An Update on 2023H1 Results of Activation Group (9919 HK)
Earnings highlights and commentaries from luxury brands on China
Activation Group (9919 HK) unveiled its first-half financial results for 2023 on August 10th, 2023. In this article, we will provide an overview of Activation's performance during this period and share thoughts on its future prospects.
The Experiential Marketing segment recorded a full recovery, reaching RMB 280 million, surpassing the 2021 H1 level of RMB 276 million.
IP development experienced a substantial increase in segment margin, surging to 52% from the 25.5% recorded in 2021 H1. While this segment contributed only 3.8% of the total revenue in the first half of 2023, the progress is noteworthy.
The employee count decreased to 241, marking a new low since the company's initial public offering in 2019. This reduction is attributed to a decrease in junior headcount within support functions, resulting in lower general and administrative expenses.
The reported net profit margin stood at 10.9%, an improvement over the 9.2% net profit margin observed in the first half of 2021. When adjusted for other income and expenses, the net profit margins for 2021 H1 and 2023 H1 align at 9.7%.
The company declared an interim dividend of HKD 0.02 per share, constituting a 35% payout ratio based on the reported net profit. This is below the historical average but consistent with the company's policy of a minimum 35% payout ratio.
Outlook for 2023
The management maintains a high level of confidence in the outlook for their core business, Experiential Marketing, throughout the remainder of 2023. Their optimism is grounded in the expectation of a busier second half, traditionally contributing 60-70% of annual revenue. While the interim dividend payout ratio currently stands at 35%, the management remains open to the possibility of distributing more earnings as dividends according to a media report (in Chinese). Given the company's track record of offering generous dividends, including special dividends, we are confident in the management's ability to enhance payouts with the release of the annual results.
In addition to cultivating strong partnerships with major international luxury brands for large-scale marketing events, management envisions expanding its market share by taking on more mid-sized projects. It made sense for the company to target larger events initially, as organizing large events require more expertise and therefore have less competition. But as they have become the trusted partner for the luxury brands, management thinks they can better leverage the customer relationships and increase the wallet share among existing customers. In terms of economics, mid-sized projects yield similar gross profit margins as larger ones, although of course larger projects deliver higher profit dollars. The management emphasizes that the company's focus will remain on luxury clients to safeguard the company's overall margin from dilution.
Furthermore, the management identifies growth opportunities in local premium brands such as Arc’teryx (acquired by Chinese sports equipment company Anta Sports (2020 HK)) and URBAN REVIVO. According to management, these local premium brands are intensifying their investments in brand-building through large marketing events. Activation, with its distinguished reputation in the experiential marketing industry in China, is poised to benefit from this trend.
As previously noted in our May update, Activation's IP Development segment holds significant potential, and management expresses optimism in this segment. Anticipated resumptions of Tour de France events in China post-COVID are expected to generate revenue from ticketing, sponsorships, and souvenir sales. Additionally, projects like Shanghai Design Week and the joint venture with Hong Kong Land in Shanghai are sources of excitement for management, with plans to expand their workforce.
Commentary from Major Luxury Brands
Finally, we have summarized key highlights from the first-half earnings reports of major luxury groups, namely LVMH, Hermès and Kerings. All of them observed Chinese consumers' luxury spending surpassing the 2021 levels. Notably, LVMH saw a 40-45% increase in consumption within its Fashion & Leather category by Chinese consumers compared to 2021. Despite the backdrop of a significant economic slowdown and escalating debts in China's property sector, luxury consumption among Chinese consumers continues to flourish. LVMH and Hermès both reported growth in their marketing expenses (Kerings does not disclose its marketing expenses specifically). These findings are encouraging indicators for Activation Group's prospects.
“If we do that, over the semester and despite a fairly slow start in January and to a lesser extent in February, we enjoyed a 40% to 45% increase on a 2-year stack basis of our business with Fashion & Leather. Vuitton is slightly above that and Dior is slightly below that. But all in all, we are very satisfied with the level of business we do with the Chinese client base as it has been up compared to 2021 more than 40%.”
“Watches & Jewelry is no exception to the global trend that has been described before, a little bit under pressure in the U.S. and a very strong performance in Asia and notably with the Chinese customers. They are not growing -- if I take the same measurement, I mean, the 2-year stack basis and the global customer base, Chinese customer base, they don't rise as fast as the number I mentioned before for Fashion & Leather. But we are in between 25% and 30%. So a significant growth anyway with Chinese customers over 2 years.”
Jean-Jacques Guiony, Chief Financial Officer
“This increase in marketing and selling expenses was mainly due to higher communications investments as well as the development of retail networks. Among these marketing and selling expenses, advertising and promotion expenses amounted to 12% of revenue, increasing by 24% on a constant consolidation scope and currency basis.”
2023 H1 Report
“Asia, excluding Japan, plus 28% after a successful Chinese New Year pursuing its strong dynamism in Greater China and in all of the region, namely in Singapore, in Thailand, Australia and Korea. Second quarter benefited from a favorable comparison basis compared to last year as a result of the health measures in China in April and May 2022.”
“In the meantime, well, what can we say, that we've had a very good first half with the basis for comparison which is favorable, in particular for China, which went through health problems last year and organically growth as we had in Q4 in China or for Q2 today for the U.S.A.”
“I'll begin by answering on China, it's fairly straightforward. Growth throughout Asia, excluding Japan, is fairly uniform. On average -- well, the average is very similar in all the countries, very great successes in Mainland China, in Korea, in Singapore. Lots of success in Australia. I'm not trying to brag. We have to remain humble. The world is very unstable. But there is nothing specific to China in this respect if we look at the figures that we've given for Asia.”
Axel Olivier Dumas, Chief Executive Officer
“Sales and administrative expenses represented €1,485 million compared to €1,178 million at the end of June 2022. They include in particular €259 million in communication expenses compared to €196 million in the previous half.”
2023 H1 Report
Moving to Asia Pacific. The region accelerated sequentially, up 22% comparable in the quarter. Greater China was a key driver, up more than 50% with a strong rebound in Mainland China and very high growth in Hong Kong and Macau.
Jean-Marc Duplaix, CFO & Deputy CEO
So just to give you an indication, I think in Q2, roughly 25% of the Chinese spendwas abroad, so not on the domestic market. And compared to '21, so on a 2-year stack, we were up something at group level around mid-single digits, with quite wide, I have to say, performances depending on the brands.
Claire Roblet, Director of Financial Communications & Market Intelligence
Following the challenges posed by the COVID-19 pandemic in 2022, Activation Group exhibited a robust resurgence in the first half of 2023, in line with expectations. The company's primary business segment, Experiential Marketing, has not only rebounded but has exceeded its performance in the first half of 2021. Notably, prominent luxury brands within the Chinese national cluster reported exceptional performance in their first-half results. Activation's management is confidently aiming for a bottom-line figure of RMB 100 million for the entire year. While the interim dividend payout ratio of 35% may seem modest, we anticipate an improvement in the dividend payout ratio upon the release of the 2023 annual results. Our maintained projection is for a total revenue of RMB 1 billion and a 10% net income margin for the full year.
The author of this article owns shares in Activation Group (9919 HK).
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