TV Hitmaker Linmon Media to Go Public, But Will Its Finances Be a Turn-off?

Tencent-backed TV drama producer Linmon Media has been approved to list its shares on the Hong Kong Stock Exchange

Key Takeaways:

• The production company with a string of hit dramas to its name has been cleared to launch a Hong Kong IPO. Tech giant Tencent is a big client and holds nearly 20% of its shares
• The company’s earnings performance has been bumpy, with revenues falling in the past three years but surging in the first quarter of this year

By Lau Ming

China’s entertainment business is a vast but volatile market, with regulatory risks and fickle consumer tastes to contend with. Now the stage is set for a producer of popular TV dramas to list its shares, hoping to score a hit with investors.

The plot so far looks promising. Linmon Media Ltd. has quickly made a name for itself in the industry with TV dramas that got high ratings and raked in more than a hundred million yuan in revenue each. The production company also enjoys heavyweight backing from tech giant Tencent (0700.HK), which is both a major shareholder and one of its biggest clients.

Founded in Shanghai in 2014, Linmon Media has risen up the rankings of Chinese TV drama makers to reach fourth place last year in production revenue terms, according to data in the company’s preliminary prospectus.

The company, which recently passed hearings to list on the Hong Kong Stock Exchange, is involved in the cycle of TV drama production from investment and filming to distribution and advertising. It can boast an enviable success rate so far.

Six of the eight proprietary dramas it made from 2019 to 2021 ranked among the top 20 TV or Internet-streaming productions. It beats other top-five producers with its TV drama win rate: 75% percent of its productions achieved high ratings versus an average of nearly 46%.

The company scored hits with “A Love for Separation” in 2016 and “A Little Reunion” three years later, going on to launch a further two dramas in the series. The subsequent shows “A Little Dilemma” and “Xiaomin’s House” were also popular.

Linmon has proven itself to be capable of building on existing franchises while churning out new shows to keep audiences hooked.

Plot twist: revenue fluctuations

But those blockbuster TV dramas have not guaranteed a stable bottom line. A closer look at the company’s financial statements could be a turn-off for some risk-averse investors.

The company’s main revenue stream comes from licensing its productions to online video platforms or TV stations in exchange for royalties. Licensing revenue has slipped over the last three years, according to data quoted in the prospectus. It fell from 1.63 billion yuan ($240 million) in 2019 to 1.21 billion yuan a year later and 1.05 billion yuan last year. In that time, licensing’s share of overall revenue fell from 91% to just over 84%.

Over the same timeframe, net profit also fell more than 20% from 80.40 million yuan to 60.90 million yuan. The company blamed the drop on a smaller number of episodes licensed as well as relatively low licensing fees.

But in the first quarter of this year, revenue surged more than nine-fold to a whopping 470 million yuan, mostly due to the airing of two licensed dramas on other platforms. The extreme earnings volatility makes it hard for the market to assess the company’s business performance.

The big investments of time and money in TV production are recognized risks for producers. Even developing scripts and making initial preparations can take 18 to 24 months. With up to six months of shooting and post-production on top of that, the whole process can last as long as two to three years.

Taking custom-made dramas as an example, the fixed cost of producing each episode can reach 500,000 yuan to 5 million yuan, while an entire series of 40 episodes can run into the tens of millions or even hundreds of millions of yuan. Moreover, the longer the production time the greater the uncertainty about the outcome. Sudden changes in market trends, consumer preferences as well as laws and regulations can hurt ratings or even lead to shows being cancelled, inflicting heavy financial losses on the drama makers.

Over the past three years, the proportion of revenue from Internet-streamed dramas has been trending downwards. From 77% in 2019, it fell to around 74% a year later and then dipped to just under 69% last year.

Linmon Media relies on Tencent as its major client. It is not only licenses shows to Tencent’s video platform but also makes commissioned shows in which the tech platform provides the IP – a copyright-protected idea or creative work – while Linmon Media handles the production.

In fact, Tencent’s revenue contribution is on the rise, growing from under 5% in 2019 to nearly 17% last year. And Tencent is also its biggest strategic investor, giving financial backing the year after the company was founded and now holding just under 20% of total shares.

Linmon Media can point to the Tencent links and its own proprietary IPs as business advantages, but it also faces challenges in a maturing industry with a low level of market concentration.

The Chinese TV production market grew at a meager annual rate of only 2.9% from 2017 to 2021 and is expected to expand only incrementally in the next five years, according to market research. Although Linmon Media ranks among China’s top four TV producers, its market share is a mere 2.5%. The top five TV production companies combined only control around 18% of the market, highlighting the intense competition in the industry.

Risk of resting on laurels

Licensing fees from new dramas are more lucrative than for productions that have been aired before, so the company needs to keep churning out fresh works to keep revenues flowing.

Although established franchises can have enduring appeal, audiences could tire of familiar storylines and switch their attention elsewhere.

But efforts to initiate new projects carry the risk that, in the event of a flop, clients may be less likely to keep faith with Linmon. That could create a vicious cycle in which the company struggles to attract funding, production quality slips, the chances of a ratings failure increase, and the company struggles to maintain investor confidence.

Linmon Media is already trying to diversify revenue sources and tap new growth opportunities. For example, it is providing customers with services including overseas distribution, product advertising within its dramas, and IP licensing for works derived from copyrighted material. But the success of these tactics still hinges on the popularity of its original shows. So, it has yet to find a way to fundamentally diversify and mitigate business risks.

On the plus side, the company has many projects in the pipeline: 29 in either the script-development or early-preparation stage, two in the shooting or post-production process and two about to be screened. Ten of these projects have already been sold and are scheduled to be aired within the next four years. Thus, the company looks set to maintain financial flows for quite some time.

One of the company’s peers, Strawbear Entertainment Group (2125.HK), can be used as a benchmark to estimate Linmon Media’s potential IPO valuation. Strawbear Entertainment went public in Hong Kong in 2021. It finished shooting eight productions last year and turned a net profit of 169 million yuan, giving a price-to-earnings (P/E) ratio of eight times.

On a comparative basis, the IPO valuation of Linmon Media would amount to only around 580 million yuan. To top this estimate, the company may need to provide investors with a compelling narrative for predictable growth with few adverse plot twists.

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