Interpretation of US IPOs | High quality development has led to a sharp rise in customer concentration, and the low profitability of the World Alliance (OCP.US) is difficult to solve

Thanks to the successful commercialization of AI technology in the advertising business, the stock price of AppLovin (APP.US), a leading US AI advertising company, has surged more than tenfold this year, and its market capitalization has reached trillion yuan.

The popularity of AppLovin has driven the stock prices of companies in the A-share market, including Leo Shares (002131.SZ), Blue Cursor (300058.SZ), and Easypoint World (301171.SZ), etc., to rise sharply. This also means that the market's attention to AI advertising companies has increased significantly. Investors have begun to more actively search and lay out potential stocks in this field, and Kuangshi Alliance, which has already begun its listing journey in the US, has entered the eyes of investors as a result.

The Zhitong Finance App learned that after submitting a public prospectus (F-1 document) to the SEC on March 29, the Big Data AI intelligent advertising service provider Kuangshi Alliance updated its prospectus for the third time on September 3 to accelerate its IPO process.

According to the prospectus, Kuangshi Alliance applied for listing on the NASDAQ under the “OCP” code. It plans to issue 2 million common shares at a price of 4-6 US dollars per share in this IPO, raising up to 12 million US dollars in capital. Meanwhile, 2 million common shares account for 13.79% of the company's total share capital after completing the IPO (assuming that the over-allocation authorization has not been exercised), and the corresponding IPO market value of Chuangshi Alliance will be between 58 million US dollars and 87 million US dollars.

In terms of performance, Chuangshi Alliance's revenue for fiscal year 2023 (12 months ending June 30) was US$157 million, up 324.78% year on year. Net profit for the period was US$4.455 million, up 253.85% year on year. However, by the first half of fiscal year 2024 (6 months ending December 30, 2023), its revenue growth had stalled, falling slightly by 2.6% year on year to US$112 million, and net profit for the period increased 73.6% year on year to US$1.262 million.

Why did the rapid revenue growth of the Everlasting Alliance come to an abrupt end in the first half of the 2024 fiscal year? Can it return to a growth trajectory? Will this have an impact on the company's valuation? You can find answers through its prospectus.

Shifting from rapid development to high-quality development

Since its establishment in December 2015, Kuangshi Alliance has been deeply involved in the advertising industry. Currently, it mainly provides customers with tailored mobile advertising services (including formulating mobile advertising plans, advertising on media platforms, monitoring advertising performance data, and optimizing advertising strategies), and also provides advertising agency services to its customers. Among them, media marketing is the core business of Kuangshi Alliance, and the business accounted for more than 99% of revenue in fiscal year 2022 and 2023.

It is easy to see from the prospectus that the explosive growth of Kuangshi Alliance's revenue in fiscal year 2023 is directly related to its seizing the industry opportunities brought about by the explosion of short video platforms. Due to the popularity of short videos, short video platforms have become a new position for brands and merchants to advertise, and the pattern of the marketing industry has evolved as a result. Based on this, Kuangshi Alliance has developed an active layout and continuously expanded media channels.

According to the data, in fiscal year 2022, 2023, and the first half of fiscal year 2024, Kuangshi Alliance has cooperated with 48, 197, and 92 mainstream media platforms and their agents, respectively, including media partners such as Tencent, Sina, and 360.

After the significant expansion of media channels, Everbright Alliance's customer growth sped up. According to the prospectus, in fiscal year 2022, fiscal year 2023, and the first half of fiscal year 2024, the number of Kuangshi Alliance customers was 64, 238, and 120, respectively. Well-known companies such as Tencent, Huawei, and Vipshop were all customers of Everworld Alliance.

After a sharp increase in the number of customers, Everworld Alliance's performance in FY2023 naturally achieved explosive growth. However, from a profitability perspective, Chuangshi Alliance's gross margin for FY2023 was 5.5%, and the net profit margin was 2.8%, down 0.6 percentage points from 3.4% in FY2022. This is mainly due to the sharp increase in sales and marketing expenses, which affected the company's net interest rate.

Entering the first half of fiscal year 2024, Kuangshi Alliance no longer only pursues scale expansion. As a result, it began high-quality development, focused more on high-value customers, and eliminated some low-margin customers. This increased gross margin by 1 percentage point to 3.2% during the period, and the corresponding net interest rate also increased from 0.6% to 1%. But even so, Everlasting Union's net interest rate is still relatively low.

Market competition continues to intensify, and customer concentration has increased markedly

In fact, the low profit level of the Everlasting Alliance is also directly related to the high level of competition in the industry. Although the popularity of short video platforms has brought popularity to short video marketing, a large number of marketing companies have also accelerated their influx into this circuit, leading to continued intensification of market competition.

If ad marketers want to stand out in a fiercely competitive market, they must accumulate core competitiveness in terms of intelligent recommendation algorithms, data analysis, programmatic advertising, and accurate marketing. If the Everlasting Alliance fails to make a breakthrough in these areas, then it may be difficult to effectively resolve its low profit level situation.

In addition to intense market competition, Everbright Alliance is also facing other potential business challenges, such as a sharp rise in customer concentration. According to the prospectus, in fiscal year 2023, Kuangshi Alliance's top five customers accounted for 9.24%, 7.58%, 3.36%, 2.88%, and 2.34% of revenue, respectively, in total only 25.4%. The customers are scattered and the customer structure is relatively good. However, entering the first half of the 2024 fiscal year, the revenue share of the top five customers of Kuangshi Alliance has soared to 53.4%, with the largest single customer accounting for 28.4%. If demand from leading customers weakens or is lost, it may have a clear impact on the performance of the Global Alliance.

Second, the advertising industry is very sensitive to macroeconomics. If the economy is sluggish, companies will take the lead in cutting corresponding marketing expenses to save operating expenses. Therefore, when the economy is relatively weak, advertisers' advertising demand will also drop significantly, which makes the advertising industry show obvious cyclical characteristics. Whether countercyclical development can be achieved is a test for a timeless alliance.

Furthermore, whether results can be achieved in overseas markets will be a key factor in determining the valuation of the Everlasting Alliance. Kuangshi Alliance clearly stated in its prospectus that it will explore opportunities to cooperate with overseas media platforms such as Google, Meta, TikTok, and Bing, and will establish cooperation with agents of such international media platforms. Starting in the third quarter of 2024, it will enter the international mobile advertising market; at the same time, Kuangshi Alliance will begin exploring the live e-commerce market in Southeast Asia in the third quarter of 2024. The Global Alliance needs to use performance to prove that it has the ability to develop overseas business.

Taken together, Kuangshi Alliance achieved explosive growth in FY2023 and began high-quality development in FY2024. This led to a contraction on the revenue side and an acceleration in profit side release. However, intense competition in the market, excessive concentration of customers, industry volatility, and the ability to develop overseas markets are all potential challenges that Kuangshi Alliance needs to face.