Maori 70% Gross Margin Card Game Firm Rushes for HK IPO Before Big IP License Expiry
Kayo submitted an application for an IPO on the Hong Kong Stock Exchange, intending to raise funds to expand production and further increase its influence. Through the prospectus, this "King of Chinese Playing Cards" that occupies the minds of post-2000s, also disclosed to the market for the first time an annual revenue of 4 billion yuan and a gross profit margin of 70%.
These seemingly simple card pieces have not only attracted the attention of countless elementary school students but have also become a new favorite in the capital market with a gross profit margin as high as 70%.
On January 26th, Kayo Limited officially submitted an application to the Hong Kong Stock Exchange, seeking a listing in Hong Kong.
According to the prospectus, this "King of Playing Cards" which became popular due to Ultraman cards, has an annual revenue of over 4 billion yuan, with 90% constituted by the "exorbitant profit" card business—the selling price varies from 1 to 99 yuan, with a cost as low as 50 cents, and a gross profit margin of over 70%.
The appeal of the cards lies in the fact that to complete a series or obtain a desired rare card, one must not only repeatedly purchase but also exchange with friends. Some families of children who are passionate about Ultraman cards have spent tens of thousands to millions of yuan on this hobby, just for a rare card.
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From a business perspective, the core of this business is solely in IP operation. Over the years, Kayo has obtained authorization for popular IPs such as Ultraman and Egg Party, produced collectible trading cards, and sold them through a distributor network covering 31 provinces and more than 200 dealers, achieving rapid market share expansion.
In the fiercely competitive toy market, Kayo is about to face the challenge of the expiration of IP authorizations. Whether it can further complete capitalization through the IPO is also related to its growth myth and whether its leadership position in the pan-entertainment product industry can continue.
Annual revenue of 4 billion yuan, gross profit margin of 70%
The prospectus shows that Kayo's main product sales revenue for 2021, 2022, and the first nine months of 2023 were 2.298 billion, 4.131 billion, and 1.951 billion yuan, respectively.
Among them, collectible trading cards as the main product accounted for 94.4%, 95.1%, and 85.8% of total revenue, basically around 90%. In comparison, the stationery category expanded in 2022 contributed relatively less to the revenue.KaYou's profitability is astonishingly strong. According to the prospectus, for the years 2021, 2022, and the nine months ending September 30, 2023, the company's gross profits were 1.335 billion yuan, 2.842 billion yuan, and 1.314 billion yuan, respectively. The corresponding gross profit margins were 58.1%, 68.8%, and 67.3%, with the gross profit margin for collectible card games reaching 59.5%, 69.9%, and 71.2% respectively.
In terms of costs, KaYou's direct material costs mainly consist of the purchase expenses of raw materials such as paper and ink, with each pack costing only about 0.5 yuan, while the suggested retail price for each unit of collectible card games generally ranges from 1.0 yuan to 99.0 yuan.
As the domestic leader in card games, the company's main business growth is facing challenges.
During the reporting period, the company launched 132, 168, and 121 collectible card series, respectively. The main products include series such as "Ultraman Hero," "Ultraman Hero Duel," and "KaYou Three Kingdoms."
Due to the decline in sales revenue of collectible card games, KaYou incurred net losses of 153 million yuan and 296 million yuan in 2021 and 2022, respectively, and turned a profit in the first three quarters of 2023.
In terms of sales volume, the company's toy sales increased from 1.29 billion units in 2021 to 2.329 billion units in 2022. However, in the first three quarters of 2023, the sales volume of collectible card games was nearly halved, dropping by 49.44% year-on-year to 1.04 billion packs (boxes).
As of September 30, 2022, the sales volume decreased from 2.087 billion units in the nine months to 1.075 billion units in the same period of 2023, mainly due to the decline in sales of collectible card games.
Overall, the company's profitability has also fluctuated significantly in the past two years, and the "moat" is not solid.
During the reporting period, the operating profits were 932 million yuan, 1.803 billion yuan, and 482 million yuan, respectively; the adjusted net profits reached 795 million yuan, 1.62 billion yuan, and 578 million yuan, respectively. As of September 30, 2023, KaYou held cash and cash equivalents of 980 million yuan.
In response, KaYou explained that the decline in sales volume of collectible card games in the first three quarters of 2023 compared to the same period last year was mainly due to the company's strategic efforts to enrich its product portfolio and IP matrix to meet consumers' growing demand for a more diverse range of product categories and IP content... In addition, the decline in sales volume of collectible card games also reflects the impact of public health conditions on overall social activities and the overall business environment.The prospectus indicates that the company typically pays a one-time advance to IP partners and royalties based on product sales performance or production volume. In 2021, 2022, and the first nine months of 2023, the copyright fees paid by Kayou to IP partners were 166 million, 211 million, and 113 million RMB, respectively.
