How can Semk Holding grow its B.Duck family?
Photo source: Semk Holding’s Prospectus dated 30 December 2021
Who does not have a childhood memory with a cute little bath duck? I bet at least most parents would buy bath ducks for kids nowadays. Recently, a more than twenty years’ old bath duck, B.Duck, was listed on the Hong Kong Exchange, and its creator’s name is Semk Holding International Limited (“Semk Holding”). I felt surprised that a company with a duck IP could go IPO. However, its business does not seem very promising when looking closely and its share price already reflected that.
Learning from Disney’s business operation, Semk can seek more cooperation, such as strategic partnership or acquisition, with Chinese sticker companies to rejuvenate itself.
Disney and character IP industry
Semk Holding is in the character IP industry. The biggest player or winner in this industry is Disney. Mickey Mouse, as Disney’s first and one of the most successful characters, can bring revenue to its creator for four rounds in general, 1) box office, 2) video sales, 3) theme parks, and 4) consumer products.
Mickey Mouse was first seen in the cartoon short “Plane Crazy” on 15 May 1928 and became a hit in the animation movie called “Streamboat Willie” on 18 November 1928 because of the use of sound. According to “The Numbers. com”, a website providing movie data, “Fantasia”, a movie of the Mickey Mouse series, had box office revenue of US$83 million, shown on cinemas in 1940, 1985 and 1990.
In 1990, “Fantasia” was turned into Disney’s biggest selling video, notching up 14.3 million sales in the U.S. alone. To give some context, “Avatar”, probably the most popular movie of all time, sold 10 million DVDs in the U.S., and “Pirates of The Caribbean: Dead Man’s Chest” was the only release that outsold “Fantasia”.
In addition, people, not only kids but adults, can play with Mickey Mouse, costume-wearing workers of course, in Disney theme parks and recreate memories from those cartoons. According to the FY2020 Disney annual report (year ended on 30 September 2020), parks and resorts, one of the four (4) revenue segments, accounted for 29% of the total revenue and generated US$20.5 billion revenue.
What’s more, customers can buy Mickey Mouse products from head to toes. According to Wall Street Journal, in FY2018, Mickey Mouse and his gang (including Minnie, Goofy, Pluto, and Donald Duck) sold $3 billion in merchandise, including both adult and children’s products.
There is no doubt that outstanding marketing and operations contribute a lot to Disney’s success. However, it is the high-quality character, Mickey Mouse, that started everything. Acknowledging the importance of IPs, Disney started its strategic expansion in 2005. It brought numerous IP character related companies, such as Pixar for US$7.4 billion in 2006, Marvel for US$4 billion in 2009, and Lucasfilm (Star Wars) for US$4.06 billion in 2012.
Semk Holding and its future
According to the Prospectus dated 30 December 2021 (“Prospectus”), Semk Holding has a series of IP characters and B.Duck, the first IP, is the most popular one, accounting for 73.6% of the total revenue in 6M2021 (the first half-year of 2021 with financial year ended 31 December 2021). Please refer to the following screenshot.
Photo source: Semk Holding’s Prospectus dated 30 December 2021
As mentioned in the Prospectus, one of the risks for Semk Holding is that they may not maintain and enhance the popularity of their IP characters, especially B. Duck. To solve this issue, Semk Holding will use approximately HK$33.7 million, 11.8% of the net proceeds from IPO, to hire an additional of around 60 designers. There is no plan for acquiring external characters or other character IP companies.
Semk Holding has two business models, 1) the character licensing business and 2) the e-commerce and other business. The character licensing business is mainly to license IP characters to third parties and charge royalties from them. On the other hand, the e-commerce and other business is to directly sell character-featured products on online and offline channels to customers. The breakdown of two revenue lines is as follows.
Photo source: Semk Holding’s Prospectus dated 30 December 2021
Amazingly, Semk Holding can create such a big empire with mainly consumer product sales, only the last round in Disney’s IP business model. Merchandising licensing is attributed to nearly 70% of total character licensing business revenue and e-commerce and other business is all about consumer merchandise.
Increases in the character licensing business from FY2018 to 6M2021 were mainly due to the increase in excess royalties charged from licensees, according to the Prospectus. Semk Holding can charge more from licensees because of increased sales of goods or services featuring IP characters. On the other hand, the revenue from e-commerce and other business is decreasing from FY2018 to 6M2021. In other words, the licensees of Semk Holding have better abilities to sell goods or services than Semk Holding. However, all sales still depend on how popular the IP characters can be.
The main market of Semk Holding is in mainland China, accounting for 96.3% of the total revenue in 6M2021. That’s why the first strategy stated in the Prospectus is to open a flagship store in Shanghai due to geographical advantages. Such flagship store would serve as a one-stop platform for Semk Holding and licensees to showcase all character-featured products. In addition, Semk Holding plans to reserve a certain area of the flagship store for LBE (location-based entertainment) licensees to provide fans and customers with greater entertainment, dining, and leisure experience.
Photo source: Semk Holding’s Prospectus dated 30 December 2021
Linking the dots, we can see that Semk Holdings has an IP-concentration problem and its main geographic focus is on mainland China. That means Semk Holding must create more characters that can be popular in PRC to increase its revenue. Nevertheless, the in-house creation of IPs and the organic growth does not seem to be an effective solution since Semk Holding has been on this path for over twenty years and the problem is still there.
Referring to the expansion of Disney, Semk Holding can explore the inorganic growth path by establishing strategic partnerships with or acquiring other character IP companies in China, especially sticker companies. In China, it’s very interesting that lots of the most popular IPs are created through social media, specifically, Wechat. The main reason is that the user base of social media is huge and it’s easy to attract attention.
For example, Block 12, one of the earliest sticker creators in China, has a sticker pool with over 300 characters and its first sticker series, “长草颜团子”, had over 10 million fans as in 2019, according to the company’s announcement. “长草颜团子” is the first sticker in the following screenshot from the official website. In addition, this sticker company has received several rounds of financing from institutional investors and expanded its business to merchandise sales, clip doll machine operations and TV series production.
Photo source: The official website of Block 12
Another popular duck sticker series, “小刘鸭”, a more compatible character with B. Duck, has been downloaded more than 110 million times as of October 2019, according to the data from a “小刘鸭”‘s business partner. There is no doubt that many brands would cooperate with”小刘鸭” and utilize its popularity, including Tencent, Paris Baguette and Nestle. Please refer to the following screenshot. The two ducks on the top are “小刘鸭” and some licensees are shown below the ducks.
Photo source: 原仓一码通
Although the above popular and mature sticker companies are not cheap to buy, there may be room for strategic partnerships. Those sticker companies, as startups, can benefit from Semk Holding’s high-quality licensees and licensing experience. Semk Holding, on the other hand, can bring more popularity to the B.Duck family through cooperation and even expand to TV series or movie production if possible.
What’s more, there are so many sticker series on the Wechat platform and Semk Holding can buy some value-for-money ones to expand its IP family.
