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M17 Entertainment IPO: Where Do I Sign?

June 11,2018 13:08

With an innovative streaming platform that is changing the way the artists interact with fans in Asia, M17 Entertainment (NYSE:YQ) is growing at a high pace. Its revenues grew to $79.5 million in 2017 showing a growth rate of 2,059%. The experts say ...

With an innovative streaming platform that is changing the way the artists interact with fans in Asia, M17 Entertainment (NYSE:YQ) is growing at a high pace. Its revenues grew to $79.5 million in 2017 showing a growth rate of 2,059%. The experts say that it has become the largest live streaming platform in Developed Asia.
The company is offering 7,511,000 ADSs to be sold in a new IPO at price per ADS between $10.00 and $12.00. Remarkable underwriters are working with the company as shown in the image below:

Source: Form F-1

Source: Form F-1
Incorporated in Cayman but headquartered in Taiwan, M17 Entertainment operates a live streaming platform by revenue in Developed Asia. With a market share in Developed Asia of 19.2% in Q2 2018, according to Frost & Sullivan, the platform has experienced astonishing business growth since it was founded in 2013.

Source: Form F-1
The total number of registered users on the company’s dating applications increased to 14.6 million as of March 31, 2018 from 13.9 million and 11.0 million as of December 31, 2017 and 2016 respectively. Furthermore, the company’s average monthly active dating users grew from 0.5 million in December 2016 to 0.7 million in just three months period ended March 31, 2018.
How is the company achieving these incredible numbers?
The co-founders and core management team own over 20 years of combined expertise in recruiting top artists and producing music and video content in Asia and globally. With that, most interestingly, this new business model is said to be very different from what we used to see in the media industry:

“This model has made it possible for us to disrupt the traditional artist-agency model by creating a robust and systematic process of discovering, training, developing and promoting artists. We are able to identify and nurture high-quality artists early while avoiding substantial upfront investments.” Source: Form F-1

Additionally, in my view, another brilliant feature is that the artists can also receive feedback and earnings from their fans. It is quite different from 80s and 90s when the artists were not able to monetize their success and check their earnings. Read the following lines about this matter:

“Our online competitions give fans an opportunity to show their support to their favorite artists with gifts and provide our popular artists an opportunity to increase their earnings.” Form F-1

Finally, the platform is providing high quality content. Bear in mind that in March, 2018, average daily time spent by live streaming users was equal to 40.4 minutes. Additionally, the number of new artists is growing at a very high pace. Everybody seems to be a member of the community. In Q1 2017, the number of contract artists was 1,627, and right now in Q1 2018, this figure is 7,719. As a result, the revenues have been growing at a high pace in 2017 and 2018:

Source: Form F-1
Who is making this fantastic growth possible? In March 2018, 583 employees were working for the company, including 294 people in sales and 150 people in general and administrative personnel. The following information was given about this matter in the form F-1:

Source: Form F-1
In addition, the company makes use of 11 offices in Taiwan, Hong Kong, Singapore, Japan, and other locations. Also, it leases an aggregate of approximately 1,897 square meters of office space:

Source: Form F-1
Market Opportunity: Developed Asia
The company is targeting a large market. According to Frost & Sullivan, Developed Asia, which consists of Taiwan, Japan, South Korea, Singapore and Hong Kong, had over 215 million people, over US$35,000 GDP per capita, and an annualized nominal GDP growth rate of 1.56% in 2017.
Revenue Growth
The platform was launched in 2013, but it took some years until the company established the business in Taiwan, Japan, South Korea, Singapore, and Hong Kong. With that in mind, let’s talk about the explosion in the total revenues reported. In 2017, the revenues grew to $79.502 million which represents a revenue growth rate of more than 2,059% from the previous year 2016. Additionally, in the same time period, the gross profit grew from $2.714 million to $13.997 million, exhibiting growth rate of 415%. The gross margin in 2017 was equal to 17% as shown in the following table:

Source: Form F-1
The company reported losses of $16.55 and $21.84 million in 2016 and 2017, respectively. However, growth investors will not really care about the losses if the business maintains the same revenue momentum and gross profit margin in the following years.
Are the ADSs undervalued at $10-$12? Number of assets per share and cash per share
The balance sheet seems also interesting. It shows a cash increase of 600% from January 1, 2016 to December 31, 2017, and assets increase of 3,400% in the same time period. It can be seen in the following table, which was obtained from the F-1 document:

Source: Form F-1
How did the company receive this amount of financing? M17 sold considerable amount of preference shares, which are going to be converted to class A shares before the IPO goes live.

Source: Form F-1
The following is the state of the liability side. In my opinion, once the preferred shares and the convertible notes are converted into class A shares, the amount of liabilities will diminish radically. As of December 31, 2017, the total amount of liabilities was equal to $144.5 million, and the total amount of preference shares was $95.303 million, approximately 65% of the total amount of liabilities. In my view, many analysts will not closely study the F-1 form and will not notice that these liabilities are going to “disappear.” That’s an opportunity for us.

Source: Form F-1
Are the shares being undervalued?
The company is selling ADSs at $10-$12. Each ADSs can be converted into 8 Class A shares, so each share is being valued at approximately $1.5. Taking into account the conversion of warrants and convertible notes, I got a total number of shares of 313.5 million (Class A shares and Class B shares):

Source: Form F-1
Taking into account 313.5 million shares, the cash of $82 million to be received from the IPO, the conversion of notes of $18.5 million and $24 million in cash as of December 31, 2017, I got the following financial statistics:

Source: Prepared by the Author
In my opinion, taking into account assets per share of $0.72 and cash per share of $0.4, the shares are cheap at $1.5. In other words, each ADSs should be worth more than $10-$12.
Considering that M17 Entertainment is an early stage company, the most adequate is the EV/Sales multiple. With 313.5 million shares at $1.5, I obtained a market capitalization of $470 million. Adding $2.064 million in long term debt and subtracting $24 million in cash in hand, $82 million from the IPO and $18.5 million from the conversion of the notes, I got an enterprise value of $347.5 million.

Source: Prepared by the Author
Assuming 50% growth in 2018, I obtained FY 2018 revenues of $118 million, and EV/FY 2018 revenues of 2.9x. With that, I believe that the company should have made more than $118 million in 2017. Bear in mind that only in Q1 2018, M17 made $37.9 million. Assuming 90% growth in 2018, I would get a ratio of 2.32x, which, I believe, is closer to what the figure should be.
Let’s compare the company’s EV/Sales ratio with another business that recently executed an IPO in the US. I want to mention Huya Broadcasting (NYSE:HUYA), which I recently assessed in this piece. In my opinion, this other company also offers a streaming platform in Asia and has less than 900 employees. It was recently created and is growing at a similar growth pace. I believe that these features make the two businesses comparable.
HUYA sold shares at $8-$13 per share in the IPO or an implied EV/Sales ratio of 2.4x-4x. With that in mind, please notice that the shares are now trading at $34.89. In my opinion, this is a good reason to believe that M17’s EV/Sales ratio of 2.32x may be too low.
The Class A, Class B shares and the CEO
I need to mention following feature about different share classes for the new shareholders: class A and class B. Class A shareholders have the right to one vote, and class B shareholders have the right to twenty votes. Additionally, each class B share can be converted into class A share, but the opposite cannot happen. The following information is a good read:

Source: Form F-1

Source: Form F-1
What are the consequences? This means that class B shareholders control the company, and they will be able to decide about many matters without asking the opinion of class A shareholders. In particular, the CEO, Joseph Jiexian Phua, owns Class B ordinary shares and will be able to exercise 56.3% of the total voting power.
With an outstanding revenue growth in a short time period and a business model that seems to be changing the life of artists, I will be following this stock very closely. In my opinion, the ADSs are quite cheap at $10-$12 and will increase as more investors get to know the business projection.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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