Text: Flying Snow
Source: Bowang Finance
From the "Ultraman card" to the "My Little Pony Cards" that are now popular among elementary school girls, the trading card is a "big item" card game Co., Ltd., which was once shocked by its "performance" of more than 4 billion yuan with a gross profit margin of up to 70% and an annual income of up to 4 billion yuan.
Source: Card Game Prospectus
Since the submission of the prospectus to the Hong Kong Stock Exchange on January 26 this year, the attention of the industry and investors to this company has only increased.
Source: Card Game Prospectus
According to the card game prospectus, in 2021, 2022 and as of the first three quarters of 2023, the corresponding gross profit margins of "toys" products are 58.1%, 68.9% and 69.4%, while the corresponding gross profit margins of "trading cards" are "true" to 59.5%, 69.9% and 71.2%.
Source: Card Game Prospectus
In the company introduction section of its prospectus, Cardgame describes itself as a "pioneer in the field of trading cards in China", and says that "while consolidating our position as a leader in the trading card field, we are also focusing on enriching our toy product portfolio with the introduction of other product categories such as dolls, trading card collectibles, badges, stickers and acrylic stands." ”
Source: Card Game Prospectus
In the prospectus, the card game stated that its revenue source was mainly from the sale of toys (including trading cards, dolls and other toys) and the sale of stationery products. After the author "peeled back the cocoon" of the main financial data of its prospectus, it was found that the trading cards that accounted for more than 85% of its revenue were precisely the "basic plates" and "hole cards" of card games.
However, in the face of its trading card revenue once fell by more than half, the diversified expansion layout had little effect, and due to the high incidence and frequent occurrence of public opinion controversy due to the "harvesting of primary school students", coupled with the increasing "completion" of the regulatory "blind spot", or will ring the bell in the second half of this year, is it more or less facing various hidden worries and "uncertainties" related to its development in the capital market?
01
Revenue is trapped in the card "large single product dependence", and the prospectus shows that its revenue fell by nearly half in the first three quarters of last year
According to the prospectus submitted by Card Game on the Hong Kong Stock Exchange, in 2021, 2022 and the first three quarters of 2023, its revenue will be 2.298 billion, 4.131 billion and 1.952 billion yuan respectively, and its gross profit will be 1.335 billion yuan, 2.842 billion yuan and 1.314 billion yuan respectively. The corresponding net profit was -153 million, -296 million and 260 million yuan respectively.
Source: Card Game Prospectus
It is not difficult to see that although the net profit of Kayou in the first three quarters of 2023 turned around, the revenue of 1.952 billion yuan in the same period is equivalent to a year-on-year decline of nearly half, and the gross profit of 1.314 billion yuan means a year-on-year decline of nearly 50%.
In addition, as can be seen from the table below, the adjusted net profit for the first nine months of 2021, 2022 and 2023 was RMB795 million, RMB1,619 million and RMB578 million, respectively, measured in accordance with non-IFRS.
Source: Card Game Prospectus
Although the voluntary disclosure of "non-international standard net profit" can provide an additional reference for the capital market to examine and evaluate the value of the company. However, it is undeniable that in 2021 and 2022, the net profit of card games in the same period will be -153 million and -296 million respectively, but in fact, it is showing a trend of rising losses.
What's more noteworthy is that card games are suspected of falling into the "big single product dependence" of trading cards as "housekeeping".
According to its prospectus data, the sales of trading cards in card games will account for 94.4%, 95.1%, and 85.8% respectively in 2021, 2022, and the first three quarters of 2023.
However, compared with the high sales ratio of trading card "large single products", the fact that the revenue of card games, the "big single product" - trading cards, has slowed down in the first three quarters of 2023.
Even in terms of revenue, compared with the sales of 2.169 billion yuan in 2021 and 3.930 billion yuan in 2022, the sales of card games in the first three quarters of 2023 are only 1.675 billion yuan. Its trading card sales in the first three quarters of 2022 will be about 3.479 billion yuan.
