copyrights, music recording business, concert hosting and production, and artist management. Currently, Fenghua Qiushi has formed three major business segments: music copyright licensing and music recording, which the company considers to be its main business segment; concert hosting and production; and artist management. The biggest highlight is the artists managed and cooperated with by the company, including popular stars such as Lu Han and powerful groups like The Black Panther Band. According to a report by Torch Insight, based on the revenue generated from music copyright licensing and music recording in China in 2022, the company ranks 14th among over 400 music record companies, with a market share of about 0.6%. Among the over 200 music record companies headquartered in China, it ranks third, with a market share of about 1.5%. However, it is worth noting that despite its high ranking in the industry, Fenghua Qiushi's performance in recent years has not been impressive. In terms of revenue, it has been relatively volatile. From 2020 to 2022, the company's revenue was 70.56 million yuan, 81.86 million yuan, and 94.85 million yuan, with year-on-year growth rates of 16.01% and 15.87% for the latter two years, showing a downward trend in growth rate. As of May 2023, the company's revenue decreased by 77% to 7.98 million yuan compared to the same period last year. Under the sudden decline in revenue, Fenghua Qiushi's net profit has also continued to decline. According to the data disclosed in the prospectus, from 2020 to 2022, the company achieved net profits of 42.72 million yuan, 33.25 million yuan, and 29.93 million yuan, declining year by year. Compared to a loss of 690,000 yuan in the first five months of 2022, the net loss for the same period this year has further expanded to 16.55 million yuan. At the same time, the company's proud "high gross profit" is also shrinking significantly: as of May 2023, the company's gross profit was only 2.1 million yuan, a significant decrease from 12.732 million yuan in the same period of 2022. Additionally, the company's gross profit margin has also dropped significantly, from 80.7% in 2020 to 26.3% in the first five months of 2023. The negative effects of declining revenue and profitability are also reflected in Fenghua Qiushi's cash flow. It is understood that Fenghua Qiushi's cash flow has shown a sharp decline. Among them, the net cash inflow from operating activities has dropped significantly from 5.879 million yuan in the first five months of 2022 to 543,000 yuan in the first five months of 2023, and the ending balance of cash and cash equivalents has also decreased from 31.323 million yuan in the first five months of 2022 to 19.592 million yuan in the first five months of 2023. Under the shrinking revenue, declining profitability, and tight cash flow, it is not difficult to understand the determination of Fenghua Qiushi to go public in Hong Kong despite all the difficulties. The market has great development potential, but growth obstacles are emerging In terms of industry space, the music copyright industry in which Fenghua Qiushi operates undoubtedly has certain growth potential. According to the prospectus, the market size of the Chinese music copyright industry increased from approximately 3.3 billion yuan in 2017 to approximately 15.7 billion yuan in 2022, with a compound annual growth rate of approximately 37.1%. Driven by the increasing diversification of music distribution channels and the demand for music copyrights, the market size is expected to maintain a high growth rate and reach approximately 37.5 billion yuan by 2027, with a compound annual growth rate of approximately 19.0% from 2022. Although the industry size is not large, the double-digit growth rate clearly provides development opportunities for Fenghua Qiushi. However, it is worth noting that Fenghua Qiushi's over-reliance on its core artist, Lu Han, reveals the company's lack of competitiveness. Specifically, from 2020 to the first five months of 2023, the purchases of Lu Han Group by Fenghua Qiushi accounted for 29.5%, 16.1%, 7.9%, and 4.8% of the company's total purchases, and 60.8%, 45.9%, 76.3%, and 19% of the total expenses for artists, music copyright agency, and music creators under the company's sales costs. At the same time, Lu Han's contributions to the company's revenue accounted for 21.2%, 9.3%, 16.2%, and 15.4% of the total revenue, and Lu Han's contribution to the company's gross profit accounted for 21.6%, 9.6%, 22.5%, and 51.7% of the company's gross profit. Therefore, as a high-profile artist, if Lu Han chooses not to renew his contract with the company, it will have a detrimental impact on its performance. The company has also highlighted this risk in the prospectus, stating that if the company fails to renew its contract with Lu Han, his music works may be adversely affected, which will also have a significant adverse impact on the company's business, operating performance, and financial condition. In addition, Fenghua Qiushi's revenue is highly dependent on its main customer, Tencent Music, with the main customer accounting forThe singularity also adds variables to the company's development. The prospectus disclosed that from 2020 to May 2023, the revenue generated by Tencent Music (the largest customer of the group throughout the reporting period) accounted for 68.1%, 38.1%, 40.2%, and 24.2% of Fenghua Qiu Shi's total revenue, respectively.The main reason for this is that the development time of the domestic record market is short, compared to well-known overseas record companies such as Sony and Warner, there is a large gap in record resources, which puts Fenghua Qiu Shi in a weak position in the bargaining with Tencent and Netease Cloud and other music platforms. Taking all these factors into consideration, although Fenghua Qiu Shi ranks relatively high in the industry, there is a suspicion of being "strong on the outside but weak inside." After all, its growth is heavily reliant on the golden effect brought by its core artist Luhan and the revenue brought by major clients. This means that its growth is mainly dependent on external factors, and it is difficult for it to truly expand its scale. It also represents that its growth is in an unstable state. These factors are likely to make investors have less confidence in making large investments.