Not quite the ticket

Why did Maoyan’s IPO debut so poorly this week?


The market leader for ticket sales

Cats might be colour-blind, but they can see incredibly well in dim light and have a wider visual field than humans, thanks to the many ‘rod cells’ in their retinas. For investors in Maoyan Entertainment’s initial public offering in Hong Kong (maoyan means “cat’s eyes” in Chinese), that vision looked to be lacking when its HK$1.96 billion ($250 million) deal came to market.

On their maiden trading day on the eve of the Lunar New Year holiday this Tuesday, the shares closed 1.35% below the offer price – a poor outcome considering the stock was priced at the bottom end of its indicative range a week earlier. And in spite of an unusual extension to its bookbuilding period, the funds raised amounted to just a quarter of the original plan. Maoyan’s valuation at IPO was 27% less than the value attributed to it in the last round of private equity fundraising led by Tencent in 2017.

The underwhelming response to the IPO might be partly explained by a seasonal lull, plus a recent trend of subpar performance for new listings in Hong Kong (see WiC438 for how poorly Xiaomi fared – it was also a cornerstone investor in Maoyan). But the questionable prospects faced by China’s largest movie ticket sales platform arguably played a bigger role.

Spun off from Beijing-based on-demand services provider Meituan Dianping in 2016, Maoyan, though commanding 61% of China’s online movie ticketing market, is in the red. Its net loss for the first nine months last year stood at Rmb144 million, as an 87% spike in selling and marketing expenses ate into its topline gains.

Similar to its affiliates within the Tencent ecosystem, Maoyan is waging a cash-burning war for customers with its Alibaba-backed archrival, in this case Tao Piao Piao – a rivalry that explains the persistent lack of profitability. But aside from that struggle the broader fear is that its market is already saturated.

Yes, China’s movie industry is growing, so the demand for online ticketing will continue to expand. But how many more consumers are out there to target: the industry’s online penetration rate had already reached 85.5% as of September. That implies the next stage of growth for Maoyan will get costlier as it tries to lure remaining offline buyers while also enhancing the stickiness of its platform to defends its current market share.

One way to achieve the latter goal is to invest aggressively in the content on its platform, which explains why Maoyan is planning to reserve a third of the funds tapped through its IPO for boosting partnerships with media companies.

It is currently in talks with a local online video company, an entertainment content production house, a movie producer-cum-distributor, and an offline entertainment business. Additionally, it is completing the acquisition of a 15% stake in Hong Kong-listed Huanxi Media, most famous for producing last year’s big hit Dying to Survive (see WiC417).

Maoyan’s strategy is to invest in film production and promotional services so as to diversify its income from purely ticketing. The move is a hedge against a threatened regulatory change that will forbid film producers, distributors and theatres from subsidising third-party ticketing platforms, and capping the handling fees for each ticket booked online at Rmb2. The new rule could shave 24% off Maoyan’s ticketing fees, or Rmb700 million every year, Orient Securities has estimated.

But apart from getting more capital intensive, Maoyan’s shift in business model raises other concerns. Take what happened with Us and Them. The romantic drama – directed by Taiwanese singer-actress Rene Liu – was mired in controversy last year after an unusually high proportion of pre-sold tickets were later ‘refunded’. The anomaly prompted sceptics to question whether Maoyan had manipulated the box office to generate more opening day buzz for a movie it had also co-produced and supported as lead distributor (see WiC408).

Analysts also warn that Maoyan relies on two of its shareholders to drive almost all of its traffic. The company is currently drawing 95% of its users from the social media apps run by Tencent and Meituan, which own 14% and 7% of Maoyan respectively (post-IPO).

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