• Global IP protection leader on video content with strong technical track record

• Surging demand for IP protection on streaming platforms to support growth

• Expansion in China to catch the IP monetisation trend and go-overseas story

• Bright growth prospect backed by supportive policy and wide customer base

What’s New

Background. Founded in 2005 and listed in HKEX in Jan 2018, Vobile (3738 HK) is a global leading SaaS provider for digital content asset protection and transaction. It is the ranked first in the world in terms of 2016 revenue with a worldwide market share of 7.5%, according to Frost & Sullivan. Vobile provides content protection and content monetisation solutions to help content owners identify potentially infringing content and reduce infringement[1]induced revenue loss. Its revenue grew at CAGR of 79% during FY18- FY21, mainly generated from: (1) Subscription services– consisting primarily of content protection (e.g., Video Tracker, watermark technologies) and channel management, and (2) value-added service consisting of content monetisation platforms to enable revenue-sharing for conventional home video distribution through online platforms. These two segments account for 36% and 63% of total revenue, respectively, as of 1H22. By region, the US and Mainland China contributed 59% and 41% of total revenue, respectively, in 1H22.

Industry growth: Growing IP protection demand riding on online video content explosion.

The online video platform market size is expected to expand at a CAGR of 18.4% between 2022-2028 to reach US$22.9bn by 2028 globally, according to Grandview research. In addition, traditional content parties such as Disney and Warner Bros are transforming to streaming media and direct sell-to-consumer, which is further driving the content transaction business and demand to protect their copyrights.

Industry growth: Supportive industry policy in China.

Chinese government’s latest 14th five-year plan (2021- 2025) guided that added value of core industries in the digital economy will reach Rmb150bn or 10% of GDP in 2025, representing a 16% 4-year CAGR. Among them, IP and patent protection is one of the key infrastructures to consolidate the digital economy, which has received supportive measures from the government.

Growth driver #1: Deepening social media platform revenue-sharing monetisation. Over 60% of Vobile revenue comes from value-added service, or revenue[1]sharing model by cooperated platforms. Further monetisation comes from wider access to client content assets. Vobile will help the content owners to maximize the value of its IPs property by tracing the copyright infringement and get revenue-sharing from the realized income. There are millions of video content on YouTube and Facebook which are IP-related content or re-created based on other popular IPs, which should favour leading IP right protection players like Vobile. In Aug 22, Vobile upgraded their contract with Warner Bros to help manage and monetise all its content in library on different social media platforms.

Growth driver #2: Expanding customer coverage via cross selling. Vobile is expanding its customer base from the tier-1 firm studio and IP owners to tier-2 and 3 players in the US and China. In 1H22, subscription-base revenue grew 136% to HK$202m, driven by increased customer number and recurring income. In addition to expanding customer coverage, the company expanded the scope and amount of content protection product under different scenarios. Vobile also cross-sells its diverse valued-added service product to existing customers to provide their new monetisation opportunities via new content distribution channels.

Growth driver #3: Catch IP protection trend in domestic market. Foreign movies and content created by leading global film studios enjoys high popularity in China. It leaves ample room for Vobile to leverage its unparalleled protection capabilities to promote content transaction in China. This business model is still at the early stage in China but the growth and trend are solid. We expect the company to register robust growth via (1) assisting content providers and owners to manage and monetise their content in downstream distributor or on emerging video channels such as Douyin, Kuaishou (1024 HK), Bilibili (BILI US), etc, and (2) assisting the domestic original content to go overseas, including obtaining advertising and other revenue sharing when distributed on overseas platforms like YouTube and Facebook.

Competitive advantage #1: Leading market position with strong customer base. As the leading digital content protector, Vobile customers consist of 178 global film studios (e.g, Paramount, Warner Bros, Universal) TV networks (e.g. HBO, BBC, NBC) and content owners (e.g. Disney (DIS US), Netflix (NFLX US), YouTube, iQiyi (IQ US), ByteDance) in the US and Asia. The well-established relationship with leading content partners enables it to cover wide video content and build up strong ecosystem on IP protection network.

Competitive advantage #2: Proven track record on technological capabilities. The company has the industry leading IP rights tracking capabilities including proprietary VDNA (fingerprint) and watermark technologies. The company’s core VDNA technology is designed to detect video content matches that have undergone manipulation by infringers enabling the platform to discover audio, video, and image content accurately and efficiently. Over the 17 years of business operations, the company has accumulated 10m+ VDNA assets, the largest video DNA database authorised by IP rights holders. The effectiveness of VDNA is evidenced by the global market leading position and high customer retention rate of 95%.

Competitive advantage #3: Business expansion via acquisition. The company acquired Particle culture Technologies in 2022 to further strengthen its leadership in content product offerings and expand its geographic reach in China. The Particle culture covered several video platforms in China and offers product solutions for video content on online video platform (e.g., Tencent Video, Bilibili) to integrate into broadcast and TV network in China. Along the way, Vobile made several significant acquisitions, namely Blayze (2014), Rentrak (2015), IP[1]Echelon (2018), the RightsID and ChannelID divisions of ZEFR (2019). These acquisitions enable the company to enlarge the business scale and expand customer coverage.

Financials and valuation. Vobile raised HK$74.7m in its initial public offering (IPO) on the HKEX in Jan 2018. In 1H22, revenue was HK$556m, up 74% y-o-y, and adjusted net profit increased by 39% to Hk$50m, adjusted net profit margin at 9%. Apart from that, Vobile has cash and cash equivalent of HK$438m and recorded a net operating cash inflow of HK$13m in 1H22. We expect Vobile to maintain 40% revenue growth in the next three years. If we were to assume a revenue growth of 40% for FY23, Vobile is trading at c.5x FY23 PS. The valuation is appealing vs. industry peers’ c.7x FY23 PS, (e.g. Weimob (2013 HK) and Kingdee (268 HK) on the back of a stronger growth profile. Key risks. (1) fail to retain existing major customers (2) earnings pressure due to expansion into new market