Tencent-Backed Soulgate Seeks to Get Its Groove on With Hong Kong IPO

Operator of China’s metaverse social media dating app Soul files for listing less than a month after finally ditching a year-long suspended plan for an IPO on the Nasdaq

Key Takeaways:

• Soulgate has seen revenue soar in recent years as user numbers on its Soul app have exploded, with Generation Z making up the bulk of users
• Net losses have ballooned as the company burns through cash in a bid to expand its user base and further refine its AI-driven algorithms

By Emily Chan

Tencent-backed (0700. HK) Soulgate Inc., the operator of the eponymous metaverse social networking app Soul, is finally looking to get its fund-raising groove on by applying for an IPO in Hong Kong, a month after dropping a year-long suspended plan for a more than $250 million listing on New York’s Nasdaq.

However, whether it can generate that magic spark with investors remains to be seen after posting widening net losses as it burns through cash on marketing to attract more users and develop new technology.

Much like love at first sight, on the surface Soulgate has plenty of eye-catching appeal for investors. As China’s first metaverse-based social networking platform, where all users interact via avatars with virtual identities, Soul has become very popular among Generation Z users, or those born between the mid-1990s and 2010.

And although it strenuously denies being a dating app, it is generally described as thus, a reputation that certainly has helped boost its appeal.

The metaverse, a highly immersive virtual reality, is one of the most imaginative evolutions of social media platforms. Launched in 2016, Soul’s self-developed AI algorithm enables users to find like-minded people and a wide range of community and gamification functions, which have been particularly appealing to the younger generation.

In addition, user privacy is well-protected, with participants not required to disclose their real names, locations or age, nor upload personal data and pictures, negating the risk of exposing their true identity. All of this this has translated into strong user and revenue growth.

Soulgate’s revenue skyrocketed to 1.28 billion yuan ($191 million) in 2021 from 70.7 million yuan in 2019, of which value-added services were 1.20 billion yuan, accounting for 93.9% of the total. Gross margins have also jumped to 85.2% from 48.6% in the same period.

Soul’s value-added services include sales of virtual products and member subscriptions that reward users with various time limited privileges. Users can also spend the virtual currency, Soul Coins, to buy virtual items and membership privileges, including special avatars, virtual gifts and increased recommendation opportunities.

Last year, Soul’s monthly active users (MAU) and average daily active users (DAU) were 31.6 million and 9.3 million, respectively, representing a year-on-year increase of 51.6% and 55.8%. Of the MAUs, a whopping 74.9% were from Generation Z. Each DAU spends about 45.3 minutes a day on the app, bringing the monthly average three-month user retention rate to as high as 79.1%.

And in the past three years, the number of average monthly paying users was 268,900, 929,300 and 1.7 million, respectively, and the monthly average income from each paying user was 21.9 yuan ($3.26), 43.5 yuan and 60.5 yuan, respectively.

It was this heady rush of early success and promise of more ahead that prompted it to apply to the U.S. Securities and Exchange Commission to sell its shares on the Nasdaq, only for it to suspend that plan a year ago in deference to alternative funding options. Finally, it ditched the plan completely early last month.

The June 30 filing for a Hong Kong IPO therefore has drawn much attention from investors for its ambition to be the first metaverse stock to be listed in the financial hub. The interest in the listing might also have something to do with the backing of Soulgate’s biggest shareholder, tech industry bellwether Tencent, which owns 49.9% of its stock.

Strong revenue, but net losses mount

However, while investors may be impressed by the strong revenue growth and explosion in user numbers, they might also be warily eying how losses have expanded by 274% from 353 million yuan in 2019 to 1.32 billion yuan last year.

Besides changes in the carrying amount of redeemable shares and financial liabilities for redemption obligations that ballooned to 277.9 million yuan in 2021 from 49.2 million yuan in 2019, Soulgate attributes the losses to heavy investment in marketing and brands, and the R&D costs of developing new ways for users to interact.

Take last year as an example. Sales and marketing expenditure, mainly on advertising and promotion, climbed to a massive 1.51 billion yuan, more than double the 621.5 million yuan in 2020 and up from 204.4 million yuan in 2019. Spending on R&D for new technology increased to 414.9 million yuan in 2021, up 122% from 187.2 million yuan in 2020.

That said, burning through cash to strengthen brand awareness and attract users is very common among start-up social media platforms. And investment in technology is crucial for Soul, whose metaverse is still in its infancy with the algorithm for analyzing user interaction and behavior requiring constant updates and refinement to help retain existing users and attract new ones.

Thus, diversified monetization channels are Soulgate’s only chance to improve its balance sheet.

Pursuant of this goal, Soul began to offer open platform capabilities in 2020, such as providing advertising services. Brands can promote themselves through advertising on the app and provide exclusive discounts or limited edition products to individual users who have bought value-added services.

Thanks to Soul’s active user ecosystem, a number of high-quality content creators have emerged on its platform. The Soul Super Real (SSR) authentication mechanism for high-quality content creators was launched in early 2020. This covers nearly 30 fields, such as music, photography and painting, serving as a bridge between brands and the SSR and playing matchmaker between customers for cooperation on marketing.

Soul also launched “Giftmoji,” an e-commerce platform that allows users to send physical gifts to each other in the first quarter of 2021, successfully attracting a number of young brands. Giftmoji not only generates fees, but also connects virtual reality to the real world, opening up new possibilities for the monetization of products on social media.

These measures, although still novel to social platforms, could help address the excessive concentration of Soulgate’s revenue sources over time.

One intriguing point worth noting is that despite many of its 32 million users flocking to the app to find a romantic partner, Soulgate goes to pains in its prospectus to point out that is a “misconception,” and one that ultimately could negatively impact its business.

It said “…our ability to attract users from our target user demographics may be severely hindered, and some of our existing users may start spending less time on or even be driven away from our mobile app due to them being connected with romance-seeking users that go against our goal and philosophy.”

Still, it seems that love is finding a way to draw users to Soulgate’s platform, regardless of its virtuous intent to create a “wholesome environment.”

Although Soulgate has not yet released the details of its offering, we can still estimate its valuation using an industry average price-to-sales (P/S) ratio of about 7.5 as the basis for calculation. This produces a market valuation of up to HK $11.2 billion ($1.44 billion), which is similar to the projected valuation when it planned to issue American Depositary Shares (ADSs) last year.

This compares to the P/S ratio of metaverse concept pioneer and owner of behemoth Facebook, Meta (META.US) of about 4.0, while that of Roblox (RBLX.US) and Matterport (MTTR.US) are 11.6 and 10.7, respectively.

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