Big livestreaming ecommerce IPO but an uncertain future

Yesterday, Huafang Group 花房集团, whose main business is livestreaming ecommerce platforms, launched an IPO in Hong Kong, raising a total of HK$170 million ($21.85 million).

• The share’s opening price was HK$3.29 ($0.42), an increase of 17.5% compared with the issue price, and the stock closed the day on HK$3.15 ($0.40) per share, an increase of 12.5%, giving the company a market capitalization of HK$3.15 billion ($405.03 million).

The grandfather and the billionaire

Huafang Group has a long history. The livestreaming platform 6.cn — or Six Rooms (六间房 liùjiānfáng) in Chinese — was founded all the way back in 2006 by Liú Yán 刘岩, the “grandfather” of China’s livestreaming industry. Six Rooms was perhaps slightly ahead of its time, and Liu struggled for years to monetize the platform. In 2015, Liu sold it to Songcheng Performance 宋城演艺, a performing arts company.

In the same year, the Huajiao — or Sichuan Pepper (花椒 huājiāo) in Chinese — platform was established by Qihoo 360 奇虎360, an internet security company, and its billionaire CEO, Zhōu Hóngyī 周鸿祎. In 2019, Six Rooms and Huajiao were merged under one company, Huafang Group, and Zhou became the new company’s largest shareholder, holding 38.21%.

In 2020, Huafang Group made two investments: It spent 31.5 million yuan ($4.51 million) to acquire 82% of Houla Technology 猴啦科技, a virtual idol and live broadcasting business; and 16.6 million yuan ($2.38 million) to acquire the video sharing and networking app HOLLA, which has users in North America, Europe, the Middle East, Asia, and North Africa.

Huafang Group is in fact Zhou Hongyi’s fourth company to be publicly listed:

• Qihoo 360 was originally listed on the New York Stock Exchange in 2011, and delisted as it sought privatization in 2016. In 2017, the company was listed on the Shanghai Stock Exchange via a back-door listing.
• In October 2019, 360 Ludashi 360鲁大师控股, a software company, was listed in Hong Kong.
• In November 2022, 360 DigiTech 360数科, a lending platform, was successfully listed in Hong Kong.

Livestreaming is big business

In China, Huafang Group has three main livestreaming ecommerce platforms: Six Rooms, Huajiao, and Nt33 奶糖平台. According to data listed in the company’s prospectus, as of the end of May 2022, Huafang Group had a total of 415 million registered users and over 11 million streamers (i.e., hosts). From January to May, the company had 58.57 million monthly active users and 215,000 monthly active hosts.

According to the prospectus, from 2019 to 2021, Huafang Group had total revenue of 2.83 billion yuan ($406.07 million), 3.68 billion yuan ($528.42 million), and 4.59 billion yuan ($659.67 million); and a net profit of 191 million yuan ($27.39 million), -1.52 billion yuan (-$218.74 million), and 325 million yuan ($46.61 million), respectively. The net loss in 2020 was partly explained by the company’s investments described above.

According to an industry report, China’s online live broadcast market was worth 246.2 billion yuan ($35.31 billion) in 2021, and is expected to reach 645 billion yuan ($92.51 billion) in 2027. Another article cites a different set of data: As of June 2022, the total number of live broadcast ecommerce users in China was 469 million, and the scale of China’s live broadcast ecommerce market is expected to exceed 3.4 trillion yuan ($487.68 billion) in 2022 and 4.9 trillion ($702.84 billion) in 2023.

Stiff competition and regulation

Huafang Group is competing for this large pot of gold with a huge number of competitors, including big ecommerce and video platforms like Alibaba’s 阿里巴巴集团 Taobao 淘宝网络, Kuaishou 快手, Tencent’s 腾讯 WeChat, and Douyin 抖音, as well as a range of other smaller players, including DouYu 斗鱼, Huya 虎牙直播, KuGou 酷狗直播, Kuwo 酷我聚星, YY.com YY直播, and Inkeverse 映宇宙.

In 2021, Taobao, for example, reported that a total of 500,000 new streamers entered its platform, and 25,000 live broadcast channels on the platform had annual revenue of more than 1 million yuan ($143,438). The latest trend in 2022 is for brands to participate directly in live broadcasting ecommerce, known as “brand self-broadcasting.” Several brands, including L’Oréal, Anta 安踏, New Oriental 新东方教育, and Uniqlo have enthusiastically taken up self-broadcasting; in the first half of 2022, L’Oréal’s gross merchandise value (GMV) on its live broadcast channel on Douyin, for example, exceeded 238 million yuan ($34.13 million).

This large market has attracted a number of new regulations in recent years. In May 2022, for example, the Cyberspace Administration of China and other government departments published new regulations prohibiting minors from participating in live broadcast rewards, and governing the key functions of live broadcasts.

In order to keep attracting and retaining users, livestreaming platforms must continuously provide interesting and attractive content, and in the process, illegal content has appeared regularly on these platforms. For its part, Huafang Group has admitted that it has been fined about 100,000 yuan ($14,343) in the past for broadcasting lewd and inappropriate content and selling fake products.

Declining prospects

Despite its successful IPO, Huafang Group’s prospects for China’s live broadcasting ecommerce market are already in decline. According to the company’s prospectus, in the first five months of 2022, Huafang Group’s numbers of new users and streamers and average monthly active users and streamers have all experienced year-on-year declines.

The rot may have started to set in much earlier. In 2018, the number of monthly active users of the Huajiao platform was 41 million, but in May 2022, this number had fallen to 30.62 million. And it is becoming more expensive to acquire paying customers: From 2019 to 2021, the customer acquisition cost on Huajiao increased from 14 yuan ($2) to 19.9 yuan ($2.85). Over the same period, the average revenue contributed by each paying customer declined from 350 yuan ($50) in 2018 to 293 yuan ($42) in May 2022.

One possible reason for this precipitous decline is the prevalence of fake products on livestreaming platforms. An article published yesterday by the newspaper Legal Daily 法治日报 listed various examples of fake products that were being sold in live broadcast channels, from watches, mobile phones, and boots to skin care products, underwear, and fake Ikea products.