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Canxing’s Road to IPO Canxing has a very hard time going public, and here's why.

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admin 2021-03-02 Collect

After three years, Canxing Media still hasn’t gone public.

 

On February 2nd, the Shenzhen Stock Exchange rejected Canxing Media’s request to go public on ChiNext, the NASDAQ-style subsidiary of the Shenzhen Stock Exchange. 

 

On February 4th, Canxing told China Securities Journal that it will adjust its IPO plans and reapply as soon as possible. 

 

According to the Shenzhen Stock Exchange, Canxing received a lot of questions about its complicated structure, goodwill amortization and pending legal cases. And these longstanding problems of Canxing also concern the investors.

 

The prospectus shows that from Financial Year 2015 to 2020, Canxing Media’s operating income was 2.462 billion yuan, 2.706 billion yuan, 2.058 billion yuan, 1.653 billion yuan, 1.733 billion yuan, and 873 million yuan. After peaking in 2016, Canxing’s profitability fell off the cliff. 

 

Canxing’s operating income in the first three quarters of 2020 fell 29.9% year-over-year and net profit decreased 43.52% year-over-year. Although the impact of the coronavirus pandemic is a big factor, Canxing’s performance in 2020 was still worrisome. 

 

In addition to financial performance, Canxing is also suffering from operational difficulties such as The Voice of China ratings falling, copyright infringement cases, goodwill impairment and the coronavirus pandemic, etc. 

 

Canxing’s Road to IPO

 

Canxing made an IPO plan as early as 2014. Canxing originally planned to IPO in Hong Kong following its parent company STAR Group Limited and its brother-sister corporation Mengxiangqiangyin planned to go public on the A-share market. However, due to a major adjustment of the equity structure of Star Media, Canxing Media’s IPO plan was suspended.

 

In 2016, Canxing completed the equity restructuring. In December 2017, Canxing completed Pre-IPO round of financing with a valuation of 21 billion yuan. 

 

In February 2018, Canxing began to prepare for listing on ChiNext, and submitted IPO auxiliary filing materials to the Shanghai Securities Regulatory Commission. In June 2018, Canxing completed the latest round of financing and raised 200 million yuan and 160 million yuan from Hangzhou Alibaba Venture Capital Management Co., Ltd. and Tibet Qiming Music Co., Ltd, respectively.  The former is a venture capital company owned by Alibaba, while the latter is an affiliate of Tencent Music.

 

Despite the backing of Tencent and Alibaba, Canxing Media’s first IPO still failed to materialize. In December 2018, Canxing Culture completed IPO counseling and submitted a prospectus to the China Securities Regulatory Commission, but failed to pass the review.

 

In May 2020, Canxing submitted a prospectus for the second time, getting ready to go public on the Shenzhen Stock Exchange. However, on September 15th 2020, Canxing withdrew the application to update some financial information. 

 

On July 22, 2020, November 3rd 2020 and January 22nd, 2021, Canxing submitted prospectus three times to the Shenzhen Stock Exchange. And Canxing still failed to pass the review after five attempts. 

 

Why can’t Canxing pass the IPO review?

 

Firstly, its shareholder structure is too complex.

 

On February 4th, China Media Capital, one of the shareholders of Canxing Media, asserted that Canxing failed IPO mainly due to complicated ownership structure, not because it has any questionable operation issues or unsatisfactory financial performance.

 

Canxing Media was originally a company set up by STAR Group Limited, a subsidiary of News Corp, to enter the Mainland China market. In 2010, Chinese Media Capital acquired 53% equity in STAR Group Limited and set up a joint venture with News Corp. In 2014, News Corp exited the joint venture and Chinese Media Capital took over.

 

Other than the set up of the company, Canxing’s many corporate shareholders and celebrity shareholders have complicated ownership relationships to each other, making it very hard for the authorities to make sense of it. 

 

In addition to the complex shareholder structure, the risk of large goodwill impairment is also a problem that cannot be ignored.

 

Mengxiangqiangyin was founded in 2012. Its main business is music production, licensing, merchandise development and operation, live event promotion, and artist management. Shenzhen Stock Exhange listed A-share company Zhefu Holdings had acquired 40% equity for a price of 840 million yuan. 

 

In March 2016, Canxing Media acquired 100% equity of Mengxiangqiangyin for 2.08 billion yuan. Canxing said that Mengxiangqiangyin’s operations have a lot of synergy with its own existing business, so this transaction will help Canxing beat competition, diversify its business and enhance its advantage. 

 

And at that time Mengxiangqiangyin only had 112 million yuan in net assets, so Canxing paid 1.968 billion yuan in goodwill.  In April 2020, Canxing retrospective adjusted its goodwill from 1.968 billion yuan to 1.635 billion yuan. At the end of June 2020, the total net assets of Canxing Media is only 3.779 billion yuan.

