On the evening of October 28th, Aolife Entertainment (002292.SZ) disclosed its third-quarter report for 2021 and information on the proposed investment amounts for adjusted private placement projects. Following a negative net profit growth in the second quarter, Aolife Entertainment's net profit continued to decline in the third quarter. Since the end of 2020, commodity prices have been continuously rising, along with continuous chatter about 'rising' shipping costs. As a listed company with overseas revenue accounting for half of its earnings and toy sales and baby products accounting for over 75% of its business, Aolife Entertainment has been greatly affected by this.
Do the long-term strategic agreements between major shipping companies have corresponding thresholds for business volume or capital? What strategies can small and medium-sized enterprises use in the face of rising shipping costs? From the company's perspective, what are the advantages and disadvantages of signing long-term strategic agreements with shipping companies? Xiang Weili, Executive Director of Frost & Sullivan Greater China, was interviewed by a reporter from CCB News to answer questions related to long-term shipping agreements.
Cailian Social
Cainiu News Agency (Guangzhou, Reporter Ren Chaoyu)On the evening of October 28th, Aoyou Entertainment (002292.SZ) disclosed its third-quarter report for 2021 and information on the proposed investment amount for the adjusted private placement project. Following a negative net profit growth in the second quarter, Aoyou Entertainment's net profit continued to decline in the third quarter. Affected by factors such as raw materials and maritime transportation, net profit dropped significantly by 2902.19%, turning from a profit to a loss year-on-year.
Data shows that although shipping prices have loosened, it is very likely that they will continue to fluctuate at a relatively high level in the future. A shipping industry analyst told reporters that shipping prices can still remain high in Q4 because the mismatch between supply and demand has not been completely resolved.
This may mean that the pressure on shipping costs for OPPO Entertainment's Q4 will continue.
In terms of operations, the trend gaming business, which is most concerned about by the capital market at OFG Entertainment, has just begun and requires certain necessary investments. Based on the judgment that industry barriers are low and there are many entrants, there are still many uncertainties regarding whether this business can succeed.
As the end of 2021 approaches, whether the goodwill brought about by the company's significant mergers and acquisitions in the early stages will be impaired on the balance sheet date has also attracted market attention.
No long-term contracts? The pressure on shipping costs in Q4 may remain
Since the end of 2020, commodity prices have been continuously rising, accompanied by persistent reports of 'price increases' in shipping costs. The combined effect has eroded profits in multiple industries. As a listed company with overseas revenue accounting for half of its earnings and toy sales and baby products accounting for over 75%, Aovi Entertainment has been greatly affected by this.
The company's third-quarter report shows that in the first three quarters of 2021, operating revenue increased by 13.77% year-on-year to RMB 2 billion. The net loss amounted to RMB 81.2966 million, including a loss of RMB 94.4805 million in the third quarter, which became the main period of loss for the first nine months.
During the reporting period, the average sea freight rate for the company's baby products business and toy business increased by 207% and 477% year-on-year respectively. Specifically, in the third quarter, the average sea freight rate for baby products and toys was $12,000 per container and $15,000 per container, respectively. The impact of price increases further intensified, resulting in a year-on-year increase of over $40 million in sea freight costs for the third quarter. The prices of bulk raw materials continued to rise, with the procurement cost of plastic raw materials used in major products increasing by about 50%.
Judging from the continuously rising shipping costs of the company, it is unlikely that OFE Entertainment has the possibility of obtaining long-term contracts for shipping. In an interview with a reporter from Cailian News Agency, OFE Entertainment did not directly answer whether it holds long-term contracts. However, it stated that its products are mainly exported to countries such as North America, Central and South America, Europe, and Southeast Asia. In the long run, current shipping prices are expected to return to a reasonable level. In addition to actively maintaining communication with existing suppliers and shipping companies, the company is also developing new shipping companies. By booking space through multiple channels, it expands the guarantee of spare storage space to ensure timely shipment of goods and reduce gross profit losses.
