ANALYSIS: Lizhi Posts Strong Revenue Growth in Preparation for U.S. IPO

Chinese podcasting network LIZHI has filed for a U.S. IPO. The firm has grown impressively as a major player in a promising online podcasting subscription market.

Donovan Jones
    Nov 12, 2019 12:00 PM  PT
ANALYSIS: Lizhi Posts Strong Revenue Growth in Preparation for U.S. IPO
author: Donovan Jones   

Quick Take

Lizhi (LIZI) has filed to raise gross proceeds of $100 million from a U.S. IPO, according to an F-1 registration statement.

The firm operates a social audio platform for user-generated content in China.

LIZI is growing revenue and gross profit but at a decelerating rate and is generating increasing comprehensive losses.

Company & Technology

Guangzhou, China-based Lizhi was founded in 2010 to develop a mobile audio platform for user-generated content for Chinese consumers.

Management is headed by Founder, CEO and Director Jinnan (Marco) Lai, who was previously CEO at Shanghai Labox Information Technology.

Lizhi has developed a social audio platform for user-generated content that features tools which enable creators to create, edit, store and share their audio content.

In Q3 2019, Lizhi counted 46.6 million average total Monthly Active Users (MAUs), an increase of 26.7% from about 36.8 million average total MAUs in Q3 2018.

During the same period, the number of monthly active hosts increased by 12.3% from about 5.1 million to 5.7 million in Q3 2019.

The platform's ‘average monthly total interactions' in Q3 2019, representing the sum of monthly average number of comments, private messages, posts, likes and multi-user on-air dialogues, reached 2.5 billion, an increase of 27.6% from 2.0 billion during the same period last in 2018.

The firm's platform offers podcasts across 27 categories, such as life and relationships, parenting, education, talk shows and music radio as well as 107 sub-categories that include love and bedtime stories, and family.

Lizhi also offers other types of audio media entertainment, including social, music, talk shows, animation, comics and games, as well as audio books.

Customers

The firm obtains paying customers primarily through advertising brand marketing.

Selling and marketing expenses as a percentage of revenue have been uneven but trending lower as revenues have increased.

The selling & marketing efficiency rate, defined as how many dollars of additional new revenue generated by each dollar of selling & marketing spend, was 1.0x in the most recent six-month period.

Notably, management has provided no customer retention information, a critical aspect of evaluating subscription-based revenue models.

Market

According to a recent market research report by Daxue Consulting, the Chinese podcast market grew by 70% year-over-year in terms of total users, reaching 170 million in 2018.

The podcast industry in China is anticipated was projected to grow over $7.3 billion in 2018, primarily due to most podcasts being paid subscriptions with a focus on educational content, also known as the ‘pay for knowledge' industry.

As a comparison, the US market is currently worth only $314 million annually and, while individual podcasters in China can make up to $8 million a year with 250,000 listeners, Serial, the most popular podcast in America, profited about $500,000 with 19 million downloads.

Data from iiMedia shows that the China audiobooks market was valued at RMB3.24 billion ($460 million) in 2017, which further rose to RMB4.5 billion ($650 million) in 2018 and is projected to reach RMB7.8 billion ($1.15 billion) by 2020.

The overall China audio market is projected to generate more than RMB6.09 billion ($840 million) by 2019, with 486 million users listening.

Financial Performance & IPO Details

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

  • Growing topline revenue, although at a decelerating rate

  • Increased gross profit and stable gross margin

  • Negative and uneven operating profit

  • Uneven and currently negative cash flow from operations

As of June 30, 2019, the company had $23.5 million in cash and $29.6 million in total liabilities. (Unaudited, interim)

Free cash flow during the twelve months ended June 30, 2019, was $1.6 million.

LIZI has filed to raise $100 million in gross proceeds from an IPO of ADSs representing underlying Class A shares.

Class B shareholders, who will be the company founders, will be entitled to ten votes per share versus one vote per Class A share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

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

  - To develop innovative products

  - To invest in the application of our AI technologies

  - To expand our overseas operations

  - For general corporate purposes

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

Listed underwriters of the IPO are Credit Suisse and Citigroup.

Commentary

LIZI is attempting to tap U.S. public market capital for its expansion plans in a difficult time for Chinese firms on U.S. markets.

However, the recent performance of Chinese IPOs in U.S. markets over the past few years has been challenging, leading investors to be hesitant.

The firm's financials show a company that is growing revenue and gross profit but at a decelerating rate of growth.

Additionally, as the firm grows, LIZI is generating operating losses and increasing comprehensive losses, indicating a delayed path to profitability.

Sales and marketing expenses as a percentage of revenue have been uneven but trending downward.

The market opportunity for podcasting in China appears significant and is expected to grow markedly in the medium-term, so the firm enjoys favorable industry dynamics.

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. 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.

This is a legal gray area that brings the risk of management changing the terms of the contractual agreement or the Chinese government altering the legality of such arrangements. Prospective investors in the IPO would need to factor in this important structural uncertainty.

Credit Suisse is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 10.9% since their IPO. This is a top-tier performance for all major underwriters during the period.

Management's valuation assumptions at IPO will be critical to determine whether the reward is worth the investment for this company.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any 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.)


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