Analysis of New Stocks in the US Stock Market | A 38% Reduction in Xuhang Holdings' Marketing Team Due to the Loss of Small and Medium-sized Clients Leading to a Slowdown in Performance, What Signal Does It Send?

Sunh Holdings (SUNH.US) may face a cold reception in its U.S. listing, with its IPO fundraising amount being reduced.

As early as March 31, 2023, when Sunh Holdings submitted its initial public offering (IPO) application to the SEC, it planned to raise up to $92 million; subsequent market reports indicated that Sunh Holdings would issue 3.75 million common shares at a price of $4-6, raising up to $22.5 million.

However, in the latest version of the prospectus, Sunh Holdings' fundraising amount has been significantly reduced. On July 1, Sunh Holdings submitted its F-1/A document to the SEC for the fourth time. According to the document, Sunh will issue 2.5 million common shares in this IPO at a price of $4-5, raising up to $12.5 million.

Sunh Holdings is a content-driven marketing services provider, with as of December 31, 2023, a total of 524 self-owned accounts and 180 cooperative accounts in its new media account resources, covering approximately 100 million internet users.

However, in terms of performance, Sunh Holdings' development in 2023 was not ideal. According to the prospectus, in 2023, Sunh Holdings' revenue was 415 million RMB, a year-on-year decrease of 13.1%, and the net profit for the period was 55.465 million RMB, a year-on-year decrease of 20.5%, showing a decline in both revenue and net profit.

A deeper analysis of Sunh Holdings' prospectus may help understand why the fundraising amount was reduced.

Key to Performance Decline: Loss of Small and Medium-Sized Customers

Established in 2014, Sunh started with traditional digital advertising, by publishing customers' product or service ads through the company's digital advertising channels, mainly composed of applications embedding Sunh's SDK.

By 2017, to meet the growing demand of marketers in the new media field for social, entertainment, and fashion marketing content, Sunh launched comprehensive new media content marketing services and developed two business models, S2B and S2P.

Specifically, the S2B model involves developing marketing plans, creating marketing content, and organizing related online and offline activities according to customer needs. The S2P model refers to the company editing and producing short videos from authorized TV dramas, movies, and variety shows, and placing them on short video platforms to provide online traffic services for large internet media platforms.

As of now, Sunh Holdings' main business is digital advertising and new media comprehensive content marketing services. According to the prospectus, from 2020 to 2023, the revenue share of Sunh Holdings' digital advertising services decreased significantly from 53.6%, 22.6%, 13.3%, to 17.2%, while the revenue share of new media content marketing services rapidly increased from 46.4% in 2020 to 86.7% in 2022, indicating that Sunh Holdings has seized the trend of new media From the perspective of performance, from 2020 to 2023, Xuhang Holdings' revenue was RMB 351 million, 471 million, 478 million, and 415 million respectively, with net profits of RMB 44.719 million, 69.246 million, 69.81 million, and 55.465 million during the same period. The trend of performance changes shows a clear positive correlation with the proportion of revenue from new media content marketing services, indicating that Xuhang Holdings' revenue growth is driven by new media content marketing services.

Data shows that from 2020 to 2022, Xuhang's digital advertising service revenue was 188 million RMB, 106 million, and 63.418 million respectively, showing a rapid decline, which is due to the company's strategic shift towards new media content marketing services. Meanwhile, the revenue from new media content marketing services during the same period was 163 million, 365 million, and 414 million, with rapid growth attributed to Xuhang's acquisition of Hangzhou Xingkong Internet Culture Communication Co., Ltd. in 2021. The integration of this business led to sustained growth, resulting in the company's overall gross profit margin increasing to 36.8% in 2022, compared to an average of 30% in 2020 and 2021.

However, in 2023, Xuhang's growth came to a halt, with its revenue declining by 13.1% to 415 million RMB during the reporting period. This was mainly due to a 17% decline in revenue from new media content marketing services as a result of a decrease in the number of small and medium-sized clients. Even though the digital advertising business recorded a 12.5% year-on-year revenue growth due to the addition of two clients, it was unable to offset the overall revenue decline.

Although Xuhang's gross profit margin remained stable at 36% in 2023, and operating expenses were reduced with the business scale, the net profit for the period still decreased by 20.5% to 55.465 million RMB.

From the above analysis, it is evident that Xuhang Holdings has capitalized on the trend of new media, achieving rapid growth through the external acquisition and integration of new media content marketing services. However, with a significant proportion of small and medium-sized clients, the sustained economic downturn has put pressure on the operations of these enterprises, leading to the loss of Xuhang Holdings' small and medium-sized clients and affecting the company's business development. This is also the reason why the revenue declined while the gross profit margin remained stable, as the lost small and medium-sized clients had relatively lower profit margins.

