Red Child City Technology, from 1 to 100

On March 21, Chizi City Technology (09911) delivered an outstanding report card for 2023.

The performance announcement shows that the company's revenue for the reporting period was approximately RMB 3.31 billion, an 18% year-on-year increase; net profit was about RMB 760 million, a 165% year-on-year increase; and net profit attributable to the parent company was around RMB 513 million, a year-on-year increase of about 294%.

Two key points to note about this announcement: first, the more than doubling growth in net profit for 2023 is built on a high base from 2022, demonstrating its continuous high growth potential; second, the profit growth rate significantly exceeds the revenue growth, indicating improved operational efficiency and enhanced commercial capabilities within the company during the period.

Earlier this month, following the release of the profit forecast, Chizi City's stock rose nearly 50% intraday, with trading volume reaching HKD 106 million, attracting market funds.

Analyzing Chizi City's 2023 performance report, one of the key factors contributing to its significant growth is the "latecomer products." During the reporting period, in addition to well-known products such as MICO and YoHo in its broad social business, latecomer products TopTop and SUGO have also risen strongly. Additionally, its LGBTQ business segment has contributed substantial revenue and profits.

The success of the "latecomer products" is of great significance to Chizi City. It signifies that the company's model of replicating hit products has been successful. In the global social entertainment arena, after starting from scratch, Chizi City has entered the "replication" phase from 1 to 100. With this "replication capability," Chizi City is expected to create more hit products and drive the company's sustained growth in the future.

From Single Product to Multiple Advancements

Chizi City Technology has been deeply cultivating overseas markets for over a decade. As early as 2013, the company focused on developing tool applications for overseas markets. After accumulating a large user base through tool applications, Chizi City seized the live streaming trend, transitioning to the more user-engaging and commercially valuable social product field, and launched the live social platform MICO in 2014, one of the earliest Chinese live social platforms to go global. By 2018, this product had become a leading platform in the Middle East, North Africa, and Southeast Asia markets due to its expansion efforts and first-mover advantage.

MICO gave Chizi City a good start in the overseas live social arena. However, due to market players like Ying Universe and Flower Room Group heavily relying on live streaming business, leading to relatively single revenue categories and limited future growth potential, Chizi City recognized the significant role of addressing diverse user needs and a diversified product matrix in reducing market risks and enhancing monetization efficiency. Therefore, the company embarked on the path of diversifying its social business products and creating new growth curves In terms of diversification of social business products, Chizi City is advancing its strategic approach of "multiple products, multiple markets", continuously improving its global social entertainment ecosystem through "product replication" and "country replication". Following MICO, Chizi City launched the voice social platform YoHo in 2018, and in the past two years, introduced the companion social platform SUGO and the multiplayer game social platform TopTop, continuously enriching the company's diverse social product matrix.

Although MICO and YoHo were launched earlier, thanks to Chizi City's localized operational capabilities and refined operations in the social business, these two products demonstrated strong vitality during the reporting period. As of now, both MICO and YoHo have long been ranked in the top 30 of data.ai's "China's non-gaming app overseas revenue ranking", maintaining a leading position in commercialization levels in the industry.

The rise of the later products SUGO and TopTop is even more impressive. SUGO, as a companion social dating platform, has shown revenue growth rates among the top in similar overseas products, entering the top 30 of data.ai's "China's non-gaming app overseas revenue ranking" for 5 consecutive months in the second half of 2023, with rankings steadily climbing. In 2023, its revenue and profit both increased by over 3 times and 6 times respectively compared to the previous year, showing significant growth.

Meanwhile, TopTop has consistently ranked at the top of the Google Play social app bestseller list in the "Gulf Six Countries" since its launch, becoming a leading game social product in the Middle East and North Africa. Data shows that the product's active users spend an average of 60 minutes per day on the app, showing strong user loyalty and promising growth prospects.

Diversified social interactions, as the "fresh blood" of Chizi City's social business, also made a qualitative breakthrough in 2023. After completing the consolidation of Blue City Brothers, Chizi City leveraged its operational advantages to help it achieve continued profitability. Building on the user and brand momentum of Blued International, the company launched a new brand for LGBTQ+ community platform targeting overseas markets - HeeSay, marking Chizi City's accelerated layout in the global LGBTQ+ market.

