Analysis of US Stock IPOs | China's e-sports industry produces its first IPO, can Star Esports tell a new story of success?

We cannot predict when the wind will come, but we need to find the right position and wait quietly for the wind. For NIPG.US (NIPG.US) in the esports and gaming industry, perhaps it is the "new story" that practitioners have been waiting for.

Recently, NIPG.US's listing in the United States has made new progress.

After submitting the public version of the prospectus (F-1 document) to the U.S. Securities and Exchange Commission (SEC) for the first time on June 12th Beijing time, NIPG.US submitted an updated prospectus (F-1/A document) to the SEC on July 6th Beijing time. This indicates that NIPG.US's IPO process has entered an accelerated stage, with the price range of its stock issuance and fundraising scale also disclosed.

According to the F-1/A document, NIPG.US will issue 2.25 million American Depositary Shares (ADS) in this IPO (each ADS corresponds to 2 ordinary shares), with a price range of $9-11 per ADS, raising up to $24.75 million before the exercise of the over-allotment option.

Based on the above price range, if the over-allotment option is not exercised, then after the issuance of 2.25 million ADS, it will account for 4% of NIPG.US's total shares. This means that NIPG.US's IPO market value will reach between $506 million and $619 million.

NIPG.US is well-known in the industry, owning two well-known esports clubs, Ninjas in Pyjamas and eStar, and is one of the most widely operated and influential esports organizations globally. Behind NIPG.US is the son of business tycoon Stanley Ho, Stanley Ho's son, Stanley Ho, which has attracted high attention since its establishment.

However, what the market is most concerned about now is the attitude of the capital market towards NIPG.US. After all, as the first esports and digital entertainment company in China expected to go public, whether it can gain favor from the capital market is crucial to the entire esports industry in China.

By reviewing the past performance of listed esports companies and analyzing NIPG.US's prospectus, we may find the answer.

Obstacles for Esports Companies: Single Business Model and Unstable Revenue Expectations

From a global perspective, there are quite a few esports companies that have been listed (including those that have been delisted). The first global esports concept stock was Astralis, founded in 2016, the first Intel series champion in CS:GO history, winning over $1 million in series tournament prizes. In December 2019, Astralis was officially listed on Nasdaq in Denmark.

After Astralis took the lead in listing, the trend of rapid development in the esports industry has provided many esports companies with the opportunity to go public. According to incomplete statistics, after 2020, more than 20 esports companies have chosen to go public, including Faze Clan, ESE Entertainment Group, GameSquare Esports, Guild Esports, and others However, from the results, the performance of these esports companies in the capital market is unsatisfactory. Taking Astralis and the most well-known esports brand in North America, Faze Clan, as examples, Astralis was listed for less than 4 years and officially delisted in August 2023; Faze Clan had an even more tragic fate, being listed in July 2022 but delisted in March of this year due to the stock price falling below $1, with the entire listing lifecycle being less than two years and the stock price dropping more than 10 times.

The key reason for the "big failure" of Astralis and Faze Clan in the capital market is the failure to achieve sustainable revenue growth and the difficulty in overcoming profitability challenges. Among the esports companies that have been listed, most of them have overly single revenue models, with teams relying on tournament prizes and commercial sponsorships for revenue generation. In such a business model, not only are operating expenses high, but also due to sponsors flocking to top teams, the team's performance has become a significant factor affecting revenue. Therefore, the revenue of esports clubs will fluctuate significantly with changes in team performance.

Taking Astralis as an example, its revenue for the 2022 fiscal year was DKK 87.548 million, with sponsorship income, tournament prizes, and other related income accounting for as high as 90.49%, heavily relying on esports team operations. The single commercialization model limits the growth and profitability of Astralis.

Faze Clan's level of commercialization is slightly better than Astralis. According to the last financial report of Faze Clan before delisting (third quarter of 2023), the total revenue for the first three quarters of 2023 was USD 36.749 million, a 24% year-on-year decrease. Among them, brand sponsorship revenue was USD 14.616 million, content revenue was USD 9.658 million, consumer product revenue was USD 0.852 million, and esports revenue was USD 11.537 million.

Figure: Faze Clan's revenue data for the third quarter and first three quarters of 2023

Although Faze Clan has expanded into content and consumer product businesses on the basis of brand sponsorship and tournament prizes to explore the monetization potential of fans, this still falls within the scope of esports team operations. And due to the lack of effective control over operating expenses, Faze Clan continues to incur severe losses. In the first three quarters of 2023, general and administrative expenses alone accounted for 107.04% of total revenue for the period, leading to a loss rate close to 100%. With such huge expenses, how can there be profits?

Image: Faze Clan's performance data for the third quarter of 2023 and the previous three quarters

Star Esports' Mighty Solution: More Than Just "Esports Stocks"

Due to the lackluster performance of listed esports companies, the enthusiasm of the capital market for esports companies has waned. However, unlike enterprises such as Astralis and Faze Clan that overly rely on esports team operations, the upcoming listing of Star Esports presents a unique answer, depicting a different commercial landscape to the capital market.

