NeoTV Group Begins U.S. IPO Amid Revenue Drop

A Quick Take On NeoTV Group Limited

NeoTV Group Limited (NTV) has filed to raise $55.2 million in an IPO of its ordinary shares, according to an F-1 registration statement.

The firm hosts and promotes E-sports events in China.

NTV wants to expand outside of China but is performing poorly in its existing market.

I’ll provide an update when we learn more IPO details.

NeoTV Overview

Shanghai, China-based NeoTV Group Limited was founded to enable fans to easily connect with Esports events, athletes, and related ecosystem participants in China.

Management is headed by Chairman and CEO Yuxin Lin, who has been with the firm since 2007 and obtained a degree of Associate of Arts Interior Design from the Fashion Institute of Design & Merchandising.

The company’s primary offerings include the following:

• Event management

• Cloud streaming

• IP management

• Extended reality technologies.

As of June 30, 2022, NeoTV has booked fair market value investment of $11 million from investors including ZYD Holding Limited.

NeoTV - Customer Acquisition

The company seeks to host and promote Esports events through its connections with fans, participants, influencers, brands, broadcasters and sponsors.

NeoTV's primary revenue comes from "providing integrated services relating to the Esports tournaments business and the production of variety shows."

Selling expenses as a percentage of total revenue have trended higher as revenues have decreased, as the figures below indicate:

(Source - SEC.)

The Selling efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Selling expense, fell to negative (12.2x) in the most recent reporting period, as shown in the table below:

(Source - SEC.)

NeoTV’s Market & Competition

According to a 2022 market research report by iResearch China, the Chinese market for Esports was an estimated $23.6 billion in 2021 and is expected to reach $30.8 billion by 2024.

This represents a forecast CAGR of around 9% from 2021 to 2024.

The main drivers for this expected growth are an increase in the usage, availability and broadband connection for smartphones and, temporarily, the COVID-19 pandemic.

Also, below is a 2022 map of the major players in China's Esports industry:

Major competitive or other industry participants include the following:

• VSPN

• ImbaTV

• FUNSPARK

• EM ELECTRONIC SPORTS

• GaoJing Culture

• LiChang E-sports

• XianZhi E-sports

• PGL

• DSPORT

• Major internet platform operators.

NeoTV Group Limited Financial Performance

The company’s recent financial results can be summarized as follows:

• Declining topline revenue

• Sharply reduced gross profit and gross margin

• Increased operating losses

• Reduced cash used in operations.

Below are relevant financial results derived from the firm’s registration statement:

(Source - SEC.)

As of June 30, 2022, NeoTV had $2.1 million in cash and $9.9 million in total liabilities.

Free cash flow during the twelve months ending June 30, 2022, was negative ($2.9 million).

NeoTV Group Limited IPO Details

NeoTV intends to raise $55.2 million in gross proceeds from an IPO of its ordinary shares, although the final figure may differ.

No existing shareholders have indicated an interest in purchasing shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

approximately 25% for building an ecosystem of overseas Esports event operation and expand business to targeted overseas market;

approximately 25% for increasing investment in research and development;

approximately 25% for advancing E-sports-focused services and infrastructure technologies, including but not limited to live broadcast technology, cloud computing and Metaverse; and

the balance for working capital and general corporate purposes.

(Source - SEC.)

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management said "there were no pending or threatened claims and litigation as of December 31, 2021" and through the issuance date of its financials.

The sole listed bookrunner of the IPO is Prime Number Capital.

Commentary About NeoTV’s IPO

NTV is seeking U.S. public capital market investment to expand its operations overseas and for its various working capital requirements.

NeoTV Group Limited’s financials have shown dropping topline revenue, lowered gross profit and gross margin, and higher operating losses but decreasing cash used in operations.

Free cash flow for the twelve months ending June 30, 2022, was negative ($2.9 million).

Selling expenses as a percentage of total revenue have trended higher as revenue has decreased; its Selling efficiency multiple dropped to negative (12.2x).

The firm currently plans to pay no dividends to retain future earnings for reinvestment back into the firm's growth and working capital requirements.

NTV’s CapEx Ratio indicates it has spent on capital expenditures even as its operating cash flow was negative.

The market opportunity for Esports in China is large and expected to grow at an impressive rate of growth in the coming years, so the company enjoys a positive industry growth dynamic, although it faces stiff competition from a variety of companies.

Like other Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S. investors would only have an interest in an offshore firm with contractual rights to the firm’s operational results but would not own the underlying assets.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Additionally, the Chinese government’s crackdown on IPO company candidates combined with added reporting requirements from the U.S. side has put a serious damper on Chinese IPOs and their post-IPO performance.

A significant risk to the company’s outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA act, which requires delisting if the firm’s auditors do not make their working papers available for audit for three years by the PCAOB.

Additionally, post-IPO communications from the management of smaller Chinese companies that have become public in the U.S. has largely been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and representing a very different approach to keeping shareholders up-to-date about management’s priorities.

Prime Number Capital is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (80.0%) since their IPO. This is a bottom-tier performance for all major underwriters during the period.

Risks to the company’s outlook as a public company include the need to spend heavily on R&D as well as its stated objective of expanding overseas where it may have no experience in doing successfully.

When we learn more about the IPO from management, I’ll provide an opinion.

Expected IPO Pricing Date: To be announced.

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