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From the acquisition in 2016 to 2019, Canxing Media never made a goodwill impairment adjustment. The IPO Committee questioned Canxing why they didn’t adjust the goodwill on the 9th IPO review meeting. Canxing responded that from 2016 to 2019 Mengxiangqiangyin’s net profit were 146,246,100 yuan, 163,209,400 yuan, 177,016,300 yuan, 182,398,500 yuan, with a compound growth rate of 7.64%, so the value of the company had significantly increased since the acquisition.

 

In addition, Canxing claims that the business structure of Mengxiangqiangyin had also been optimized in recent years. The percentage of non-copyright-licensing businesses such as artist management and live entertainment has been reduced from 35.79% to 21.46%. At the same time, the licensing businesses with a gross profit margin of around 80% are doing well, and the music copyright licensing market price continues to rise, which is very good news to Mengxiangqiangyin.

 

In 2019, Mengxiangqiangyin ramped up its copyright protection effort in karaokes which resulted in a karaoke licensing revenue of 5,043,300 RMB and expected this area to continue to grow. The company’s online music training platform also added a strong revenue stream for the company.  

 

However, with all of the good news, Canxing still expects net profit of 2020 financial year will be lower than that of 2019 and the profitability to be lower than 14.73% which was estimated in 2019. 

 

Thirdly, there are some potential legal liabilities.

 

Canxing Media has two major businesses, variety show production and operation, and music production and licensing. Copyright issues made Canxing’s road to IPO very rocky. 

 

In June 2016, Zhejiang Talent Television & Film Co., Ltd(唐德影视) filed a lawsuit against Canxing for unlawfully using the name “The Voice of China”. The lawsuit resulted in The Voice of China series changing its name. The lawsuit was later settled outside of court.

 

In September 2019, Canxing’s variety show Let’s Band featured a cover of NeZha’s song and a member of the band NeZha issue a statement on Weibo to ask the production team of the show to stop the infringement. The clip of the cover song was deleted from the show later. 

 

The most recent infringement case was a lawsuit filed by the South Korean TV network MBC that produced the original version of King of Masked Singer against Canxing Media in Shanghai in July 2020, claiming a total of more than 150 million yuan in licensing fees, distribution shares, liquidated damages, and late fees.

 

As the copyright holder of the show, MBC believes that Canxing is in breach of the licensing contract of the two shows, King of Masked Singer and Infinite Challenge. Since the licensing  of these two shows in 2015, Canxing has produced and broadcast a total of six shows that are similar to the two shows licensed from MBC. 

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Canxing Media’s latest prospectus indicated that there is a risk  company may infringe on the intellectual property rights in its production, including using video content produced by others in its programs, using music composed by others as the soundtrack of the programs, and having covers of songs composed by others in its programs. Even with a license, there is still a risk of infringement of third party intellectual property rights.

 

Variety Show Market Is Changing

 

Founded in March 2006, Canxing Media have produced many well-known variety shows like The Voice of China, Masked Singer, China’s Got Talent and Street Dance of China. It is one of the few professional variety show production companies with the ability to produce large-scale variety shows and continue to launch excellent programs.

 

From 2017-2019, Canxing produced 9, 6 and 9 variety shows respectively. And for the year of 2020, Canxing Media produced a total of 11 programs, reaching the highest level of production volume and market share in history. In 2021, there are 14 programs expected to be produced and broadcasted. 

 

Traditional TV network is Canxing’s main program placement partner, however, the continuous growth of internet variety shows in recent years has encroached the market share of TV variety shows, and even surpassed them in terms of influence and popularity.

 

According to the Tencent Entertainment White Paper, the number of TV variety shows from 2017 to 2019 were 106, 93, 79, and the number of internet variety shows from 2017 to 2019 were 113, 124, 105, respectively. The number of internet variety shows have been larger than TV variety shows in recent years.

 

The decline in market share of TV variety shows has had an impact on Canxing’s performance. The Voice of China 2020’s rating was 2.476%, less than half of The Voice of China Season 4 (5.308%) that broadcasted a few years ago. 

 

Canxing Media has made a series of adjustments to transition into the internet variety field. 

 

In 2018, Canxing’s Street Dance of China was launched on Youku and became a huge success. The first season of the show has a 8.7 Douban rating, which was really high, and received a total sponsorship of nearly 600 million yuan. The second and third seasons also received 8.8 and 8.5 points on Douban. The show was also licensed to be broadcasted outside of China, becoming the first Chinese internet variety show to “go overseas”. 

 

After that, Canxing collaborated with iQiyi, Youku, Tencent Video and other video streaming platforms, and successively put out some well received shows like Rave Now and Let’s Band

 

However, despite the success of multiple internet variety shows, The Voice of China series still account for a high percentage of the Company’s revenue right now. From 2017 to 2019, the percentage of revenue generated from the two programs are 32.33%, 32.96% and 26.67%, respectively.

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The high reliance on a single program poses risk in the operation of the company.

 

With the competition from rising internet variety show production companies like MEWE Media and YinheKuyu Media, Canxing’s slightly “old” style of production risks losing its audiences.

 

After another unsuccessful try for IPO, Canxing Media said that it will reevaluate and reapply. 

 

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