Payment-based technology platform Yeahka (09923.HK) (“the Group”) announced on 9 November that it agreed to acquire a 42.5% equity interest in Beijing Chunagxinzhong Technology Co., Ltd. (“Chuangxinzhong”).
This transaction is Yeahka’s second external investment after the Group became a cornerstone investor in the listing of Joy Spreader (6988.HK) earlier this year.
It is not difficult to see what Chuangxinzhong and Joy Spreader share in common: Both are service providers of performance-based advertising. The former is a primary/secondary agency for Tencent Social Advertising and a secondary agency for Toutiao. The latter leverages business intelligence technologies to serve corporate clients and media publishers.
Yeahka’s two investments in Joy Spreader and Chuangxinzhong are also a testament to its advanced efforts to develop marketing services. In the first half of this year, marketing revenue of the Group exceeded RMB 144 million, representing an increase which was over 11 times greater than last year.
As mobile payments cover increasingly more offline spending situations, Yeahka’s performance-based advertising services within its marketing business are expected to set the Group onto its next promising stage of growth.
Focusing on business synergies while balancing financial returns
According to an announcement released by Yeahka, 50% of the RMB 170 million consideration will be paid to Chuangxinzhong as a first installment, while the remaining three installments will be paid based on pre-determined performance targets over the next three years. Specifically, Chuangxinzhong’s management has committed that net profit over the next three years will be no less than RMB 45 million, RMB 53 million and RMB 62 million, respectively.
“It took us only about two months from initial discussions to sign the agreement,” Mr. Weichen Zhao, General Manager of Strategic Investment of Yeahka said.
“Things went quite smoothly throughout the process, from initial discussions, to negotiations and due diligence,”Mr. Weichen Zhao continued. “The key is that Chuangxinzhong shares a similar vision as us. Although it has only been in business for less than three years, we take a long-term view. This is also a fundamental requirement that we have for the management of our future investment targets. We also quickly reached consensus on the guaranteed performance.”
According to public information, the core team of Chuangxinzhong all came from EMAR Online. Lingjin Qin, Founder of Chuangxinzhong, previously served in various senior roles at EMAR Online, including as Technical Director, Vice President and Chief Operating Officer. He has almost twenty years of professional experience in related industries.
Since its inception in 2018, Chuangxinzhong has achieved tens of millions in net profit 2019, and its net profit in 2020 is expected to exceed RMB 30 million. Based on this growth rate, Chuangxinzhong is likely to meet its expected commitments in the next three years.
Mr. Weichen Zhao was also impressed by a detail in the due diligence process. “In the first half of this year amid the COVID-19 outbreak, the management team of Chuangxinzhong quickly took advantage of the boom in online education while avoiding customers from high-risk industries,” said Mr. Weichen Zhao. Zuoyebang and Yuanfudao, the two most popular education technology companies in the first-tier market, are customers of Chuangxinzhong.
It should be noted that the signing of the valuation adjustment mechanism agreement represents, to some extent, Yeahka’s restraint and caution in making investments.
When seeking investment or acquisition partners, Yeahka’s core principle is based on the possibility of a high degree of synergy and strong relationships between the two parties.
While the investment planning of Yeahka and internet giant CVC (Corporate Venture Capital) have a common belief that business synergies are the top priority, at the moment, Yeahka has a higher demand for financial returns. For example, the current P/E ratio of Yeahka is about 45X, but the P/E ratio for this transaction with Chuangxingzhong, calculated based on the transaction price and the estimated financial performance, was much lower. This is certainly expected to enhance Yeahka’s EPS.
In addition, Yeahka also pointed out in the announcement that it intends to acquire an additional 42.5% stake in Chuangxinzhong in the future, and will make further announcements on the additional acquisitions when necessary.
As of the close of trading in Hong Kong on November 11, “Joy Spreader”, another investment of the Group, closed at HK$3.61 per share, up more than 25% compared with the offer price of HK$2.88, and once reached HK$4.81 in early November. In other words, it is evident that Yeahka is quite forward-looking when choosing to invest in Joy Spreader.
In addition, in March 2019, Yeahka and its strategic shareholder, Recruit Holdings Co., Ltd, a renowned Japanese internet company, jointly established RYK Capital Partners Limited, a platform for investments in the industry. To date, the Company has invested in a QR code payment service platform “Haoshengyi”, and startups such as SaaS software developer “Zhibaiwei”, which help the Group bolster its investment portfolio and optimize its ecosystem.
Marketing services has further growth potential
From the perspective of Yeahka’s overall business:
Yeahka is a payment-based technology platform. The merchants and consumers covered by its payment services provide Yeahka with stronger competitive advantages and growth potential for its technology-enabled business, especially its marketing services.
As of October 31, 2020, Yeahka’s active payment service customers rebounded to pre-pandemic levels. The number of consumers using the Company’s payment services approached 600 million and has continued to grow quarter-to-quarter. The number of app-based payment services transactions continued to grow rapidly between July and October 2020, with growth exceeding 30% over the first half of this year.
It can be said that at a time when online traffic growth is slowing and offline traffic is becoming increasingly scarce, a payment service that reaches hundreds of millions of consumers and merchants will undoubtedly provide Yeahka with a strong first-mover advantage and help it form a “moat” for a long time to come.
Through its payment services, Yeahka is able to reduce the cost of acquiring marketing service customers, as well as maximize the value of its marketing services based on its insights on merchants and consumers. For example, Yeahka has developed solutions that help customers precisely select advertising slots before launching promotions, which has long been a major pain point for performance-based offline advertising.
Yeahka has also launched its Data Management Platform (“DMP”), Juliang, which is a precision advertising platform powered by AI and machine learning. Juliang has attracted a large amount of offline traffic from nearly different ten channels, including gas stations, car parks, supermarkets and retailers, as well as colleges and universities.
However, it is still challenging for Yeahka to fully realize the potential of the vast traffic brought by its payment services. While Yeahka is able to intelligently match offline traffic from various consumer scenarios with targeted users and then connect them to advertisers, the Company needs stronger online capabilities to expand its marketing services into different verticals leveraging its traffic and data assets.
This would mean a “waste of resources”, as the huge traffic brought by Yeahka’s payment services has not yet been monetized. Yeahka’s vast resources, which are deeply coveted by internet giants and venture capital institutions, have turned out to be a solid foundation for its robust business growth.
Shortly after going public, Yeahka made a substantial investment in Chuangxinzhong, which has a large advertiser base, premium online media resources – including Tencent and Tik Tok – and substantial content creation capabilities, especially for short videos. This will generate strong synergy with Yeahka’s existing marketing for precision advertising, which will facilitate the accumulation of DMP-based user profiles and traffic data, and optimize its delivery model to achieve favorable marketing ROI.
The integration of Yeahka’s offline and online operations is expected to further empower its marketing services and generate greater momentum, which will in turn boost the sustainable growth of its payment services and drive the overall profitability of the company.