Has Wise Master provoked "public anger"?

The rise and fall of Lu Da Shi (03601) - A roller coaster ride of deception.

According to the Zhītōng Finance app, Lu Da Shi proposed a special dividend on September 11 and held a board meeting on the 21st of the same month. The stock price soared by 50% the next day and reached a 71.7% increase in the following five trading days. The major shareholder, Cheng Sheng Precision, strategically reduced their holdings by selling 34.343 million shares on the open market, accounting for 12.77% of the total issued shares. However, the stock price plummeted below the original level in the next four trading days, resulting in a roller coaster ride lasting nine trading days.

In reality, Lu Da Shi's actions have angered investors. Firstly, the precise reduction of holdings by shareholders, and secondly, the cancellation of the board meeting on the 21st of the same month. The special dividend seemed to be a cover-up, possibly aimed at boosting the stock price to attract followers. The company may have engaged in illegal reduction of holdings and non-compliant information disclosure. Their intentions were too obvious, and some investors have even demanded compensation. If this event receives attention from regulatory authorities, the company may become embroiled in a wave of litigation.

Setting aside the irregularities, is Lu Da Shi really in trouble?

Declining performance and a significant decrease in profitability

According to the Zhītōng Finance app, Lu Da Shi is mainly engaged in online traffic monetization businesses, including online advertising services. Their core product is the Lu Da Shi software, and they also operate an exclusive licensed online gaming business. Over the past three years, the company's performance has been on a downward trend, mainly due to fluctuations in revenue from advertising and exclusive licensed operations. In the first half of 2023, there was a recovery with double-digit growth, but the online gaming platform continued to decline.

In the first half of 2023, the company's revenue increased by 61.55%. The revenue shares of the three main businesses, online advertising, online gaming, and exclusive licensed operations, were 35%, 22.3%, and 42.6% respectively. The growth contribution from exclusive licensed operations reached as high as 109%. During this period, the company partnered with Universal Pictures and obtained the licensing rights for Kung Fu Panda, with global distribution rights for both mobile and PC platforms. It is expected that this online game will be officially launched by the end of 2023.

Lu Da Shi's business model relies on traffic. They actively develop traffic acquisition channels and optimize product features. For example, they have launched the Lu Da Shi computer version exclusive black gold mode, as well as practical functions such as desktop organization, super uninstallation, and compression tools. However, the results have not been very significant. The number of monthly active users on the PC platform decreased in the first half of the year, reaching approximately 92.1 million. On the other hand, the operating data of the declining online gaming platform remained strong. According to disclosures, the company focused on releasing high-quality games and achieved significant results. The user payment rate for new users in the first half of the year increased by more than 25% compared to the same period last year.In addition, the company has expanded its evaluation-related business and established deep testing services with well-known domestic mobile phone brands. At the same time, a testing laboratory for electric vehicles has been established, and the Lu Xiaoke product has been launched to further develop intelligent evaluation services in the automotive field. However, the revenue performance has not been seen yet. The intelligent vehicle scene is just starting, and most new energy vehicle manufacturers are self-developed, making it difficult for third parties to enter the market. The results still need to be verified over time.

The profitability of Lu Da Shi has declined significantly, with a gross profit margin of 30.8% in the first half of the year, a year-on-year decrease of 16.4 percentage points. From 2020 to 2022, it was around 50%. The net profit margin for shareholders was 12.3%, a year-on-year decrease of 6.03 percentage points. The reason for the decline in gross profit margin is the significant increase in advertising and promotion costs, while in operating expenses, there has been some optimization in sales and management expenses, with a total expense ratio of 9.94%, a year-on-year decrease of 5.53 percentage points. Research and development expenses account for the majority of the expenses, with an expense ratio of 8.22%, which has remained relatively stable in previous years.

The company's financials are remarkably clean, with virtually no debt. The total assets and net assets are not significantly different, and the cash ratio is very high. As of June 2023, the company's net assets amounted to 633 million yuan, of which cash and cash equivalents reached 472 million yuan, accounting for 74.6%. Interestingly, the company rarely engages in external expansion and has very little capital expenditure. The cash is mainly used for investment in bank wealth management products, resulting in annual interest income of several million yuan.

The company's main partner bank for wealth management is China Merchants Bank. According to the disclosure in the first half of the year, there were approximately 70 million investors in wealth management products linked to the price of gold issued by China Merchants Bank, and they were basically redeemed and reinvested after maturity. In fact, the company's cash assets used for wealth management are very small, and most of the cash remains idle. The main issue is that the company does not distribute dividends, which has caused dissatisfaction among most long-term investors.

According to the disclosed information, as of the end of 2022, Lu Da Shi's three major shareholders were Tian Ye (holding shares of Da Shi Holdings and equity held by Cheng Sheng), Zhou Hongyi (360), and Shanghai Dongfangwang Stock Company Limited (Shanghai Oriental Network indirectly holds shares), with shareholding ratios of 47.83%, 30.763%, and 17.58% respectively. Cheng Sheng, who reduced his holdings this time, is the largest shareholder Tian Ye's concerted action person. After the reduction, Tian Ye's (concerted action person) shareholding ratio dropped to 35.06%, while Cheng Sheng still has 48.4021 million shares to be reduced.

It is worth noting that the company has two executive directors, including Mr. Tian Ye, Chairman of the Board and Chairman, and Mr. He Shiwei. Mr. Tian Ye controls the board of directors and the decision-making power of the company's operations. He is also a core member of the Remuneration Committee. According to the disclosure, one member of the management team has a salary exceeding HK$4 million, equivalent to 6.15% of the net profit in 2022.In addition, Mr. Zheng serves as the company secretary, while Ms. Huang is the securities representative. As the disseminators of information disclosure, they are both subject to field audits. There may have been irregularities in this disclosure, possibly for the purpose of reducing holdings.

Lu Dashifu's business fundamentals are mediocre. Traditional online advertising revenue has encountered bottlenecks, and the exploration of new business models is in its infancy. There is uncertainty in the flow of car evaluation services, and the income from exclusive licensing operations fluctuates greatly. Although there will be new authorized issuances at the end of the year, their sustainability remains in doubt. In addition, the company's profitability has declined, and the exclusive licensing business may continue to drag down profitability in the second half of the year. Overall, the company lacks growth potential and performance expectations.

In the secondary market, investors vote with their feet. Since its listing, the company's market value has continued to decline, and trading volume has been consistently low. The daily turnover generally hovers around several hundred thousand Hong Kong dollars. As of now, the current price has fallen into the penny stock range, with a price drop of 91.1% compared to the high price in its first year of listing. If it weren't for this "deceptive" announcement, it is highly likely that the company would still be ignored. However, the blatant act of cutting leeks has angered the market, and it is expected that the incident may continue to ferment.

Taking everything into consideration, it seems that Lu Dashifu is really in trouble: firstly, its performance fundamentals are weak, leaving no room for imagination; secondly, the management is ineffective, sitting on a large amount of cash without utilizing it and adopting a stingy approach to dividends. In addition, the behavior of capital markets cutting leeks has caused investors to once again reevaluate the management's capabilities. As a long-term investor, it is best to watch the show and exercise caution to avoid stepping on landmines.