Regarding sales and distribution expenses, Kayou's expenditures in 2021, 2022, and the first nine months of 2023 were 181 million, 375 million, and 296 million RMB, respectively, accounting for 7.9%, 9.1%, and 15.1% of revenue. As the scale of operations continues to expand, channel development and maintenance costs have doubled compared to two years ago.
Additionally, Kayou incurred net losses in 2021 and 2022, mainly due to the fair value changes of financial liabilities measured at fair value through profit or loss related to its Series A preferred shares.
Sequoia and Tencent Bet on Kayou
To further expand its business, Kayou's capitalization is also accelerating.
In 2022, Kayou received pre-IPO investments from Sequoia China and Tencent, with a valuation of $1 billion. They currently hold 10.50% and 3.00% of Kayou's shares, respectively.
The funds raised from this IPO will be mainly used for expansion, including the expansion and upgrading of production facilities; enriching the IP matrix and enhancing IP operation capabilities; product design and development of more product categories and series to enrich the product portfolio; optimizing storage and logistics capabilities; digitalizing business operations; and brand promotion.
Currently, Kayou has three operating production bases and a logistics center located in Zhejiang and Guangdong, supporting its national sales network. The production base in Kaihua, Zhejiang, began operations in August 2020, mainly producing collectible card games; the production bases in Yiwu, Zhejiang, and Dongguan, Guangdong, began operations in March and April 2023, respectively, producing stationery and packaged figurines.
Additionally, there are two under-construction production facilities in Yiwu, Zhejiang, expected to be completed in 2024 and 2025, with annual production capacities of 300,000 and 3 million units, respectively.
However, Kayou's current self-owned production line capacity efficiency is not very high, with the card game production utilization rate just over 50% last year. Data shows that the production utilization rates of the Kaihua production base were 68.1%, 78.7%, and 52.5% in 2021, 2022, and the first nine months of 2023, respectively. In the first nine months of 2023, the production utilization rate of the Yiwu production base was 54.7%.The expansion of "preparing for the rain while the sun is shining" may be aimed at the overseas market. The company believes that pan-entertainment products have tremendous growth potential in overseas markets and plans to use its operational experience in the Chinese market to jointly develop markets such as Southeast Asia with local partners.
A report from China Insights Consultancy shows that in 2022, the market size of the collectible card market in the United States, China, and Japan were 17.2 billion yuan, 12.2 billion yuan, and 11.4 billion yuan, respectively, while the Southeast Asian market was 1.7 billion yuan, with an expected rapid growth in the next five years. The per capita expenditure on collectible cards in Japan and the United States are 92.3 yuan and 50.7 yuan, respectively, which are also much higher than China's 8.6 yuan.
The Hidden Danger of the "King of Chinese Cards"
Behind this card giant, which mainly targets the post-2010s audience, stands a 51-year-old founder.
The prospectus shows that in 1994, he enrolled in the Zhejiang Province Water Conservancy and Hydropower Cadre School (now known as Zhejiang Tongji Vocational College of Water Conservancy and Hydropower Cadres), majoring in finance and accounting. He started his printing business in 2008 and founded Card You in 2011, turning the company into a billion-yuan group in just 12 years.
According to the China Insights Consultancy report, Card You is currently the second-ranked pan-entertainment product company in the Chinese market, with a market share of 7%, second only to a Danish private company established in 1932 (presumably Lego). The market size has grown from 584 billion yuan in 2017 to 1297 billion yuan in 2022, with a compound annual growth rate of 17.3%.
Based on the total transaction volume in 2022, Card You ranks first in the Chinese collectible card industry with a market share of 71.0%, making it the leader in the card field. In addition, Card You ranks seventh in the Chinese pan-entertainment stationery industry.
IP licensing is at the core of Card You's business, with the company currently owning 44 well-known IPs, including Ultraman, Ye Luoli, Egg Party, Naruto, Detective Conan, and Harry Potter, among others. Among them, the most popular Ultraman series, since obtaining the license in 2018, has launched 274 card series and 28 stationery series, covering more than 50 Ultraman hero characters.
It is worth mentioning that most of the above-mentioned popular IP licenses will expire between 2025 and 2029, which may bring some uncertainty to the company's long-term development.
Regarding the licensing cooperation model, Card You stated that the term of the company's licensing agreements with IP partners usually ranges from one to ten years, and these agreements generally do not renew automatically. If the company fails to obtain, maintain, or renew IP licensing arrangements on favorable terms, or if IP partners fail to maintain and protect their IPs, the company's business, financial condition, and operating performance may be significantly adversely affected.In contrast, the company's first proprietary IP - Card Tour of the Three Kingdoms, launched products in April last year, focusing on the innovation of traditional culture. As of September 30, 2023, the cumulative gross merchandise volume of related theme products was only about 110 million yuan.
In the fiercely competitive market, whether the company can further complete capitalization through the IPO will determine whether its growth myth can continue.