Baofeng Technology's profit dilemma: What are the reasons for not adapting to the local environment?

After opening at the fifth limit down on July 17, although Feng Xin, chairman of Baofeng Technology (300431.SZ), was mentally prepared for the company's stock price to fall after resuming trading, no one dared to predict to what extent the company's stock price would fall. After all, with the company's current market value of nearly 30 billion yuan and a profit of more than 8 million yuan in the first half of the year, it is difficult to calculate the support point of the stock price through valuation.

As the first so-called Internet platform company on the ChiNext, coupled with a serious lack of liquidity, the company's stock price has long been out of touch with its actual performance. Under the special trading system of A-shares, the company has set a record of more than 30 daily limit increases after its listing. The problem it faces now is: these Internet companies have gone through many difficulties to adapt to A-shares, but can A-shares provide a trading rule that is compatible with them?

Profit Dilemma

Compared with Baofeng Technology, Youku Tudou (YOKU.N), which is listed on the New York Stock Exchange, has never made a profit since its listing in 2010, and its losses have been getting bigger and bigger in recent years. In 2014, it lost 838 million yuan, and in the first quarter of this year alone, it lost 517 million yuan. Despite this, the company's current share price of around US$19 per share is not much lower than the opening price of US$27 per share on the first day of listing six years ago.

Compared with the valuation standards of the US capital market for Internet technology companies, A-shares obviously cannot tolerate such continuous losses for a company. According to existing regulations, if a company incurs losses for three consecutive years, it will be delisted from the market.

In order to welcome these innovative Internet technology companies, exchanges including the Shenzhen Stock Exchange's ChiNext are seeking to relax listing conditions, allowing innovative Internet companies that "can make profits but give up profits for the sake of company development" to not be bound by the rigid condition of delisting due to losses within three years.

However, due to the revision of the Securities Law, the Shenzhen Stock Exchange's reform of the GEM is still at the stage of a plan. At this time, Baofeng Technology, as the first Internet technology company to dismantle the VIE structure, successfully listed on the GEM in March this year.

According to the reporter's understanding, before the listing, Baofeng Technology and the Shenzhen Stock Exchange had multiple rounds of communication. Ultimately, subject to the listing rules of "must maintain profitability for more than three years", Baofeng Technology still carried out cost control to ensure profitability. In the three years before the company went public, the proportion of operating costs to total operating income basically remained between 24% and 28%.

After going public, in order to increase user activity as quickly as possible, Storm Technology used a large amount of the raised funds for the copyright purchase of video resources, which is what the company described in its prospectus as the "Internet High-Definition Video Service Platform Upgrade and Expansion Project." More importantly, according to the information disclosed by the company in early June, the company had already "prepaid" this fee long before the raised funds were in place, and had spent 132 million yuan on the "Internet High-Definition Video Service Platform Upgrade and Expansion Project" alone.

The surge in costs is most directly reflected in the company's financial statements. In the first quarter, the company's operating costs accounted for 34% of its revenue, up from 25% in the year before its listing. Coupled with the increase in sales and administrative expenses, this directly led to the company's small loss in the first quarter.

According to the company's first-half performance forecast announced on July 14, the company's first-half profit is expected to be between 3.4332 million yuan and 8.0108 million yuan, a decrease of 65% to 85% from the same period last year.

Acclimatization

The profit earned in half a year was less than 8 million yuan, while the corresponding market value was nearly 30 billion yuan. Such a huge valuation disparity made investors feel uneasy.

On the evening of July 15, after three consecutive limit downs, Baofeng Technology posted a stock price stabilization announcement. However, in the eyes of investors, this announcement did not contain much substance. The share repurchase, share increase and employee stock ownership plan mentioned in it were all preceded by a qualifying condition of "actively exploring" or "introducing at the right time."

Then on the evening of July 16, Baofeng Technology again issued an initiative in the name of Feng Xin, saying that the company's senior executives were unable to increase their holdings due to regulatory requirements, and therefore proposed that the company's employees increase their holdings. Feng Xin would "cover" the losses incurred by the employees' increase in holdings, and at the same time provide financial support for some employees' increase in holdings.

The securities investment consultant interviewed by the reporter was unable to give an accurate valuation as to how low the stock price of Baofeng Technology would fall. In his opinion, the stock price of Internet companies such as Baofeng Technology cannot be measured by traditional valuation methods. What can ultimately affect the stock price is a balance between the long and short sides.

Just like the round of surge in Storm Technology's stock price after its listing, in addition to the favorable external environment of the overall rise of A-shares, more importantly, it is based on the special trading rules of A-shares. First, its issue price of 7.14 yuan per share corresponds to an issue price-earnings ratio of only about 15 times, and the stock price is seriously underestimated, which has become the original driving force for the subsequent rise in the secondary market; secondly, the stock has only 30 million shares in circulation, and the cumulative trading volume in the first 20 trading days after listing is less than 1 million shares, and the market supply and demand are seriously unbalanced; coupled with the A-share daily limit system, the liquidity of the stock is severely suppressed, and the more investors want to buy, the less they can buy.

The stock price did not stop until it reached a high of 278 yuan per share. At this time, the stock price had increased nearly 40 times compared to the original issue price. If the price-earnings ratio is used as a reference, it is close to 600 times.

"The U.S. stock market has many valuation standards for these Internet companies, such as referring to the valuation of the same industry, but what investors value most is the innovation capabilities of these companies." Industry insiders who have been paying close attention to U.S. stocks said in an interview with a reporter that as more and more Internet companies return to the A-share market, including some innovative companies such as mobile games, the traditional price-to-earnings ratio valuation method cannot be used to measure the value of these companies.

"It is impossible for the regulators to modify the trading rules because of these Internet companies. Ultimately, it depends on how investors judge the investment value of these companies." said the industry insider who was interviewed by the reporter.

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.