Source: Card Game Prospectus
"The decline in trading card sales also reflects the impact of public health conditions on overall social activities and the overall business environment," the company said in its prospectus. ”
This explanation may be difficult to alleviate the anxiety and worry of the capital market about the over-reliance of card games on the "big item" of "trading cards" and the sustainable development of the future.
Perhaps in order to accelerate the stimulation of revenue, card games continue to "play high" on trading cards. According to its prospectus, in 2021, 2022 and the first nine months of 2023 alone, card games have launched as many as 132, 168 and 121 trading card series, involving "Ultraman Cosmic Heroes", "Ultraman Hero Showdown", "Card Game Three Kingdoms" and so on.
Trading cards, as the "cornerstone" of the card's sustainable development, also stated in its prospectus that "to lay a solid foundation for continuous design and launch of new products, as of September 30, 2023, we have built a strong IP matrix composed of 44 IPs." ”
However, according to media such as "Securities Star", in fact, many of the "main" IP authorizations of card games are facing expiration. Among them, Ultraman IP will expire in 2029, Ye Luoli's IP will expire in 2033, and Douluo Dalu Animation and Egg Boy Party IP will face the reality of license expiration next year.
Behind the high gross profit margin of card game trading cards for several years, it may be related to the relatively low IP licensing fees it obtains.
In its prospectus, Kayou said that in 2021, 2022 and the first nine months of 2023, it paid 166 million yuan, 211 million yuan and 113 million yuan in IP fees, respectively, accounting for only 7.2%, 5.1% and 5.8% of total revenue.
Perhaps, this kind of IP expense, which can be "ignored" and "accounted for a small head", is also the reason why the annual income of card games once exceeded 4 billion yuan.
However, in the "Risk Factors" section of its prospectus, Kayou clearly states that "we are exposed to risks related to IP licensing. If we fail to obtain, maintain or renew an IP licensing arrangement on favourable terms, or our IP partners fail to maintain and protect their IP, our business, financial condition and results of operations could be materially and adversely affected. ”
Source: Card Game Prospectus
It can be said that with the continuous advancement of the IPO plan, coupled with the diversification "acceleration run" in an attempt to find the "second growth curve", with little effect, together with the changes in the regulatory environment and the high and frequent occurrence of public opinion controversies, how much will Card Game have to pay for the licensing fees for expired and newly "debuted" IPs, and will it still be able to maintain a low level?
What's more, how can a card game that relies solely on trading cards, a "big item", find a "second growth curve" to solve the hidden worries of future development, and how to dispel its potential "uncertainty" in the capital market?
02
Accelerate the diversification of the layout, can card games find the "second growth curve"?
Perhaps the card game itself has realized that it relies too much on the "big item" of trading cards, and once the IP market changes suddenly, the licensing fee rises, or the regulatory end "fills" the "gap" in the supervision of the card category, then the future of card games will inevitably be full of unknowns.
In the past two years, Card Games has accelerated its business layout of related diversified products, trying to rely on its leading advantages and brand effect in the trading card market to attract its target users "primary school students" to "pay".
To this end, Card Game has vigorously "expanded its territory" in the related diversification of stationery categories, and has carried out large-scale promotion in its existing card channels and related channels by providing IP-themed stationery products such as pens and books.
However, the diversified layout of card games does not present the "hot scene" of its trading cards. Although public data shows that in 2022 and as of the first three quarters of 2023, Cardgame has launched 6 and 52 stationery series respectively.
Source: Card Game Prospectus
However, despite the continuous increase in the SKU of stationery series products, its prospectus shows that compared with the card IP "derivative" product dolls and other toys sold by card games, the sales in the first three quarters of 2023 accounted for 4.1% and 3.2%, and the sales of its "stationery" products accounted for only 6.9% in the first three quarters of 2023.
This is obviously in stark contrast to the 85.5% proportion of the "big item" trading cards of card games in the same period, and it also proves in a sense that its diversified layout based on stationery series products has little effect.
Source: Card Game Prospectus
However, the diversification of card games is destined not to press the "pause button". Because, the "big item" of card games that has long been publicly reported by authoritative media and often on social platforms - trading cards, in addition to revenue and capital, also faces high and frequent public opinion controversies.