A study of the prospectus reveals that we cannot simply label Star Esports as "esports stocks". This company, which is about to go public, is telling us a new story about "game entertainment".

Star Esports' journey began with esports. However, while deepening the moat of esports team operations through acquisitions, Star Esports has diversified its commercial monetization, realizing parallel development in various businesses such as esports, event activities, and talent brokerage, becoming a comprehensive digital sports group.

As early as 2020, Star Esports acquired the championship team eStarPro of the 2019 King Pro League (KPL) through a stock-for-stock merger, making it the only club in China with both Wuhan KPL and Shenzhen LPL home venues. Subsequently, in early 2023, Star Esports acquired the European veteran esports club NIP, marking the largest cross-border merger in the esports industry to date. This transaction enhanced Star Esports' coverage of esports projects, enriched its professional player talent pool, and improved the company's competitiveness in esports team operations.

According to the prospectus, Star Esports has laid out numerous mainstream esports projects including League of Legends, King of Glory, CS:GO, and holds fixed seats in games such as LPL, KPL, FIFA, QQ Speed Professional League, and CODM Professional League. As of January 31, 2023, Star Esports has won 19 championships in top global esports events (ranking in the top ten prize pool), including games such as Counter-Strike: Global Offensive, King of Glory, Rainbow Six, and FIFA, far exceeding other esports organizations in the number of championships.

The acquisition of NIP club has provided Star Esports with new opportunities for global development. Currently, Star Esports Group's business covers regions in Asia, Europe, South America, with home venues in Wuhan and Shenzhen, and regional offices in Stockholm, Shanghai, and Sao Paulo.

Beyond the story of esports teams, talent brokerage and event activities have become accelerators for Star Esports' rapid progress. In terms of talent brokerage business, benefiting from the rich esports talent pool accumulated by Star Esports, as of December 31, 2023, the company's esports players and artists have approximately 99 million fans on social media It is worth noting that Xing Jingweiwu has not only signed KPL esports player "Promise" and Douyu anchor "Sao Yi", well-known figures in the esports industry, but has also extended its reach to the broader sports and entertainment arena. Top entertainment industry artist Wang Jiaer has also joined this company as a partner and beneficial shareholder.

Wang Jiaer is one of the world's famous pop idols and one of the most followed male artists on Instagram. As of April 30, 2024, Wang Jiaer has approximately 33 million followers on Instagram.

Starting out as an esports team operator, Xing Jingweiwu seems to have begun to evolve from a pure esports company to a comprehensive online game entertainment company. The effects of its diversified business expansion are also evident in its revenue structure.

According to the prospectus, in 2023, Xing Jingweiwu's core business revenue from esports club operations, talent brokerage, and event activities accounted for 25.9%, 62.9%, and 11.2% respectively. Talent brokerage and event activities have become new growth drivers for Xing Jingweiwu's revenue. Thanks to this, Xing Jingweiwu's total revenue in 2023 increased by 27.09% to $83.68 million, with talent brokerage becoming an important force driving revenue growth for Xing Jingweiwu.

However, it is important to note that Xing Jingweiwu is still experiencing continuous losses. In 2022 and 2023, its net losses under the US Generally Accepted Accounting Principles (GAAP) were $6.306 million and $13.258 million respectively, with loss rates of 9.6% and 15.9%. Investors should pay attention to two key points:

Firstly, Xing Jingweiwu has effectively controlled the proportion of total operating expenses. Unlike esports enterprises like Faze Clan, where general and administrative expenses alone exceed revenue, Xing Jingweiwu has effectively controlled its total operating expenses, with the proportion of total operating expenses in 2023 being only 26%.

Secondly, Xing Jingweiwu's adjusted EBITDA is on the verge of breaking even. It is well known that compared to GAAP accounting standards, adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) under non-GAAP accounting standards eliminates the impact of factors such as depreciation and amortization, better reflecting the true profit level of the enterprise for the period. In 2022 and 2023, Xing Jingweiwu's adjusted EBITDA was -$0.648 million and -$1.731 million respectively, with adjusted EBITDA profit margins of -1.0% and -2.1%, approaching profitability It can be said that adjusting EBITDA to the breakeven point to some extent indicates the expectation of potential profitability for Xingjing Wei Wu in the future, but whether it can truly achieve profitability still requires continuous observation and tracking.

However, it can be confirmed that Xingjing Wei Wu is indeed different from pure e-sports companies. Its continuous growth and expansion of the business map, gradually upgrading the company to a global, comprehensive online gaming and entertainment company, show positive aspects in various dimensions such as business layout, revenue structure, operating cost control, and profitability.

This means that the valuation of Xingjing Wei Wu should not rigidly copy the currently listed e-sports companies. Given Xingjing Wei Wu's diversified development opening up growth space and stronger profitability than pure e-sports companies, Xingjing Wei Wu is expected to receive a higher valuation premium, which is relatively reasonable.

Can Xingjing Wei Wu, which is trying to tell a new story, impress the market funds that have been "heartbroken" by e-sports companies such as Astralis and Faze Clan? As the listing process of Xingjing Wei Wu progresses, the answer will gradually "come to light"