US Stock IPO Preview | Shield Technology: Revenue of about $4.9 million cannot conceal the decline in performance quality

In the first half of 2024, the global mobile gaming market is showing a clear trend of recovery. Despite a 4.5% year-on-year decline in global mobile game downloads, revenue has increased by 4.7% year-on-year. It is evident that although the dividend of traffic in the past few years is gradually disappearing, the monetization ability of existing players is continuously strengthening.

Against the backdrop of industry recovery, Pyro AI Inc., a holding company of Hong Kong-based mobile game developer Shield Technology Limited (hereinafter referred to as "Shield Technology"), officially submitted an IPO to the U.S. Securities and Exchange Commission (SEC) on July 24th, intending to use PYRO as the stock code and apply for listing on Nasdaq. The company initially submitted a confidential application to the SEC on January 17, 2024, with Guotai Securities being the sole bookrunner for this transaction.

The company plans to issue 2.25 million shares of stock at a price range of $4 to $5 per share, with the fundraising amount ranging from $9 million to $11.25 million. Based on the midpoint of the proposed price range, Shield Technology's market value will reach $110 million.

Authorized Games Account for Approximately 60% of Revenue

According to the prospectus, Shield Technology was established in 2020 and is mainly engaged in mobile game and online game development, including game design, programming, graphics, and distribution of the company's mobile games and online games on various platforms. The company's core products include proprietary game development, third-party game licensing, and software game development services. As of the end of 2023, the company's games include Abyss, Mascot, Mythical World, Gambling Platform, Poker, and seven licensed games.

As of December 31, 2023, Shield Technology had 63 experienced employees serving as producers, game designers, artists, game engine developers, and marketers. According to Frost & Sullivan data, the company ranked among the top five game developers in Hong Kong in terms of the number of developers in 2023.

For the fiscal years 2022, 2023 (fiscal year ending on June 30 each year), and the first six months of the 2024 fiscal year (ending on December 31, 2023), hereinafter referred to as the "reporting period," Shield Technology's revenues were $2.7847 million, $4.8647 million, and $2.9719 million respectively, with corresponding net profits of $0.1559 million, $0.9795 million, and $0.1134 million. Overall, the company's performance is showing a positive growth trend.

In terms of business segments, during the reporting period, revenue from software game development was approximately $0.0839 million, $1.27 million, and $0.181 million, accounting for approximately 3%, 26.1%, and 6.1% of total revenue respectively; revenue from proprietary games was approximately $0, $0.662 million, and $1.064 million, accounting for 0%, 13.6%, and 35.8% of total revenue respectively; revenue from licensed games was approximately $2.701 million, $2.934 million, and $1.726 million, accounting for approximately 97%, 60.3%, and 58.1% of total revenue respectively In short, authorized games are the revenue pillar of Shield Technology, accounting for nearly 60% of the company's revenue until the end of 2023.

It is worth mentioning that during the reporting period, the revenue from third-party authorized games was approximately 1.7 million yuan, 1.7 million yuan, and 2.9 million yuan, accounting for 88%, 57%, and 60% of total revenue, respectively. Shield Technology's revenue relies on third-party authorized games. If the license agreements of third-party game developers are terminated prematurely, it will severely affect its liquidity.

Furthermore, Shield Technology's revenue depends on a few popular games. By the end of 2023, the top five games contributed over 90% of the revenue. Relying solely on a few popular games has led to a declining proportion of paying users for the company. In the six months ending in 2022 and 2023, the proportion of paying users to players was approximately 9.6% and 6.83%, respectively.

Despite showing a growth trend in performance, Shield Technology's liquidity does not seem optimistic. In the six months ending in 2022 and 2023, the net cash flow from operating activities was approximately 1.557 million yuan and 990,000 yuan, respectively, showing a significant shrinkage; cash and cash equivalents were approximately 252,000 yuan and 107,000 yuan, respectively. Despite revenue growth, cash flow has contracted, indicating that its performance cash content is not high.

In addition, the overseas market is an important source of revenue for Shield Technology. In the six months ending in 2022 and 2023, game players outside Hong Kong contributed 25.4% of the total revenue to Shield Technology. Therefore, in the company's future plans, the international market is an important part of its development. From this perspective, this may be one of the reasons for its choice to list in the United States.

Will the Game Red Sea Market See New Opportunities?

Being in the saturated game market, Shield Technology's listing indicates that the industry still has new opportunities.

According to Gamma Data's "2023 China Game Industry Report," the actual sales revenue of the domestic game market in 2023 was 302.964 billion yuan, a year-on-year increase of 13.95%. According to the Game Working Committee, from January to June 2024, the actual sales revenue of the domestic game market was 147.267 billion yuan, a year-on-year increase of 2.08%; the number of game users was 674 million, a year-on-year increase of 0.88%. The market development tends to be stable and moderate.

At the same time, the game industry has found new growth and breakout points, one of which is mini-games. The mini-game market has been favored by game companies in the past two years, relying on the user base of domestic mobile games. The more convenient and faster mini-games have become the most prominent track, experiencing a 300% growth in 2023 Even the game company Juoliang Engine once estimated that the overall market size of small games in China will further increase in 2024, with an overall expectation exceeding 60 billion yuan.

Looking ahead, driven by key trends such as cloud gaming, the global mobile gaming market is expected to continue to grow strongly, with further geographical expansion in regions where AR/VR integration and the rapid growth in smartphone usage are taking place. With VR providing more immersive experiences on mobile devices, the industry's prospects remain very strong. The market size of the global mobile gaming development is projected to grow from $179.4 billion in 2023 to $269.2 billion in 2028, with a compound annual growth rate of approximately 8.1%.

Therefore, for many game companies like Shield Technology, there is still more "open source" space and incremental market opportunities. The prospectus shows that Shield Technology plans to complete and launch its platform in the first quarter of 2025 (calendar year), providing game players with its own games and high-quality games from other game companies, as well as interactive social media. In this IPO, Shield Technology is also mostly preparing funds for new business strategies, expecting to receive a net income of $7.9 million in this IPO, with 40% of the funds allocated to product development, including the construction of a proprietary game platform.

In conclusion, although Shield Technology's performance is showing a growth trend, it mainly relies on licensed games, and with a decrease in paying users in the case of relying on a few games, its growth momentum appears somewhat weak. However, the improvement in the industry environment will further enhance the bargaining space for its listing, which may help it achieve better investment expectations