Zhang Xiaofei, an expert from Whale Platform Think Tank and the director of Yumang International Logistics, told reporters that long-term agreements involve cargo space and prices. There must be a threshold for long-term contracts, but it varies among different routes and shipowners.
"
Xiang Weili, an expert from the Whale Platform Think Tank and Executive Director of Frost & Sullivan Greater China, told reporters that long-term agreement contracts are generally signed by large enterprises with relatively fixed goods and larger volumes. Small and medium-sized enterprises should actively negotiate prices with shipping companies, sign relevant long-term agreements, and hedge against pressure by establishing warehouses at the destination port, actively negotiating with destination port customers, and jointly bearing freight costs.
According to incomplete statistics from CICC, Midea, Haier, LONGi, and TCL have all signed strategic cooperation agreements with COSCO Shipping & Logistics Holdings this year.
The growth rate of the Shanghai Shipping Exchange China Export Container Freight Index has slowed down significantly in the past two weeks. Data on October 22 showed that the composite index only rose by 0.5% compared to the previous period. However, this does not indicate that a turning point in shipping costs will occur in the short term.
The latest report from Zhongzhou Futures on October 18th indicates that the significant increase in global maritime shipping is mainly due to post-pandemic supply-demand mismatches, structural differences in maritime shipping, and fuel prices. As the traditional peak season of the fourth quarter gradually ends, there are signs of weakening in the forward charter market. Fourth-quarter freight rates may slightly decline, but due to the potential rise in crude oil prices, the cost impact is expected to keep freight rates fluctuating at a relatively high level.
Another maritime analyst told reporters that shipping prices can still remain high in Q4, as the mismatch between supply and demand has not been completely resolved.
Adjust the proposed investment amount for fundraising projects. The inherent advantages of online games still need to be developed through post-launch operations.
TikTok collectibles are currently the most anticipated business of OFE Entertainment. Judging from the performance of related star companies, this business is characterized by high profit margins and strong growth potential. For OFE Entertainment, which specializes in toy development and sales with a focus on IPs, entering the TikTok collectibles industry undoubtedly has an inherent advantage.
The layout of the pop culture business started in the second half of 2020, and production lines began construction in the first half of 2021. In the second half of the year, the company raised its strategic positioning for the pop culture business again, establishing a Pop Culture Business Unit for independent management and continued resource support. Currently, the pop culture team has nearly 50 members.
It can be seen that OPPO Entertainment is making great efforts to build the trend gaming business into the company's second growth curve.
However, it cannot be ignored that entering a new industry requires certain investment. From the perspective of book value, the company's cash flow situation is not optimistic. Data from the third-quarter report shows that the company has 230 million yuan in monetary funds and 1.121 billion yuan in short-term loans, indicating a significant funding gap. The net operating cash flow was only 17.8715 million yuan, resulting in a net outflow of 338 million yuan in cash and cash equivalents, which raises concerns about its ability to generate revenue.
In terms of offline channels, OPPO Entertainment mainly collaborates with other companies. The company told the Financial News and Communications Agency that its offline channels cover over 10,000 stores including Ming Chuang Youpin, Lingli, KK Group, Sanfu, and FamilyMart convenience stores.
In comparison, Poplar Mart has chosen to build its own offline channels. According to statistics from Tianfeng Securities, in June 2021, it had a total of 212 offline stores in the Chinese mainland, covering 47 cities.
Perhaps based on the above circumstances, AOV Entertainment launched the 'Non-Public Offering of Shares' plan in May 2020, aiming to raise approximately 1.1 billion yuan. However, the final results showed that the private placement raised about 544 million yuan at a price of 4.48 yuan per share, which is quite different from the planned target. This also represents to some extent the capital market's preference for the company's fundraising projects.
The latest announcement shows that due to the decline in fundraising scale, the company has decided to adjust the proposed investment amount for the non-public offering of shares.
A media industry analyst told reporters: 'I believe that trend toys have social attributes. After buying them, people can take photos and communicate with friends. Additionally, from an IP perspective, observing Popomart reveals that their own IPs are the main sales force, so operational capabilities are very important. Moreover, the barriers to entry in this industry are low, and anyone can participate.'
