U.S. Stock IPO Outlook | With declining performance + existing shareholders looking to cash out, how will CTRL Group get investors to buy in?

Among the new stocks listed in the U.S., there are a few companies that experience the situation of existing shareholders selling shares during the IPO, meaning that existing shareholders cash out directly upon listing. The stock price performance of such companies after the IPO is often unsatisfactory, as the underlying logic is that if existing shareholders lack confidence in the company's future development, the market will also be more cautious.

Currently, among the companies going public in the U.S., there is one company that has arranged for existing shareholders to sell shares, which is CTRL Group. According to Zhitong Finance APP, CTRL Group, which focuses on promoting mobile games in the Hong Kong market, submitted its public prospectus to the SEC for the first time on March 15, 2024, and subsequently updated its prospectus as many as six times, continuously pushing forward its IPO process.

According to the prospectus, CTRL Group is applying to list on NASDAQ under the code "MCTR," intending to issue 2 million shares of common stock at a price of $4 to $5 per share, aiming to raise up to $10 million. Meanwhile, selling shareholders will sell 1.75 million shares of common stock in this IPO, and CTRL Group will not receive any proceeds from this sale.

The cashing out by selling shareholders will undoubtedly dampen market sentiment towards CTRL Group, and from a performance perspective, CTRL Group's results are also disappointing. Data shows that CTRL Group's revenue for the fiscal year 2024 (12 months ending March 31) was HKD 40.6549 million, a year-on-year decline of 14.5%, with a net profit of HKD 1.8997 million, down 30.5% year-on-year.

The combination of existing shareholders cashing out and a significant decline in performance makes the stock price performance of CTRL Group after listing difficult to be optimistic about.

Gross Margin Recovery Cannot Offset Significant Decline in Net Profit

CTRL Group is a comprehensive marketing and advertising service provider based in Hong Kong, focusing on providing advertising marketing services for mobile game developers in mainland China in the Hong Kong market. According to the prospectus, CTRL Group's entire advertising process can provide clients with one-stop advertising services, including planning, creation, placement, management, and performance monitoring of advertisements.

CTRL Group can develop advertising plans for clients based on the characteristics of their mobile games and market conditions, while also referencing popular trends in similar advertising designs. Based on the advertising plan, CTRL Group formulates an overall marketing concept and strategy for promoting mobile games, tailoring innovative themed advertising campaigns to attract the attention of target audiences and maximize advertising exposure and display volume.

It is worth noting that CTRL Group has an internal design and production team responsible for the artistic and design aspects of various advertising materials, including video, animation, and digital content such as photos. CTRL Group is directly involved in concept development, storyboard creation, script writing, casting, filming, and post-production work.

In addition to providing mainstream advertising services, CTRL Group also offers other value-added services during the advertising placement process, including creative design of advertising themes and content, localization of advertising materials, social media management services, post-publication advertising effect monitoring, custom cosplay costumes for mobile game virtual characters, and consulting on the latest market trends and fashions From the perspective of revenue structure, CTRL Group mainly provides four categories of services to clients: online advertising, offline advertising and web banner marketing, strategic planning services, and other services. In the fiscal year 2024, the revenue proportions of these four services were 35.94%, 55.58%, 1.63%, and 6.86%, respectively. Clearly, advertising is the core business of CTRL Group, with the combined revenue from online and offline advertising accounting for over 90%.

The 14.5% decline in revenue for the fiscal year 2024 was mainly due to two reasons. First, online advertising revenue plummeted by 44.2% year-on-year to HKD 14.6094 million, as most of CTRL Group's clients allocated a larger proportion of their advertising budgets to offline media after the impact of the pandemic subsided, leading to a significant drop in online advertising revenue. Second, revenue from strategic planning services fell sharply by 68.7% year-on-year, due to a decrease in the number of mobile game applications seeking such services, and some clients decided not to renew service contracts after they expired, opting instead to continue cooperation based on one-time advertising packages.

After the significant decline in revenue from online advertising and strategic planning services, even though offline advertising and web banner marketing revenue grew by 26.3% and other services revenue surged by 104.8%, it still could not prevent the overall revenue decline of CTRL Group. While this is somewhat related to changes in service channels driven by client demand, the core reason may be the overall decline in market demand.

