ANALYSIS: Blue Hat Interactive Entertainment Proposes U.S. IPO Terms

BHAT's U.S. IPO plans may be small, but the firm provides investors with exposure to the growing Chinese augmented reality space.

Donovan Jones
    Mar 24, 2019 6:05 AM  PT
ANALYSIS: Blue Hat Interactive Entertainment Proposes U.S. IPO Terms
author: Donovan Jones   

Quick Take

Blue Hat Interactive Entertainment intends to raise gross proceeds of $18 million from a U.S. IPO, according to an F-1 registration statement.

The firm specializes in Augmented Reality (AR) entertainment products in China.

BHAT has posted solid financial results and presents investors with an opportunity to gain access to the augmented reality software space in China.

Company & Technology

Xiamen-based BHAT was founded in 2010 to develop and commercialize AR and interactive games, products that combine physical toys and mobile videogame features.

The firm, led by CEO and Director Xiaodong Chen, has been with the firm since its inception and was previously general manager of Guangzhou Taihao Trading.

Blue Hat's technology enables it to connect its toys with mobile devices through wireless technology, providing the user with an enriched user experience.

The company's AR products line include AR Racer, AR Need a Spanking, AR 3D Magic Box, and AR Picture Book.

AR Racer, accounting for 57 percent of the company's revenue in 2017, is a mobile vehicle racing game and is played by playing a small car on the screen of the mobile device. Using photosensitive recognition technology, the car will respond with actions when the player encounters an obstacle.

The AR Need a Spanking is a combat game with an electronic ladybug-shaped toy that uses infrared induction technology to move along a designated area on the mobile device screen. The game accounted for 31 percent of BHAT's revenue in 2017.

Customer/User Acquisition

BHAT focuses on developed areas in China, such as Jiangsu and Zhejiang, has a marketing team of 35 people, and four subsidiaries - based in Chongqing, Hunan, Fujian, and Shenyang - that are responsible for marketing the company's products.

The firm's primary user age range is between 3 and 23 years old.

The company is in the process of transitioning from offline promotional marketing to various online sales channels, including e-commerce and digital marketing. The company intends to increase brand awareness through online communities, social media, and television.

Sales and marketing expenses as a percentage of revenue are low but have been increasing, per the table below:


Expenses vs. Revenue



To Q3 2018






(Sources: Company registration statement andIPO Edge)

Market & Competition

According to a 2018 market research report by Market Research Future, the global mobile augmented reality market is projected to reach about $70 billion by 2023, growing at a CAGR of approximately 61 percent between 2017 and 2023.

The main factor driving market growth is the rising adoption of mobile technologies and the emerging Internet of Things.

The North-American region accounts for the largest market share while the Asia-Pacific region is projected to grow at a faster rate due to the growing adoption of technologies, increase in smartphone users, launching of AR-compatible and integrated handsets at cost-effective prices.

Major firms that provide or are developing mobile AR technologies include:

  • Qualcomm (QCOM)

  • SAP (SAP)

  • Microsoft (MSFT)

  • Infinity Augmented Reality

  • Apple (AAPL)


  • Samsung Electronics (SSUN.F)

                            (Source: Sentieo)

Financial Performance

BHAT's recent financial results can be summarized as follows:

  • Increasing topline revenue

  • Growing gross profit, but at a decelerating rate of growth

  • Increased gross margin

  • Growing EBITDA

  • Swing to negative cash flow from operations

As of Sept. 30, 2018, the company had $11.8 million in cash and $8.2 million in total liabilities. (Unaudited, interim)

Free cash flow during the 12 months ended Sept. 30, 2018, was $5.1 million.

IPO Details & Valuation Metrics

BHAT intends to raise $18 million in gross proceeds from an IPO from the sale of 4.5 million shares of its common stock at $4 per share, not including customary underwriter options.

Assuming a successful IPO, the company's enterprise value at IPO would approximate $140.3 million.

Per the firm's latest filing, it plans to use the net proceeds from the IPO as follows:

"We intend to use approximately 40% of the net proceeds of this offering for research and development, including expanding our research and development team and continuing to invest in and develop our products, approximately 40% for selling and marketing, particularly strengthening our sales channels and establishing physical experience stores, and the remainder for working capital and general corporate purposes."

Management's presentation of the company roadshow is not available.

The listed underwriter of the IPO is ViewTrade Securities.

Below is a table of relevant capitalization and valuation metrics for the firm:

Measure [TTM]


Market Capitalization at IPO


Enterprise Value


Price / Sales


EV / Revenue




Earnings Per Share


Total Debt To Equity


Float To Outstanding Shares Ratio


Proposed IPO Midpoint Price per Share


Net Free Cash Flow


(Sources: Company registration statement andIPO Edge)


BHAT is a small augmented reality software development firm that is seeking additional development investment from U.S. public investors.

The firm's financials are solid, with strong topline revenue growth, positive EBITDA, and profits.

Sales and marketing expenses as a percentage of revenue are low but climbing, and the firm has just posted negative cash flow from operations, perhaps necessitating the need for more funding.

The market opportunity for AR games is large and growing rapidly, but the firm faces competition from numerous other small developers. Additionally, the Chinese market for games is heavily regulated and requires government approval, which can delay launch of a developed game.

On the legal side, like many Chinese firms seeking to tap U.S. markets, the firm operates within a VIE structure or Variable Interest Entity. U.S.-based investors would only have an interest in an offshore firm with contractual rights to the firm's operational results but would not own the underlying assets.

Also, the firm's choice of selling ordinary shares is unusual for a foreign firm going public on U.S. markets. Typically, the company would sell ADSs through a U.S.-domiciled bank. ADSs provide investors with far fewer administrative issues than with ordinary shares.

ViewTrade Securities is the sole underwriter for the IPO. IPOs led by the firm over the past 12-month period have generated an average return of 90.3% since their IPO. This is a top-tier performance for all major underwriters during the period.

For investors who are bullish on the augmented reality space in China and don't mind investing in a small firm with a low float and potentially high stock price volatility, the IPO may be one to watch closely.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)