Public information shows that 52TOYS recently announced the completion of a $400 million Series C financing; AOF's partner MingChuang Youpin also entered the trend gaming business last year and launched the new brand TOPTOY. Tencent invested in the trend gaming company ViViCat, holding a 30% stake. Alibaba Pictures established a new trend gaming business brand 'Koi Joy'.
The industry is booming, and the trend of consolidation into a few tracks has become the most intuitive perception. Against this backdrop, there is significant uncertainty about whether OPPO Entertainment can break through.
Finally, it is worth noting that the past 'buying, buying, buying' M&A rhythm has brought a huge goodwill to OFE Entertainment. After years of impairment, there is still about 1.85 billion yuan in goodwill. Among them, the book value of Beijing April Sky's goodwill is 448 million yuan, and the book value of BabyTrend Inc.'s goodwill is 466 million yuan. However, according to the 2021 interim report, Beijing April Sky's net profit was a loss of 9.0975 billion yuan, while Baby Trend, Inc.'s net profit decreased by 55% compared to the same period last year.
It can be seen that the company faces significant pressure on goodwill impairment. If the aforementioned companies do not perform well in the future, it is very likely that Aofei Entertainment will continue to make provisions for goodwill impairment on its balance sheet date.
Frost & Sullivan Insight & Extended Readings
Q: Are there any corresponding business volume or capital requirement thresholds for the long-term strategic agreements of major shipping companies? What strategies can small and medium-sized enterprises use in the face of rising maritime costs?
A: In the industry, large cargo owners and major shipping companies generally sign long-term strategic agreements to protect their interests. Both parties will agree on a business threshold. Therefore, those who sign long-term agreement contracts are usually large enterprises with relatively fixed goods and larger volumes, such as South Korea's Pan Ocean Shipping and global energy giant Shell, which have continuously signed long-term strategic agreements, and Maersk and Jingke Energy have signed strategic cooperation agreements. Long-term agreements typically set contract terms based on the shipping company's available space, customer volume, and current freight rates. A long-term agreement is usually just a foundation contract; in most cases, both parties will agree to sign separate transportation contracts for each shipment, clarifying and detailing their respective rights and responsibilities. In some contract negotiations, both parties may agree to set a range of freight rate fluctuations. Within this range, they share risks and benefits, which is more fair for both parties.
Currently, the industry encourages enterprises to sign long-term agreements with shipping companies. For small and medium-sized enterprises (SMEs), they can actively negotiate prices with shipping companies and sign relevant long-term agreements to lock in risks and costs. In addition, by establishing warehouses at the port of destination, SMEs can enhance their supply chain integration capabilities and actively expand their supply chains. Finally, SMEs can actively negotiate with customers at the port of destination, jointly bear freight costs, and complete order deliveries as soon as possible.
Q: It has been observed that some listed companies have not signed long-term agreements with shipping companies. From the company's perspective, what are the advantages and disadvantages of signing long-term strategic agreements with shipping companies?
A: Signing long-term agreements can stabilize freight rates to a certain extent. In the current environment of rapidly rising freight prices, companies that sign long-term agreements can control costs, stabilize supply chains, and reduce operational risks to a certain extent.
The downside is that long-term agreements often fail to accurately predict future industry development trends, and the flexibility of clause settings is relatively low. This makes it more difficult to execute long-term agreements when there are changes in the shipping industry or when foreign trade conditions improve. For example, long-term agreements signed before 2020 had lower prices due to widespread market pessimism about future industry development. Therefore, after freight rates rose, most maritime companies reduced bookings, container supply, and postponed exports, causing goods not to be shipped normally.
*This article is reprinted from 'Cainiao Finance Union', with reporter Ren Chaoyu. The original title was 'AOF Entertainment's Q3 Profit Turns into Losses, Rising Shipping Costs May Continue to Erode Revenue, and the Gaming Business Still Needs a Breakthrough'.