Thanks to the rise of later products SUGO and TopTop, as well as the integration of diversified social interactions, Chizi City recorded a total revenue of 3.308 billion RMB in 2023, an 18.0% year-on-year increase. At the same time, the rapid growth of these products has also driven the company's commercial efficiency to continue to rise, leading to a 165% year-on-year increase in net profit and a 294% year-on-year increase in net profit attributable to shareholders in 2023.

In addition to social business, innovative businesses such as premium games have also maintained high-speed growth as Chizi City's new growth curve during the reporting period. The expected total revenue of innovative businesses is about 336 million RMB, a year-on-year increase of about 40%, accounting for over 10% of the company's total revenue.

"Alice's Dream: Merge Island" was officially launched in June 2022. This self-developed casual synthesis mobile game received global new game recommendations on Google Play just two months after its launch and has entered the top 10 of the Puzzle game bestseller list in 140 countries/regions on Google Play as of now The monthly revenue has exceeded 8 million US dollars. In 2023, Chizi City incubated high-quality games such as "Taylor's Secret" and "Sudoku".

It seems that Chizi City, entering the social overseas track with live social products, has chosen the right growth path with forward-looking strategic vision. It is not limited to existing areas, but through product diversification and layout of new tracks, it is creating a second growth curve, forming a multi-pronged growth pattern.

"Replication" to Open Up Growth Ceiling

Looking back at history, Chizi City's strong growth momentum is rare in the entire Hong Kong stock market. Data shows that from 2017 to 2022, Chizi City Technology's revenue was 182 million, 277 million, 390 million, 1.182 billion, 2.36 billion, and recorded an annual revenue of 3.308 billion in 2023, achieving rapid growth for 5 consecutive years, with a high compound annual growth rate of 62.41%.

To achieve such remarkable growth results, it is directly related to the industry's continuous growth. The global open social industry where Chizi City is located is a typical "long slope thick snow" golden track.

According to Frost & Sullivan's forecast, the compound annual growth rate of social media from 2021 to 2024 is expected to reach 15.1%, a huge market exceeding 2 trillion RMB, with many opportunities in various segmented tracks. Among them, application types of open social include but are not limited to dating, audio social, video social, live social, game social, etc. Frost & Sullivan predicts that the growth rate of audio and video social is higher than the overall growth rate of the social market, and the two are the most widely used social modes in open social.

Diverse group socializing is also a huge market. Frost & Sullivan predicts that by 2023, the global diverse group population will increase to 591 million, and the global diverse group market size will reach 5.4 trillion US dollars, with a compound annual growth rate of 7%. Diverse group socializing has significant user stickiness and monetization efficiency, demonstrating considerable consumption power. In terms of penetration rate, the penetration rate of various diverse group social products worldwide is still not high, and there is still significant room for growth in regional markets such as Southeast Asia, Japan and South Korea, Europe, and America.

In terms of gaming business, according to Unity's "2023 Game Industry Trends Report," the global gaming market size is expected to be 184 billion US dollars in 2023, a year-on-year growth of 0.6%. By 2026, this size will grow to 205.7 billion US dollars, indicating that the global gaming market will continue to grow steadily. Looking at the segmented tracks, according to Sensor Tower data, synthesis-type mobile games are one of the most prominent sub-categories of puzzle games in terms of global revenue and download growth in recent years, with vast room for growth.

Considering the industry situation, Chizi City Technology's layout appears very wise. In order to maximize the exploration and expansion of the global open social market, Chizi City's diverse product matrix covers almost all application scenarios of the open social market. One of the second growth curves, high-quality games, also targets the fastest-growing sub-category of the gaming market, synthesis-type mobile games, and can sustainably benefit from the industry's growth More crucially, with the company's moat - the ability to replicate, Chizi City has the "magic" of deeply exploring the growth potential of existing products and continuously launching new products to open up the company's growth space.

On the one hand, Chizi City Technology replicates existing products to more overseas markets through its "national replication" capability, allowing a new product with growth potential to quickly "blossom" overseas. MICO is a good example, starting from its first overseas stop in Thailand to accumulating 100 million users globally. On the other hand, the company's "product replication capability" not only enables rapid product iteration but also, based on long-term experience, allows the development of new products with strong growth potential in a short period of time. By continuously improving product penetration and accumulating users to fuel growth, the rapid growth of SUGO and TopTop also validates this capability.

