Will the VTAC de-Spac bring us the hot growth stock we have all been craving?

THIS could be an interesting week for investors lamenting the absence of growth-oriented, technology-enabled companies in the local market.

This Friday (Dec 1), shareholders of Vertex Technology Acquisition Corp (VTAC) will vote on its proposed combination with 17Live – a livestreaming platform with a significant presence in Japan and Taiwan.

Some analysts have said VTAC is paying too much for 17Live. It has also not escaped the notice of sceptical investors that 17Live faces tough competition as well as evolving regulation, and that its user base has shrunk with the easing of Covid-19 restrictions.

This could mean a rocky start for 17Live as a public-listed company, assuming shareholders of VTAC vote the deal through.

Yet, the commercial potential of livestreaming is probably still in the process of being discovered; and 17Live has arguably achieved sufficient scale to be considered a credible player in this emerging field.

The way I see it, this may well be one of the most important new listings to hit the Singapore market in a long while.

17Live generates revenue primarily by selling virtual points to its users, who then use these virtual points to purchase virtual gifts for livestreamers. Users of the platform can also join fan groups of their favourite livestreamers by purchasing monthly subscriptions.

VTAC said in a circular to its shareholders that 17Live had about 87,000 contracted livestreamers as at Jun 30, and 550,000 monthly active users in H1 2023.

17Live has also rolled out in-app games where revenue is generated by users purchasing virtual equipment and tools. In H1 2023, 17Live achieved a game penetration rate of 25.5 per cent.

In addition, 17Live enables retailers and consumer brands to pursue “live commerce” campaigns – where appropriate livestreamers are invited to promote their products. The group worked with Hyundai on a campaign in Japan last year, marking the first time cars were sold in the country through a livestreaming channel.

Frost & Sullivan said in a report that 17Live was the top pure-play livestreaming platform in Japan in 2022, with a market share by revenue of 20.8 per cent; and the second largest in Taiwan, with a market share by revenue of 26.9 per cent.

Where is 17Live going from here? VTAC disclosed in its circular that 17Live is now investing in “virtual livestreamers” – computer generated characters with human actors behind them. Technological improvements to 17Live’s platform earlier this year helped significantly expand this nascent segment of its business in Q2 2023.

The company is also expanding its footprint in South-east Asia and the United States to build a wider audience for its existing content and acquire more livestreamers.

Sceptical investors

Under the proposed deal, VTAC will initially issue 160.2 million shares at S$5 each to acquire 17Live. It will issue a further 24.4 million shares at S$5 if certain financial targets are met.

This puts the value of 17Live at as much as S$922.9 million (or US$680.6 million).

VTAC said on Nov 21 that it will also issue 600,000 new shares at S$5 each to institutional and accredited investors. VTAC had earlier indicated it would issue some two million shares at S$5 to so-called Pipe (private investment in public equity) investors.

VTAC will also issue nearly 3.8 million bonus shares on a one-for-10 basis to its shareholders and the incoming Pipe investors.

One big question is what proportion of VTAC’s shares will be redeemed by its shareholders. This could have a big impact on the final size of VTAC’s share base; and may significantly reduce the amount of funds available for 17Live to tap – from as much as S$208 million to as little as S$60 million (excluding the Pipe funds).

VTAC currently has 41.6 million shares in issue, of which 29.6 million are in the hands of investors who could potentially redeem their holdings.

Frost & Sullivan said in its valuation letter that 17Live is worth between US$697.2 million and US$750.6 million – with a median valuation of US$723.9 million. It arrived at this range by considering the market valuations of companies in similar fields, and using a discounted cash flow model.

Some analysts are less optimistic about the value of 17Live. Phillip Securities said in a research note on Nov 20 that the live-streaming platform’s fair value is US$641 million, after considering its balance sheet strength and the market valuations of comparable companies.

Research firm Beansprout said in a report dated Nov 19 that 17Live is worth US$460 million, using a discounted cash flow model.

Both research houses recommended investors fully redeem their VTAC shares and sell their VTAC warrants.

Rising profitability

One concern weighing on the market is the seeming absence of growth at 17Live as the Covid-19 pandemic waned last year. For 2022, it reported a 26.9 per cent decline in operating revenue to US$363.7 million.

The slowdown seemed to continue in H1 2023, with operating revenue declining 24.7 per cent to US$151 million. 17Live said monthly active users on its platform more than halved during the period to 550,000.

The good news is that 17Live did not lose its most ardent fans. The proportion of its monthly active users who spent money on its platform increased to 16.1 per cent in H1 2023, from 10.7 per cent in H1 2022. Average revenue per paying user during the period held steady at US$302.

VTAC said in its circular that 17Live also increased contributions from its high-margin in-app games, lowered its channel costs by optimising its payments methods, and cut its server and bandwidth costs with greater efficiency.

This led to gross profit for H1 2023 slipping only 3.7 per cent to US$63.1 million, as its gross profit margin rose more than nine percentage points to 41.8 per cent.

The company also managed to bring its operating costs down by 22.2 per cent in H1 2023 to US$50.1 million, by cutting its marketing expenses during the period.

The result was a surge in operating income in H1 2023 to US$13 million, from US$1.1 million in H1 2022.

Of course, 17Live cannot cost-cut its way back to growth. To justify the valuation at which it is being acquired by VTAC, it needs to maintain this improved profitability while also making headway with its new business initiatives and plans to push into new markets.

If it succeeds in winning over public investors, it might help pave the way for the listing of more tech-enabled, growth-oriented companies in the local market.