Durable Entertainment is not "durable," what are the difficulties in listing on the Hong Kong Stock Exchange?

The IPO run of the online drama producer Naike Entertainment Holdings (hereinafter referred to as "Naike Entertainment") is not over yet. Recently, Naikan Entertainment once again submitted a prospectus to the Hong Kong Stock Exchange, which is its fourth impact on the market. Previously, the entertainment was delivered in January, July 2022 and March 2023, respectively, but they have all expired. The delay in listing entertainment may be related to business stability and independence. In terms of revenue structure, the source of revenue for viewing entertainment is not stable. For example, the customized drama business, which contributed 60% of its revenue in 2021, will only account for 1.5 by 2022. The copyright drama business, which contributes nearly half of its revenue in 2020, will be cleared in 2022. In addition, there is also the hidden worry of relying too much on a single platform. In the first half of this year, Youku contributed 45.3 per cent of its revenue to Naikan Entertainment. The reason may be that the two are both Ali-based equity companies. According to the prospectus, Alibaba Pictures (1060.HK), an indirect wholly-owned subsidiary of Shanglian Finance, holds a 10.35 per cent stake in Naikan Entertainment. Alibaba Culture and Entertainment Company (hereinafter referred to as "Ali Entertainment") controls Youku. With Huace Film and Television (300133.SZ), Limeng Film (9857.HK) and other head film and television companies bet on higher costs, but also more easy to burst out of the copyright drama, the main entertainment to do low-cost, high-turnover network drama, the work of the watercress score is generally lower than 6, poor reputation. However, under the general trend of platforms "reducing costs and increasing efficiency" and purchasing high-quality dramas, Endurance Entertainment has not yet proved its ability to continuously output high-quality content. ## The revenue structure is unstable. Although it is a stable supplier of Youku, the performance of Naikan Entertainment is not stable. According to the prospectus, from 2020 to 2022, the entertainment industry will achieve revenue of 0.26 billion yuan, 0.346 billion yuan and 0.21 billion yuan respectively, and the revenue in 2022 will drop by 40% year-on-year. Endurance Entertainment was attributed to the decrease in revenue from online movies and online dramas. In the first half of this year, Naikan Entertainment recorded revenue of 0.162 billion billion yuan, an increase of 118.48 percent over the same period last year, and achieved a net profit of 10.311 million billion yuan, an increase of 240.19 percent over the same period last year, and its performance rebounded significantly. However, by business model split, the source of income for the entertainment is not stable. Web dramas mainly include split-account dramas, custom dramas and copyright dramas, and the production of split-account dramas and custom dramas is the core business of watching entertainment. In 2021, the proportion of revenue from custom dramas for viewing entertainment will reach 60.2 percent and that from split dramas will reach 10.3 percent; but by 2022, the proportion of revenue from custom dramas for viewing entertainment will be sharply reduced to 1.5 percent and that from split dramas will increase to 64.7 percent. Due to the drastic changes in the proportion of different modes of online drama, the gross margin of the entertainment also fluctuates. For example, in the first half of this year, the revenue share of the entertainment's split drama fell to 26.6 per cent, while the revenue share of the higher gross margin custom drama increased to 47.3 per cent, driving the gross margin of the entertainment's gross margin down 13.1 percentage points year-on-year to 25.5 per cent, with a net margin of only 6.4 per cent. By contrast, in 2022, when customized dramas accounted for only 1.5 percent, the overall gross margin of the entertainment was as high as 44.3 percent. Naikan Entertainment stated in the prospectus that, generally speaking, the gross profit margin of split-account dramas, online movies and copyright dramas may fluctuate significantly, with a fluctuation range of about 80%, while the gross profit margin of customized dramas is relatively stable, at 10%. To 20%. At present, the hard money of low gross profit is inevitable, because the proportion of customized drama supply in the industry is increasing. According to Frost & Sullivan, from 2018 to 2022, the compound annual growth rate of customized dramas reached 0.5 percent, while both split-account and copyright dramas were negative. It is expected that from 2023 to 2027, customized dramas will still be the main type of drama in China's online drama market. The trend of increasing the proportion of customized dramas is also in the interests of long video platforms that master downstream distribution channels. Some people in the film and television industry in Beijing told Xinfeng (ID:TradeWind01) that customized dramas are dramas that the platform buys from film and television production companies. At present, iQIYI (IQ.NASDAQ) is running through this model. It is highly involved in the production process of film and television dramas by setting up a film and television studio in-house. For example, there are studios specializing in suspense theme content, the most famous of which is "Mist Theater". In the customized drama mode, the platform's right to speak is much larger than that of the purchaser who only used to be content. Because homemade dramas are the key to building the core competitiveness of the platform, the platform has its own team to check the content, and many drama companies only undertake the production function in the customized drama project. ## Another hidden worry of low-quality content relying on a single platform for durable entertainment is that its income depends too much on a single platform Youku, and its independence is doubtful. Enable Entertainment and Youku are both Ali-based equity companies. According to the prospectus, Ali Pictures holds a 10.35 per cent stake in Naikan Entertainment through Shanglian Finance. Youku is the company's largest customer in 2021 and the second largest customer in 2022 and the first half of 2023. Youku once brought more than half of the company's total revenue. In the first half of this year, Youku contributed 29.9 million yuan of revenue to Naikan Entertainment, accounting for 18.5 of the total revenue. However, from the perspective of quality and word-of-mouth of works, the content provided by Endurance Entertainment for Youku is hardly of high quality, and the Douban score of its production series is hard to reach the 6-point passing line. For example, in 2021, "Dear Mr. Lemon" produced by Naikan Entertainment won the 50 million box office, with Douban scoring only 4. The customized drama "Hello, Flame Blue", which set the highest popularity on Youku platform, scored only 5.1. The Douban score of "My Name is Zhao Jiady", which set a new high at the box office of Youku's account-sharing drama in 2021, was only 4.3 ...... Under the background of "shaking hands and making, only content producers that continue to produce quality content can build a long-term competitive advantage. Some content people from film and television companies told Xinfeng (ID:TradeWind01) that the "high-quality" of the online drama industry is the general trend, especially at a time when "Aiyouteng Mang B" has reduced costs, increased efficiency and reduced procurement. Straw Bear Entertainment, a peer of the entertainment industry, said in its semi-annual report that "the trend of reducing costs and increasing efficiency in the industry has caused various broadcasting platforms to compress their budgets for purchasing episodes, resulting in a decline in revenue from their single episodes". It is understood that iQiyi and Tencent Video have already reduced the purchase of Class A and Class B dramas, focusing on the "theater" mode of building platforms, such as iQiyi's "Mist Theater" and Tencent Video's "X Theater" to bet on explosions. Moreover, the above-mentioned people said that from the supply side, head film and television production companies such as Huace Film and Television will be more inclined to produce copyright dramas. Among them, projects rated as S + have better resources to match the main creative allocation and actor allocation, "sold to the platform before filming", and the input-output ratio is also better. According to the prospectus of Naikan Entertainment, copyright dramas in the industry can generally attract investment scales ranging from 0.07 billion yuan to 0.6 billion yuan, and are "top projects" that can achieve corresponding returns ". The share of revenue from copyrighted dramas, which once reached 45.2 percent, plummeted to 5.5 percent in 2021 and was completely cleared in 2022. It is obviously more inclined to "short and fast" high-turnover online drama production projects, which is contrary to the current demand for high-quality content by both the platform side and consumers.