The last day of 2019, digital marketing firm Newborn Town went public in Hong Kong. In the past four years, it tried to be a listed company, and it is one of a few tech companies that reported net profits before IPO this year.
Newborn Town (09911.HK) went public on Dec 31, and was trading at HKD 3.25 at the time this article was published. Since mid-December, Newborn Town has attracted the public’s attention for its record-breaking oversubscription – the company may be over 1,400 times oversubscribed. Behind its Initial Public Offering (IPO), Newborn Town has walked a long and winding path from private to public.
The IPO at Hong Kong stock market was not the first attempt by Newborn Town to go public. As early as in 2015, it applied for an IPO at NEEQ (National Equities Exchange and Quotations) but withdrew the application in the first half of 2016. Again in the same year, the company intended to be listed on China’s A-share board under the shell of Tech-long (达意隆), a packing company located in Guangzhou.
After 4 years of trying to enter the secondary market, Newborn Town landed on its feet in Hong Kong. From an industry report by i-Research, global mobile Internet users reached 3.6 billion in 2018 with an estimate of 4.4 billion by 2023. The increasing user pool indicates a blue ocean market for application developers. Newborn Town is a digital marketing firm that built its business on a self-developed mobile application mix. With an IT team of over 60 people, it has created over 330 apps since its founding, and currently, over 70 are in operation.
The company adopted different revenue reporting rules for this IPO. In 2016, when it applied to be listed in the A-share market, the company reported a revenue of over CNY 115.10 million, generated in the first quarter of 2016; in Hong Kong IPO’s prospectus, it filed an annual revenue of CNY 136.85 million for the natural year 2016. According to its staff, the number submitted in 2016 was calculated using gross revenue reporting* while the one submitted at Hong Kong used net revenue reporting*.
*Gross revenue: all income from a sale is accounted for on the income statement. i.e. if a product is sold for 100 dollars, the gross revenue will be 100 bucks ignoring the cost of goods sold may be 50 bucks. Net revenue: subtracting the cost of goods sold from gross revenue.
However, ambiguity exists in their net profit reports. In its 2016 NEEQ filing, net profit reported for 1Q2016 is CNY 19.78 million; in 2019’s HKEX filing, the annual net profit in 2016 is CNY 41.22 million. The first quarter generated almost half of year-round profit, which is not common for the marketing industry, since the holiday season is the peak. From these two filings, domestic media raised questions towards Newborn Town’s profitability. The media also questioned the client and supplier part since the company has a key client that is also a key supplier to help it distribute marketing content.
As a digital marketing company that focuses on overseas markets, Newborn Town claimed it had accumulated nearly 800 million users. Based on i-research’s report in the prospectus, the 800-million number refers to devices that have downloaded Newborn Town’s applications on a global scale. Considering that people often upgrade phones, and one may even have multiple devices, the actual user number is expected to be fewer than 800 million.
It is undeniable that digital marketing is playing a critical role in current marketing strategies. Along with the increasing penetration rates of Internet users and smart mobile device use, it is expected that 3.8 billion smartphone users will be active in 2021 compared to the 2.9 billion active in 2018, according to statista. Proportionally, the increasing potential user pool is leading to a growing market – the digital marketing business.
Based on i-research’s analysis, Newborn Town is not a top player in the programmatic advertising sector. The market size of programmatic advertising in 2018 was around USD 60.7 billion and the company’s market share was 0.04% of the total, while the top competitor, Google took over 28% of the market. Yet, competition is less intensive in a growing market than in a saturated one. Newborn Town’s financial reports tell a promising story based on increasing markets and the globalization process.
Nevertheless, the globalization environment is threatened by rising unilateral trade protectionism and policy risks. For any business activity, 2020 will be a year that is hard to predict – a volatile and treacherous setting. The macroenvironment will impact on all industries, along with the marketing business that is established on other real economic bodies. For Newborn Town, a record-breaking company, no one knows if it can carry on its triumph. We may keep in mind that the previous oversubscription record breaker of the year, Ascentage Pharma Group (6855.HK), failed to deliver a performance to match with its oversubscription tally of 752.