Vertex Technology Acquisition Corp Ltd – Limited value in watching Live November 20, 2023 368

  • Vertex Technology Acquisition Corp is acquiring live streaming company 17LIVE Inc for S$800.8mn through the issuance of 160.162mn new shares. The valuation may rise another S$122mn from the issuance of new (earnout) shares by Financial targets to issue these 24.4mn new (earnout) shares include EBITDA declining by an estimated 14% YoY in 2H23 (from US$11.14mn to US$9.6mn) and total revenue declining an estimated 12% YoY in FY23 (from US$363.7mn to US$320mn).
  • Revenue for 17Live has been declining since 2021. Revenue has been dragged down by falling active users and weaker average spending. Earnings in 1H23 have improved with a net profit of US$9.4mn. This has been achieved through cost-cutting
  • We recommend shareholders vote IN FAVOUR of the proposed acquisition and to FULLY REDEEM their shares at the Redemption price range of S$5.00-S$5.02 per Our Fair Value of VTAC post-acquisition is S$5.08, assuming no redemption. It declines to S$4.55 if Earnout shares are fully issued. We also believe the purchase cost of the shares issued to the vendors of 17LIVE Inc, promote shares and earnouts shares are significantly lower than the redemption price range. Based on our current fair value, we view the warrants as out of money and there is a risk it can expire at zero value.

 

Company Background

Vertex Technology Acquisition Corp (VTAC) is a special purpose acquisition company (SPAC) listed on SGX on 20 January 2022 at the IPO price of the SPAC. On 2 October 2023, VTAC proposed to acquire 17LIVE Inc by issuance of new shares. Established in 2015, 17LIVE Inc (17LIVE) is a pure-play live streaming platform with its main markets in Japan and Taiwan. Revenue is generated from revenue sharing in Liver live streaming and V-Liver live streaming. It commands a market share by revenue of 20.8% in Japan and 26.9% in Taiwan in 2022, according to Frost & Sullivan. The content database encompasses a range of genres including music, games, education, fashion, art, chatting, handcrafting, lifestyle and cooking.

 

Investment Highlights

  • VTAC has proposed to acquire 17LIVE for S$800.8mn through the issuance of 162mn new shares. Assuming no redemption, the existing shareholder’s stake in VTAC (excluding Vertex SPC and Venezio) will shrink from 71.1% to 15.4%. Another 24.408mn new shares will be issued upon meeting financial targets (i.e. earnout shares). The financial targets include EBITDA declining by an estimated 13% YoY in 2H23 to US$9.9mn and revenue declining an estimated 12% YoY in FY23 to US$320mn.
  • 17LIVE’s strategy for expanding in the Japanese and Taiwanese markets encompasses three elements, V-Liver, mobile gaming and live commerce or livestream shopping. 17LIVE also hosts a wide range of in-person events to encourage engagement, facilitate the development of streamers, and craft immersive user experiences. V-Liver is live streaming using virtual characters. It is a US$973mn revenue industry, expected to grow by 41% CAGR from 2023-27 in Japan, according to Frost and Sullivan. 17LIVE V-Livers should grow faster since it is only 1% of 1H23 revenue (or US$1.5mn).
  • Based on price to sales and EV/EBITDA relative multiple of listed peers, we derive a fair value of 17LIVE between US$581mn to US$700mn. When we equally weigh the importance of sales and earnings plus balance sheet strength, our 17LIVE fair value is US$641mn. Assuming no redemption of shares by existing shareholders, the fair value of the combined entity of VTAC and 17LIVE is S$5.08 per share. When we include the earnout shares, the fair value per share declines to S$4.55 per share.

Phillip Securities Research was appointed by SIAS and received monetary compensation from SIAS to provide independent research on the de-SPAC of Vertex Technology Acquisition Corporation Ltd.

 

Revenue

The predominant source of revenue for 17LIVE is derived from the sale of virtual gifts and subscription plans. Revenue will only be recognized upon the streamer receiving the gift and virtual coins and expiry of the coins (1 year after purchase). The monetisation process kicks off with live stream viewers purchasing virtual gifts for their favoured streamers. These virtual gifts can then be sold back to the platforms by the streamers, setting the stage for a revenue-sharing model based on an agreed-upon ratio.

 

The second segment involves interactive video streaming companies generating revenue through the sale of user subscription plans, offering users exclusive content and privileges in exchange for a recurring fee.

 

In the third segment, platforms can efficiently capitalise on their reach by providing digital advertising spaces to brands that align with their target audience, creating opportunities for targeted marketing.

 

FY21 revenue reached US$497.8mn (+21% YoY) driven by user growth during COVID. However, there was a decline in FY22 (-26.9% YoY) due to a shift towards quality users. Quality users are defined by 17LIVE as those who have consecutively viewed a specified live streamer’s content over 320 times in total. It was unclear why 320 was the number used.

 

Liver live streaming contributes over 97% to total operating revenue in FY22 (Figure 1). The V- Liver streaming industry is a potential growth catalyst for 17LIVE. It should expand from its modest 1% contribution to 2022 revenue.

 

                 

 

 

 

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About the author

Profile photo of Paul Chew

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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