With Competition High and Market Share Low, Is Nicefilm Really Nice?

The producer of popular web drama series and movies hopes its recent hits will create an audience for its Hong Kong IPO

Key takeaways:

• Nicefilm Entertainment has filed for a Hong Kong listing even as its revenue growth is slowing sharply
• The company relies heavily on five major video platforms, which supply 95.7% of its revenue

By Fai Pui

Remember the love-hate relationship between the main characters in the hit online drama “Plot Love”? Or perhaps “The Flaming Heart,” a similar drama broadcast on online video giant Youku, was more your cup of tea? Or maybe you prefer titles like “Make My Heart Smile” that make you reminisce about your school days?

Those are just some of the web drama series and movies that took China’s internet by storm last year, all from Nicefilm Entertainment Holdings Ltd., which was founded in 2016 and counts Alibaba Pictures (1060.HK) as a shareholder. Riding the strong reception for a number of its productions last year, the company has filed an application to put its name in lights on the Hong Kong Stock Exchange.

According to the data cited in its prospectus, Nicefilm ranked second in China in 2020 in terms of revenue generated from the production and distribution of web drama series. It was fourth among web movie makers.

Last year’s drama “Plot Love” was the highest-grossing series in China, generating revenue of 50 million yuan ($7.85 million). “Make My Heart Smile” became the most popular web drama for the popular iQiyi (IQ.US) online video platform the same year, earning 45 million yuan. And its “Legend of Hunter” ranked first among Chinese web movies to premiere last year, grossing over 40 million yuan. That string of hits was almost certainly a major factor in the timing behind Nicefilm’s decision to go public despite its relative youth.

Small audience of buyers

The business of watching dramas and movies on the small screen has changed markedly in the internet age, with traditional “appointment viewing” replaced by a proliferation of on-demand material viewable over a wide range of platforms. The web drama and movie markets are expected to grow at compound annual growth rates of 10.1% and 10.5%, respectively, between 2020 and 2025, according to Frost & Sullivan data cited in Nicefilm’s IPO prospectus.

Revenue from web dramas overtook that for TV dramas in China for the first time in 2020, and such online programs are expected to dominate the drama market in the future. The web movie market has also surpassed that for theatrical movies, reflecting the start of new era for the entertainment industry.

Despite its huge potential, China’s web drama market is also quite fragmented. Nicefilm currently ranks second in revenue terms, but its market share is only 1%. What’s more, the top five web drama production and distribution companies have combined share of only 4.7%, also reflecting the intense state of competition.

Nicefilm reported revenue of 262 million yuan in the first nine months of last year, up 13.2% year-on-year. That was far slower than the 92.4% growth in 2020. Profit trends also look less than nice. After posting roughly 50% profit growth in 2020, Nicefilm’s profit actually fell 14.2% year-on-year in the first nine months of 2021 to 31.32 million yuan. That reflects the reality that well-received productions may bring fame, but not necessarily bigger profits in the highly competitive space.

It’s also worth noting that Nicefilm relies heavily on five major platforms as its customers, namely Bilibili (9626.HK; BILI.US), iQiyi, Tencent Video, Youku and Mango TV. Revenue from those five accounted for 76.1% and 74.4% of its revenue in 2019 and 2020, respectively. The figure rose even more to an overwhelming majority 95.7% in the first nine months of last year.

A faltering of any of those platforms, or China’s announcement of new internet restrictions, could be highly problematic for Nicefilm, which does not have its own video platform.

Nicefilm also faces potential risk from China’s strong oversight of cultural content. In the risk factors part of its prospectus, it disclosed that more stringent regulations are always possible for the web drama and movie market, which would require it to adopt changes to ensure compliance, potentially hitting its financial performance.

Highly valued peers

As a drama and movie producer, Niceflim’s core asset is its ability to create products that resonate with audiences. Not surprisingly, it plans to use funds from the IPO for future productions, and also plans to invest in movies for theatrical release. It also intends to use the funds to acquire more intellectual property.

The company currently has 20 major web dramas and 26 major web movies in the pipeline, and more than 14 in post-production, though it remains unclear if those can help its revenue return to a strong growth track.

While details of its IPO pricing and valuation have yet to be announced, we can reference similar Hong Kong-listed companies like Alibaba Pictures, Strawbear Entertainment (2125.HK), Maoyan Entertainment (1896.HK) and Litian Pictures (9958.HK) to estimate how it might be valued. Alibaba Pictures has a very high price-to-earnings (P/E) ratio of over 1,300 times and price-to-sales (P/S) ratio of 5 times; ratios for Strawbear, Maoyan and Litian Pictures are 88.3 times, 50.4 times and 11.3 times, with P/S ratios of 1.9, 2.9 and 0.9 times, respectively.

Based on an annualization of its profit in the first nine months of last year, the company would post a profit of 41.76 million yuan for the whole year. Excluding the exaggerated valuation for Alibaba Pictures, using an average P/E ratio of about 50 times for the other three companies would give Nicefilm an estimated valuation of about 2.1 billion yuan. That’s 1.8 times more than its 750 million yuan value it had when Alibaba Pictures took a stake in the company in 2020.

Chinese film stocks could get a boost from the festive effect of Chinese New Year, which falls at the start of February this year. But Nicefilm will probably miss that curtain call due to the longer time usually needed to complete a listing.

Still, the signs could be positive, based on strong debuts for Strawbear Entertainment and Values Cultural (1740.HK) in 2020, whose listings were both sponsored by China Merchants Securities and Zhongthai Financial, which are also underwriting Nicefilm’s listing. Thus investors should watch closely for how Nicefilm’s shares are priced, which could represent a worthwhile investment if it is valued at a discount to its peers.

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