In such a situation, as a "slightly bizarre" core business with an annual revenue of more than 4 billion yuan and a high gross profit margin, will the "big item" trading card of the card game face inquiries from the China Securities Regulatory Bureau and other relevant regulatory authorities in the increasingly in-depth IPO application process? And how will it "dilute" the potential development concerns of its "big item" of trading cards through truly stable and benign diversification?
In other words, whether Kayou, which has been "lying and earning" in the high-gross margin market for several years, can find a "second growth curve" or whether it can win the recognition of the capital market is a major key.
In the "Strategy" section of the prospectus, Kayou mentioned that it intends to adopt a variety of strategies such as "actively seeking overseas expansion" to further develop the business.
Source: Card Game Prospectus
The prospectus pointed out that at present, the licensing scope of several popular licensed IPs of card games has been extended to overseas markets such as Southeast Asia. The company also plans to work with the right local partners to offer differentiated products and implement a marketing and branding strategy tailored to consumer preferences in overseas markets.
At the time of the submission of the prospectus, according to a report issued by CIC Consulting, in 2022, the market size of the trading card industry in the United States, China and Japan was RMB17.2 billion, RMB12.2 billion and RMB11.4 billion, respectively. The market size of the trading card industry in Southeast Asia has reached RMB 1.7 billion and is expected to grow rapidly in the next five years.
Perhaps, the greater "business opportunities" of trading cards behind the diversification of the domestic market with the left hand and the strong increase in the "going to sea" with the right hand seem to outline a certain direction for the future of card games.
However, it is not yet known whether this future will be "seawater" or "flame".
03
The controversy over the "harvesting of primary school students" public opinion continues, and it is suspected that the nature of primary gambling may make it face the "soul torture" of future development
According to the "Zhangjiakou Evening News" published on August 9, 2022, entitled "Uncover the Truth! Why do "blind box" Ultraman cards make children addicted? "Some parents and teachers say that Ultraman cards not only cost a lot of money, but also consume children's energy, and excessive obsession can affect children's academic performance." ”
The media also quoted psychological experts as saying that "the 'blind box' Ultraman card has a primary gambling nature in terms of sales model, and excessive obsession may affect the mental health of primary school students." ”
News source: "Zhangjiakou Evening News", screenshot from "NetEase"
The report further quoted Guo Lina, a psychology teacher at Zhangjiakou University, as saying that there is nothing wrong with merchants developing cards based on animation images and selling cards as commodities.
"But the so-called 'rare' cards are sold in a bag with ordinary cards and sold by buyers at random, which is no longer a simple game behavior, but a primary gambling behavior popular among minors, and if children are overly obsessed, it will affect mental health."
Source: "Zhangjiakou Evening News" (Zhangjiakou News Network)
Coincidentally, according to the article "Sanya Media Financial Media (Sanya News Network)" released on April 6, 2023, entitled "Many minors are addicted to buying, collecting card toys and comparing with each other, where is the "magic" of small cards? In the past few days, the media reporter visited many schools in the city and found that many canteens are selling such card toys, "The price also ranges from the lowest 2 yuan a pack to dozens or even hundreds of yuan."
Source: Sanya News Network
And a commissary operator told the media reporter, "The level inside is random, the higher the price, the higher the probability of appearing advanced cards, like the cheapest card is basically an ordinary card, but if you want to have a holographic card of the highest level, it is only possible to draw it in the most expensive card." ”
In the report, Peng Hong, a lawyer at Hainan Jianya Law Firm interviewed by the media reporter, said, "The relevant departments should strengthen the supervision of businesses near the school, and strengthen the standardized management of products that are easy to induce deformed consumption of teenagers and children." At the same time, business operators have the responsibility and obligation to guide minors to consume correctly, and when minors purchase valuables alone, especially when a person who lacks or has limited civil capacity comes to purchase goods or receive services, he should examine whether the purchaser's consumption behavior is suitable for his age and intelligence, so as to avoid unnecessary consumer disputes. ”
It is not difficult to imagine that with the continuation of public opinion controversy and the introduction of regulatory norms, especially as Kayou, which launched its IPO, is about to become a public company, its every move will inevitably be exposed to the sun.
