Securities Times reporter Zhilan
After years of development, the domestic e-sports industry is gradually entering a mature stage.
Recently, Hero Sports, which is mainly engaged in the operation of e-sports events and related businesses, has applied for listing in Hong Kong. As a leading company in the operation of domestic e-sports events, if Hero Sports is successfully listed, it is expected to become another landmark event in the development of the e-sports industry.
However, the current loss is still the norm in the e-sports industry, and leading e-sports companies, including Hero Sports, have not been able to achieve profitability.
At present, Hero Sports is exploring diversified businesses such as content and community, but can these measures help it reverse the loss situation at a time when there are limited cash-out channels and rising costs?
E-sports event leader listed
Recently, Hero Sports, which is mainly engaged in the operation of e-sports events and related businesses, submitted an application for listing on the Hong Kong stock market.
In the prospectus, Hero Sports stated that in terms of revenue in 2020, it accounted for more than 75% of the market share of China's e-sports industry, ranking first.
The main mode of Hero Sports' event operation business is to provide event operation services for game developers, publishers and other e-sports industry participants, including event planning, event management, live broadcast, etc. Hero Sports collects event operation service fees from it.
The data shows that in 2019 and 2020, the number of games operated by Hero Sports was 2,647 and 2,054 respectively.
As of September 30, 2021, Hero Sports operated 94 e-sports events for 29 e-sports games at home and abroad, with a total of about 5,600 games.
Hero Sports stated in its prospectus that in 2020, it will be ranked first in Asia in terms of the number of events held.
In terms of e-sports business and commercialization revenue, the company ranks first in China.
In the e-sports industry, Tencent's influence is self-evident.
At present, Hero Sports is the top official professional e-sports event operator for mainstream online games such as "Honor of Kings", "Peace Elite", "Jedi Survival", "Cross Fire" and "Clash Royale".
These games are owned by Tencent.
Taking "Honor of Kings" as an example, since 2017, Hero Sports has been the only event operator of the "Honor of Kings" professional league; since the launch of the "Peace Elite" professional league, Hero Sports has also been its only event operator. business.
Tencent has also been the largest customer of Hero Sports for many years. In 2019, 2020 and the first nine months of 2021, Hero Sports' revenue from Tencent accounted for 44.6%, 48.2%, and 31.2% of its total revenue, respectively.
In addition, in the first nine months of 2021, Hero Sports also received 16.2% of its revenue from Douyu, of which Tencent is the largest shareholder.
Tencent is also an important shareholder of Hero Sports. Currently, Tencent holds a 13.54% stake in Hero Sports.
According to the cooperation agreement signed by the two parties in 2021, before November 18, 2023, the two parties will still carry out a lot of cooperation in e-sports event operation, content production, sponsorship and marketing.
Costs rise and losses widen
Benefiting from the rapid growth of the e-sports industry, the revenue of Hero Sports has grown rapidly since its establishment.
However, in 2020, under the influence of the epidemic, the number of e-sports events organized by Hero Sports decreased, and its revenue also declined.
In 2019 and 2020, the revenue of Hero Sports was 927 million yuan and 892 million yuan respectively.
Among them, the revenue from the operation of e-sports events decreased from 624 million yuan in 2019 to 492 million yuan in 2020.
In the first nine months of 2021, Hero Sports' revenue reached 1.322 billion yuan, a significant increase from the same period in 2020, but its losses are also expanding.
In 2019, Hero Sports achieved a net profit of 30.8 million yuan, and a loss of 596 million yuan in 2020. In the first nine months of 2021, the loss further expanded to 1.364 billion yuan.
A large portion of Hero Sports' losses came from changes in the fair value of convertible redeemable preferred shares issued to investors.
In 2020 and the first nine months of 2021, this value is 267 million yuan and 962 million yuan respectively.
However, even after deducting this part, Hero Sports' losses are growing.
An important factor for the expansion of losses is that the cost of sales has risen too fast.
Taking the data of the first nine months of 2021 as an example, its cost of sales reached 1.359 billion yuan, a substantial increase from 523 million yuan in the same period in 2020, and even exceeded the company's operating income for the same period.
Hero Sports stated that the increase in cost of sales was mainly due to the increase in the production cost of e-sports content, as well as the increase in the fees paid to talents and anchors, and the cost of staff and labor.
According to the company's announcement, the production cost of hero sports e-sports content increased from 275 million yuan in the first nine months of 2020 to 538 million yuan in the same period of 2021.
The reason is that the number of events it operates has increased from 60 to 94.
According to this calculation, during this period, the average content production cost of each e-sports event of Hero Sports increased from 4.58 million yuan to 5.72 million yuan.
In addition to content production costs, Hero Sports "directly attributable to other costs of generating revenue" increased from 184 million yuan in the first nine months of 2020 to 367 million yuan in the same period of 2021.
This part of the cost mainly includes the payment made by Hero Sports to game developers and publishers for exclusive access to e-sports sponsorship rights.
This shows that the cost for Hero Sports to obtain event-related qualifications has also increased.
Hero Sports said it expects the company's profitability to improve in the future, while operating cash flow will improve.
However, the company also stated that due to the rapidly developing business environment and competitive landscape, it is impossible to predict when it will start generating positive operating cash flow and profits, and may continue to lose money in the foreseeable future.
Diversity exploration remains to be seen
From the perspective of market size, although many research reports believe that the current market size of China's e-sports industry has exceeded 100 billion yuan, it includes the sales of hardware equipment such as computers and consoles, mobile e-sports games, live e-sports, e-sports Income from events, etc.
Specific to the e-sports events with high direct participation of the general public, the data released by the hero sports prospectus shows that in 2020, the market size of China's e-sports event industry is about 1.4 billion yuan, and it is expected to increase to 8.9 billion by 2026. Yuan.
It can be seen that the current market size is not large.
Relevant persons also said in an interview with a Securities Times reporter that the overall scale of the current e-sports industry is still relatively small, the channels for monetization are narrow, and the income is highly concentrated in the upstream links, making it still difficult to make profits in the middle and lower reaches.
In the short term, it is difficult for companies or local governments to see real money income.
For Hero Sports, under the influence of the epidemic, the income brought by the pure e-sports business in the short term is limited.
In order to expand the scale of revenue, Hero Sports turned its attention to other links in the e-sports industry chain, such as producing e-sports-related programs, expanding talent and anchor content, etc.
For e-sports programs, Hero Sports cooperates with related game developers, publishers, and various media and distribution channels to produce variety shows related to games and e-sports, and distribute them through online entertainment platforms.
The e-sports talent and anchor content service mainly provides content and services such as e-sports, game live broadcast and short films for live broadcast platforms by discovering and cultivating talent anchors.
Data shows that as of September 30, 2021, Hero Sports has 5,589 active celebrities and anchors under management on platforms such as Douyu and Huya.
In the first three quarters of 2019, 2020 and 2021, Hero Sports’ revenue from e-sports operations accounted for 67%, 55%, and 35%, respectively, showing a downward trend, and revenue from commercialization gradually increased.
Commercialization revenue includes Hero Sports helping game developers and publishers sell media rights for e-sports events, providing talent and live broadcast services for brands and sponsors, and providing advertising agency services in the e-sports content it provides.
With the rising cost of the main business of e-sports, it remains to be seen whether these layouts can help Hero Sports turn losses.