However, due to the decrease in the proportion of low-margin online advertising revenue and the increase in the proportion of relatively high-margin offline advertising revenue, CTRL Group's gross profit margin improved to 22.5% in the fiscal year 2024, an increase of 2.5 percentage points compared to the fiscal year 2023. This reduced the decline in gross profit to 3.6%, which is much smaller than the revenue decline. Additionally, due to a 7.2% reduction in operating expenses, CTRL Group's operating income grew by 4.9% in the fiscal year 2024.

Therefore, one of the key reasons affecting the release of CTRL Group's net profit is the significant decline in other income. In the fiscal year 2023, CTRL Group recorded other income of HKD 667,700, but entering the fiscal year 2024, due to a reduction in government subsidies, foreign exchange gains and losses, and a significant increase in interest expenses, CTRL Group reported other income of -HKD 383,900 during the reporting period.

From the balance sheet perspective, CTRL Group's total assets for the fiscal year 2024 were HKD 16.245 million, total liabilities were HKD 13.5248 million, and the debt-to-asset ratio was 83.26%, which is relatively high. Among the company's total liabilities, the total amount of short-term and long-term loans from banks was HKD 9 million, accounting for 66.54% of the company's total liabilities, which is also the reason for the significant increase in CTRL Group's interest expenses in the fiscal year 2024 It is worth noting that in the fiscal year 2024, CTRL Group distributed a total of HKD 3 million in dividends to shareholders registered as of March 31, 2023, and the distribution was made on May 16.

Short-term Development Plans May Be Difficult to Achieve Results

From an industry perspective, the game advertising market in Hong Kong is expected to continue growing in the coming years. According to an independent industry market research report by the London-based research company Euromonitor International, as the impact of the pandemic diminishes, the entertainment and media advertising industry in Hong Kong will gradually recover with the increase in consumer activities. It is projected that the revenue of Hong Kong's advertising industry will grow from HKD 29.8 billion in 2022 to HKD 39.6 billion in 2027, with a five-year cumulative compound annual growth rate of 7.3%.

Specifically, in the gaming segment, the growth of the mobile game market in Hong Kong and the overseas expansion of domestic mobile game developers will drive the development of the game advertising market. According to a research report by CITIC Securities, the revenue of Chinese mobile games in the international market has increased from HKD 20.6 billion in 2015 to HKD 136.2 billion in 2022. Furthermore, the "2024 China Game Overseas Research Report" indicates that the actual sales revenue of independently developed Chinese games in overseas markets reached USD 18.557 billion in 2024, a year-on-year increase of 13.39%. This growth trend is expected to continue in the coming years.

To seize future development opportunities in the industry, CTRL Group has detailed its future development plans in its prospectus. One is to expand into the Asian game advertising market, extending its one-stop advertising services to Southeast Asian markets (such as Taiwan, Malaysia, and Singapore). The company will comprehensively consider factors such as potential customer groups, cultural differences among advertising audiences, and advertising methods to develop overseas markets.

Secondly, CTRL Group aims to become a mobile game operator. The company's management stated that, given their in-depth understanding of mobile games, the experience accumulated from mobile game operator clients, and their involvement in the advertising process, the company has the capability to become a mobile game operator to capture the mobile game market. However, as of now, CTRL Group has not established contact with any potential mobile game projects or publishers.

From CTRL Group's future development plans, it is clear that it has identified the constraints to its growth. In fact, the competition in the Hong Kong game advertising market is very fierce, and the total market size is relatively limited. The entire advertising industry in Hong Kong was less than HKD 30 billion in 2022, and the market size for game advertising will be even smaller.

In such a market environment, focusing solely on the Hong Kong market makes it difficult to achieve breakthrough development. This is also the reason why domestic games have become a trend in recent years, while CTRL Group has not achieved rapid development by sticking to the Hong Kong market. Therefore, the company plans to expand into the Southeast Asian market. However, it should also be recognized that whether expanding into the Southeast Asian market or moving towards becoming a mobile game operator, although there is some business synergy, there remains significant uncertainty regarding effective development, and it is indeed difficult to see immediate results in the short term.

Based on this, if CTRL Group rushes to IPO solely relying on its current declining fundamentals and the posture of shareholders cashing out upon listing, the future performance of its stock price post-listing may be self-evident