Video-Minded Vobile Nears Major Purchase to Boost Growing China Business

Video monetization and copyright protection specialist’s revenue could rise 50% with its new $127 million purchase of Hangzhou-based Particle Technology

Key Takeaways:

• Video services company Vobile said it has secured funding for its $127 million purchase of China-based Particle Technology
• Company’s stock trades at a premium to peers due to its strong profitability and deepening focus on the fast-growing China market

By Christina Meng

China’s ongoing regulatory crackdowns may be hitting big tech hard, putting a major damper on growth and forcing many to lay off thousands of workers. But there’s still plenty of room for growth among smaller companies, especially in the B2B space that’s far less sensitive due to its smaller customer numbers and thus more limited collection of personal data.

That sweet spot has fueled an explosive boom for Hong Kong’s Vobile Group Ltd. (3738.HK), a software as a service (SaaS) provider of online video content protection and monetization services. The company has become a recent dark horse favorite amid all the recent gloom and doom for tech firms, posting massive revenue growth as it plays to Beijing’s calls for improved copyright protection and economic digitization.

The company is advancing its capabilities with its acquisition of Particle Culture Technology Group, a provider of video distribution and edge computing, as well as content monetization services based in the eastern China city of Hangzhou. It announced on Tuesday it has secured more than $127 million in financing for the purchase, from a group led by global lending giant HSBC.

Vobile first announced the deal last December, saying it would acquire 61.18% of Particle and its affiliates for 845 million yuan ($127 million) in cash. Following the purchase, Vobile is expected to accelerate Particle’s development in its home China market, taking advantage of the company’s strong connections in such channels as cable TV and IPTV.

This isn’t Vobile’s first acquisition. In July 2019, it purchased the core business of Los Angeles-based ZEFR Co., helping to boost its revenue by more than 130% the following year.

Capitalizing on its global footprint and growing demand for content creation services, Vobile’s revenue hit HK$687 million ($87.5million) last year, roughly double from 2020. Revenue from content protection rose 130% to HK$177 million for the year, while content monetization revenue jumped 101.9% to HK$481 million. It posted an adjusted net profit of HK$63.6 million for the year, reversing a HK$33.3 million loss the previous year.

Particle Technology posted nearly 280 million yuan in revenue in 2020 and was on track to hit about 300 million yuan in 2021, Vobile said last December when it first announced the purchase plan. That means Particle’s addition would boost Vobile’s revenue by about 50%, easily pushing it above the annual HK$1 billion revenue mark once the deal closes.

Despite the rosy picture, Vobile’s shares have lost about half of their value over the last 52 weeks. They did manage a minor rally since the latest announcement this week, rising about 9% since Tuesday. At the same time, brokerages are optimistic about the company. Everbright Securities recently raised its revenue forecast for the company this year and next, due to the huge potential of China’s domestic digital market.

In terms of ratios, Vobile is actually priced relatively high compared with other SaaS and software companies, perhaps because it’s one of the few in the group that was strongly profitable last year. Even after the past year’s weakness for its shares, it still trades at a price-to-sales (P/S) ratio of 12, higher than ratios of 9 and 6 for domestic peers Kingdee International Software (0268.HK) and Ming Yuan Cloud (0909.HK), respectively. Even global giant AutoDesk (ADSK.US) trades at a lower P/S ratio of 9. We should also point out that Vobile’s P/S ratio will come down closer to its peers with the big new revenue boost from the Particle acquisition.

Digging into China

The latest purchase shows Vobile’s determination to dig deeper into the mainland Chinese market, where video in all shapes and sizes has become the latest rage on the internet. It generated HK$166 million from China last year, up by a factor of 14 year-on-year. Following that growth spurt, China now accounts for about a quarter of its business, up from just a tiny fraction three years ago.

Its overseas business that accounts for the remaining three-quarters of revenue grew at a far slower but still healthy 61% last year. Its global business partners include all five major Hollywood studios, such as the Walt Disney Co. (DIS.US) and Universal Pictures, as well as other big video names like Fox News, YouTube and Meta(FB.US).

As video experiences rapid growth, copyright awareness and maximizing content value are growing in lockstep, playing to Vobile’s strength. That reality is particularly true in China, where piracy is still rampant despite the government’s increasing efforts to stamp out the practice.

Two top government bodies issued opinions on strengthening intellectual property protection in 2019, and in February 2020 President Xi Jinping published an article elevating intellectual property protection to a top level of China’s national strategy. And last December, the State Council issued new detailed rules for online short videos, which addressed the copyright infringement issue.

Such policy support is important for doing successful business in China, putting Vobile in a strong position to avoid the type of regulatory crackdowns that are hitting many other high-tech sectors.

The company’s core video focus also puts it in a regulatory sweet spot as China seeks to boost its digital economy to promote medium- and long-term economic growth. China’s digital economy already exceeded 45 trillion yuan last year, accounting for more than 40% of GDP. Its online copyright industry was worth 1.185 trillion yuan in 2020, up 23.6% from 2019, according to the Report on the Development of China’s Online Copyright Industry (2020).

According to its latest announcement, Vobile currently manages tens of millions of video assets and has conducted hundreds of billions of video fingerprint searches on hundreds of thousands of websites around the world without any error.

Within its growing China business, the company’s customers include Ant Chain Co., a blockchain unit of financial services giant Ant Group, helping it to build a global digital content asset distribution and transaction platform. It also works with big state-owned entities like Zhejiang Culture and Art Exchange and Chengdu Culture and Art Exchange, helping them build digital copyright protection trading platforms.

It’s worth noting that while the company’s business seems deeply tied to individual platforms, its core business centered on content and IP means that any content producer could be a potential future customer. In recognition of its potential, the company was included in the Hang Seng Index series and a number of heavy market indexes last year. Last September it was also included in the Shenzhen-Hong Kong Stock Connect, making its shares available to mainland-based buyers.

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