Market competition continues to intensify, exposing potential risks from imbalanced customer structure

From an industry perspective, as professional integrated marketing service providers typically draft specialized marketing and communication plans and use direct or indirect media to help brands or companies create and maintain a positive image and strong relationships with target audiences, more and more brands or companies are inclined to obtain professional integrated marketing services to build a positive social reputation and promote products and services. This has led to sustained growth in the Chinese integrated marketing market According to the Frost & Sullivan report, the market size of China's integrated marketing industry has increased from approximately RMB 971.6 billion in 2019 to approximately RMB 1,538.1 billion in 2023, with a compound annual growth rate of about 12.2%. It is expected to further increase to approximately RMB 2,471.2 billion by 2028, with a compound annual growth rate of about 9.9%.

In integrated marketing, digital marketing plays a crucial role, occupying the largest market share, accounting for approximately 82.5% in 2023. Compared to other types of integrated marketing services, digital marketing has the most rapid growth momentum. Its market size grew at an astonishing compound annual growth rate of about 18.0% from 2019 to 2023. It is projected that by 2028, the market size of digital marketing will reach approximately RMB 215 billion, with a compound annual growth rate of about 11.1% from 2023 to 2028.

It can be seen that the growth of the integrated marketing market is mainly driven by digital marketing, with short video marketing, social media marketing, ad inventory buying, and KOL marketing becoming the main methods of digital marketing. Xuhang Holdings has seized the new trend of digital marketing, with over 700 diversified self-media accounts on multiple media platforms, covering approximately 100 million fans. Among them, there are approximately 40.88 million fans on Douyin, 34.77 million fans on Baidu Baijiahao, 12.23 million fans on Kwai, 4.61 million fans on WeChat Official Accounts, and approximately 7.33 million fans from other internet media and e-commerce platforms, including Toutiao, Dayu, Bilibili, and Penguin FM.

By reaching a large number of fans through diversified self-media platforms, Xuhang Holdings will benefit from the continuous development of the digital marketing industry. However, investors should be aware that Xuhang Holdings will also face numerous potential challenges in its future operations.

Firstly, the development of the marketing market exhibits obvious cyclicality, highly correlated with macroeconomic fluctuations, which directly affects the operational performance of market players in the industry. Taking Xuhang Holdings in 2023 as an example, the key reason for its performance decline was the loss of clients due to the soft macroeconomic environment in the new media comprehensive content marketing services. If the economy fails to stabilize, companies may continue to reduce marketing expenses, which could impact the operations of Xuhang Holdings.

Secondly, the client structure of Xuhang Holdings may not be robust enough. Compared to small and medium-sized clients, large clients have high stability and payment capabilities, making them the most desirable client type for advertising service providers. If the proportion of large clients is high, the performance and profitability of advertising service providers will also be relatively stable. In 2023, when the advertising industry significantly recovered from the impact of the epidemic, Xuhang Holdings experienced a loss of small and medium-sized clients leading to a decline in performance, contrary to the trend of China's internet advertising market growing by 12.66% year-on-year to RMB 573.2 billion in 2023 This may indicate that Xuhang Holdings has a relatively high proportion of small and medium-sized enterprise clients, making the company's business operations appear more "fragile" when facing macroeconomic fluctuations.

In addition, Xuhang Holdings' marketing team has been significantly reduced. According to the prospectus, in 2022 and 2023, the number of marketing personnel at Xuhang Holdings was 1002 and 618 respectively, with a significant 38% reduction in marketing personnel in 2023. This is not a good sign.

Generally, the increase or decrease of sales and marketing personnel is a leading indicator of business expansion or contraction. When a company expands its business, it will increase the construction of the marketing team. When the marketing team is significantly reduced, it indicates that the company's outlook for future development has shifted from optimistic to conservative. This may be directly related to the high proportion of small clients in the company, as reducing the team may be one of Xuhang Holdings' ways to manage risks by serving medium to large clients.

At the same time, potential risks from media channels are also worth investors' attention. Users of short video platforms may have noticed that accounts that violate platform rules are not uncommonly banned or restricted, which requires Xuhang Holdings' content team to have a high level of risk awareness to ensure account security. Although Xuhang Holdings covers a diverse range of platforms and has over 700 self-media accounts to diversify risks from channels, from existing cases, a large number of fans are actually concentrated on a few top accounts. Therefore, if there are issues with these top accounts, it may affect the company's operations. In the future, there may be a possibility of increasing traffic costs on short video channels, which is also worth investors' attention.

Furthermore, there may be intensifying industry competition. The market share of the integrated marketing industry is mainly concentrated in the hands of a few top players. According to Frost & Sullivan's statistics, in 2020, the top five players held over 50% of the market share, and by 2023, the market share of the top five players had risen to 62.1%.

Obviously, the market share continues to concentrate towards the top players, which will inevitably lead to fierce competition among small and medium players. With the continuous popularity of short video platforms, more and more players are entering this arena. If future market competition intensifies, there may be a possibility of price wars, thereby affecting the company's profitability.

In summary, Xuhang Holdings has seized the trend of new media, achieved continuous growth through the synergistic integration of acquired targets, but due to the relatively high proportion of small and medium-sized clients leading to weaker risk resistance, there was a decline in performance in 2023. The company also significantly reduced its marketing team, signaling a more conservative approach. In the future, the industry's continued growth will benefit Xuhang, but the company will also face several potential challenges such as unstable customer structure, clearance of small clients, risks from media channels, and intensifying competition