According to the public opinion analysis report entitled "Ultraman Card" Public Opinion Frequently Issued, Card Game Companies Need to Adhere to the Bottom Line of Social Responsibility released by the "People's Daily Online Public Opinion Data Center" on September 29, 2022, public opinion related to the theme of "Ultraman Card" is frequent, and Weibo topics such as #Parents complain that their children are addicted to Ultraman small cards# have aroused heated discussions among netizens.
Source: People's Daily Public Opinion Data Center
The report pointed out that on August 10 of that year, the media reported that the head of a group in Beijing spent 2 million to collect the Ultraman card for Waji, which attracted widespread attention, and then # Parents spent 2 million to collect the Ultraman card for Waji # rushed to the hot search, and the forwarding and follow-up of many media boosted the event to form a wave of popularity.
According to the research and analysis of the "People's Daily Public Opinion Data Center", in the process of discussing the topic of this public opinion event, the huge expenses of parents, the operation and management of card game companies, the consumption behavior of minors, and the supervision and regulation of relevant departments have become the main focus areas.
According to the report entitled "Sales Nearly Halved, Multiple IP Copyrights Are Nearing Expiration, and Card Game Technology Controversy Continues on the Eve of IPO" released by Securities Star on February 20, 2024, "From the perspective of the overall business environment of trading cards, in June 2023, the State Administration for Market Regulation issued the Guidelines for the Code of Conduct for Blind Box Operations (Trial), drawing a red line for blind box operations and promoting blind box operators to strengthen compliance governance. The guidelines impose strict restrictions on the age of blind box sales targets, requiring that they must not be sold to minors under the age of 8. ”
Source: Securities Star official website
The report notes that trading cards have been controversial for a long time. At the beginning of 2023, Chongqing Radio and Television reported a social news that stationery stores, toy stores, and small shops allow minors to consume large amounts and consume on credit. Subsequently, in November of the same year, CCTV Finance Channel also reported in the program Punctual Finance that "Trading Cards Become the New Favorite of Teenagers, and Supervision Needed to Be Strengthened to Prevent Minors from Becoming Addicted".
Source: Screenshot from Securities Star related reports
"In general, there is still great uncertainty about the sustainability of the trading card business model of card games in the future." The report concludes.
However, the card game, which is deeply rooted in the psychology of primary school students and the popular "trend" of this group, has not stopped at continuing to earn "real money" for primary school students, despite being "trapped" in diversity and controversies in public opinion.
Nowadays, the trading cards of card games are not only cards such as "Ultraman" that are popular for elementary school boys, but also for elementary school girls, and card games have already promoted the trading cards of the hit animation IP "My Little Pony" in markets across the country.
Source: Bowang Finance Real Shot - IP card of the card game "My Little Pony".
According to the author's field investigation, the "My Little Pony" card of the card game not only has a high price reference to Ultraman cards, but also highly similar in gameplay, and has a high degree of "stickiness" in repurchase among elementary school girls.
In the evening, at the stationery store around the entrance of the elementary school, elementary school girls crowded into the card area of the card game "My Little Pony", while "regular stationery" such as pencils, pens, and homework books that should be purchased by children of this age group are not cared for.
Starting at 2 yuan and 10 yuan a pack, you can draw a "good card" card game "My Little Pony" trading cards, and you can consume at least ten or twenty yuan at a time. However, although the probability of being drawn to a "good card" by the stationery store owner's "packing ticket" for 10 yuan a pack of cards is greater, what is really "piled up" in the homes of primary school students is still a bunch of "ordinary cards (waste cards)" in exchange for "real money".
Source: Bowang Finance Real Shot: Card Game "My Little Pony" Card "Ordinary Card (Waste Card)"
At the moment, seeing that the "My Little Pony" anime has been updated to its ninth season, it is said that a new series is about to "debut". At that time, how much "real money" will be brought to the "big item" of the card game?
In the future, can card games rely on the "big item" of trading cards to "primary school students" and other underage groups, and continue to "harvest huge profits" and continue to "settle for safety"?