Updated: Aug 1
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Lvji is the leading provider of online audio tour guides in China
Based on pre-COVID-19 figures, the company is profitable, operational cash flow positive and had elevated ROIC levels
The company is led by founder and CEO Mr Zang Weizhong, who still owns a ~27% stake
Sustained revenue growth potential could come from rising domestic purchase volume, ASP expansion and capturing wallet share of outbound travelers
Headline financial performance took a hit in 1H20 owing to COVID-19 and 1H seasonality but core margins remain intact
Balance sheet remains solid with zero debt, which Lvji can capitalise on for growth opportunities
Trades at an undemanding valuation of 0.7x EV/NTM Sales and 5.4x NTM P/E. Net cash amounts to HK$0.45/share or 51.7% of market cap
DCF-backed fair value estimate of HK$1.66, representing possible upside of 90.8%
Lvji Technology (Lvji) is the largest provider of online tour guides in China with an 86.4% market share by GMV as at 2018. They deploy software via the cloud to provide online tour guides with proprietary contents protected by copyrights. These include illustrated maps of tourist attractions, alongside editorial content and voice-over commentaries of various points of interest within the attractions.
As of 1H20, Lvji had over 22,000 online tour guides globally, with the majority covering tourist attractions in China, Hong Kong, Macau and Taiwan. That said, as of 1H19 they had over 2,000 online tour guides covering tourist attractions in countries like Japan, South Korea, Australia and Italy. These mainly serve Chinese tourists who travel overseas to visit tourist attractions.
Lvji's corporate video is embedded below and more information can be found at their official site at http://www.lvji.cn/en/index.
There are two main revenue streams, 1) Sales of online tour guides and 2) Sale of customised content.
1. Sales of online tour guides
Sales of online tour guides made up 98.4% of FY19 revenue. On this front, Lvji has 3 distribution channels in the form of OTAs (97.9% of FY19 online tour guide revenue), physical travel agencies (1.9%) and through their own Lvji App (0.1%).
For sales via OTAs and through the Lvji App, end users (tourists) buy Lvji online tour guides through the respective apps and websites. Revenue is recognised on a gross basis as the product of the volume of online tour guides sold and the average listing price of these online tour guides on the respective distribution channels.
For sales to physical travel agencies, online tour guides are sold in the form of activation codes, which are typically embedded in a physical card. These cards are then resold to end users. End users may use the activation codes on Lvji’s H5 mobile websites or through the Lvji App to access the online tour guides.
Lvji does not expressly disclose the identities of their main customers. However, by the descriptions provided in the IPO prospectus as well as our own diligence checks on various Chinese OTA platforms, we believe that Customer A (57.7% of 1H19 revenue) is Tongcheng-Elong (0780.HK) while Customer B (37.3% of 1H19 revenue) is privately-held Lvmama.
It is noteworthy that Lvji has exclusive partnerships with both Customer A and B, where Lvji is the sole online tour guide being sold on their platforms. With these partnerships, Lvji has control over the pricing of its online tour guide on these OTA platforms.
2. Sale of customised content
This segment made up 1.6% of FY19 revenue. This involves one-time sales of products and services like creating bespoke, proprietary online tour guide contents for tourist attractions in the form of independent apps, mini programs or H5 mobile websites. These are commissioned by administrators of tourist attractions or local government offices.
There are two main cost drivers, both of which are embedded within cost of sales – 1) Concession fees and 2) Amortisation of other intangible assets. Together, these made up 82.2% of FY19 operating expenses.
1. Concession fees
When online tour guides are sold via OTAs, these OTAs retain a concession fee for every sale with take rate of ~50%. Concession fees made up 70.5% of FY19 operating expense.
2.Amortisation of other intangible assets
Costs pertaining to development of illustrated maps, text and audio contents are capitalised under other intangible assets. The asset base is amortised with useful lives of five to 10 years and expensed in cost of sales. Amortisation of other intangible assets made up 11.7% of FY19 operating expense.