Furthermore, the company has accumulated a wealth of mature localized operational methodologies and abundant local resources. By replicating its localized operational capabilities, the company can achieve refined operation of its products, effectively improving operational efficiency and monetization efficiency. The significant profit growth data in recent years proves that Chizi City has the ability to continuously improve commercial efficiency through in-depth localized operations.

It is worth noting that 2024 will be a crucial year for Chizi City Technology to expand its overseas diversified social business. For Chizi City, focusing on the overseas market, HeeSay will be the core of its diversified social business strategy, with broad room for upward development in the future.

From the initial live social platform to having more and more rapidly growing pan-population social products, to expanding into high-quality game business, and then to expanding diversified social businesses, Chizi City has established a vibrant social entertainment "bush" ecosystem on the golden track. The competition barrier in the global social entertainment track is also getting higher as its "bush" ecosystem becomes increasingly rich.

Through continuous "replication," the company is gradually opening up the growth ceiling.

Betting on the Middle East and North Africa Gold Market

Returning to the performance announcement, one of the main reasons for the growth in net profit and net profit attributable to the parent company is the vigorous expansion into the Middle East and North Africa markets.

In addition to the label of "veteran in going global," Chizi City is also a leader in the market under the Middle East heat wave. Continuous deep cultivation in the Middle East and North Africa, a market with strong and sustained demand, is also one of the key factors for Chizi City's sustainable growth.

The Middle East is a fertile ground for social and entertainment prosperity, with ample market dividends. According to relevant data, the overall population structure in the Middle East is young, with a median age of less than 29 years, and the local internet penetration rate ranks among the top globally, with internet penetration in the Gulf Cooperation Council countries exceeding 96%. At the same time, the Middle East has relatively high economic growth rates, with the per capita GDP in the Gulf Cooperation Council countries reaching or even surpassing the levels of developed countries. Local residents have sufficient time and money to spend on entertainment, making them "wealthy and leisurely."

Data shows that from 2020 to 2021, the growth rate of pan-entertainment applications in the Middle East reached 387%, ranking first globally. Research by the data analysis company Global Web Index shows that the average number of social media accounts per internet user in the Middle East is 8.4 According to the "2022 Social Entertainment Overseas White Paper", in the top 50 non-gaming app revenue in Saudi Arabia, entertainment accounts for nearly 80%.

In 2023, the user application download and payment data in the Middle East continues to rise, with entertainment and gaming becoming the preferred overseas gold mining tracks for overseas companies in the Middle East. The Middle East has ushered in a frenzy of domestic entertainment going overseas.

Chizi City has been deeply cultivating the Middle East market for nearly eight years and is one of the pioneers who have set off this wave of enthusiasm. The company has developed a mature localization operation methodology suitable for the Middle East market based on various dimensions such as religious sensitivity, social and family values, localization, and cultural sensitivity. This is one of Chizi City's core competencies in the Middle East market, and new players will find it difficult to establish mature localization operation capabilities in a few years.

At the performance conference on March 22nd, Chizi City revealed that the revenue of the company's core products in the MENA market in 2023 has reached 1.353 billion RMB. Over the past few years, the company has achieved rapid development in this market with its localization capabilities. Between 2020 and 2023, the compound annual growth rate of revenue is about 33%, and the compound annual growth rate of profit is 36%.

This also means that in the wave of entertainment going overseas to the Middle East, Chizi City is expected to continue to benefit from its existing first-mover advantage and core competitiveness in localization operations, laying the foundation for the company's continued growth.

Summary

From the first live social product MICO successfully expanding from one country to multiple countries, followed by several products efficiently landing in the footsteps of MICO, Chizi City's forward-looking strategic vision, as well as its strong execution in implementing localization operations and product replication and country replication strategies, have been clearly demonstrated in the historical process. This is also the best evidence that Chizi City has the ability to continue evolving and growing.

With the three core competencies of product replication, country replication, and localization operation replication, Chizi City can iterate and incubate more products in the future and expand to various countries and regions globally. These three capabilities can be universally applied in the three major business lines of pan-population socializing, diverse population socializing, and boutique games. Theoretically, with its strong replication capabilities, Chizi City has unlimited growth potential, which may be the true value of Chizi City in the long term.

Currently, the largest company in the world engaged in open social business is Match Group, holding dozens of dating, social, and entertainment products such as Tinder and Hinge, with a market value exceeding 9 billion USD. Based on the social entertainment ecosystem built by Chizi City and the gradually formed core competitiveness, Chizi City is expected to become the Chinese version of Match Group, perhaps even more than Match