(ATF) The shares of Shanghai-listed special cable-maker Sunway have soared for two days after it said it would acquire a majority stake in Chinese TikTok celebrity Luo Yonghao’s livestream start-up at a premium of 28 times.
Shortly after the announcement, Shanghai Stock Exchange issued a letter of inquiry questioning the rationality of the deal.
Sunway, based in Leshan in Sichuan province, announced on Sunday that it plans to pay 589 million yuan (US$89 million) for a 40.27% stake in Chengdu Xingkong Yewang Technology (the company name means “Starry Sky Ambition”).
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The news caused Sunway’s stock price to jump by the exchange-imposed daily limit on both Monday and Tuesday.
While Starry Sky has a book value of 51.9 million yuan, the deal values Luo Yonghao's company way over its listed value.
Starry Sky, which only started business in April, is the operator of famous live-streaming anchor Luo Yonghao’s e-commerce shows.
It gained an unaudited net profit of 40 million yuan in its first five and a half months on revenue of 369 million yuan.
Most of the business’s sales have been driven by Luo, and it has signed several new artists recently, such as actress Stephy Qi, talkshow host Li Dan, and singer Ji Ke Jun Yi.
Sunway said it will acquire stakes in Starry Sky from shareholders Li Jun and Luo Yongxiu, plus those owned by three companies – Aqua Venture, Vvild Technology and Tianjin Meiwei Technology Partnership. Li is Luo Yonghao’s business partner that co-founded Vvild Technology, and Luo Yongxiu is Luo Yonghao’s brother.
Li and Luo Yongxiu will sell their 18.2% and 17.2% holdings for 270 million yuan and 260 million yuan respectively. As part of the deal, they have pledged that Starry Sky Ambition will have a minimum net profit of 5.23 million yuan over four years starting from this year.
Aqua Venture, Vvild Technology, and Meiwei Technology will sell their 2.79%, 1.5%, and 0.57% stakes in Starry Sky, respectively.
As a condition for the acquisition, Sunway’s second largest shareholder Li Guangyuan reached a share transfer agreement with Li Jun, Kong Jianping and Longquan Qianxiu. Li Guangyuan will sell 26 million shares, or a 5% stake in the company, to each of the three respectively.
Kong was formerly co-chairman of Canaan, the Nasdaq-listed bitcoin-mining machine manufacturer. Longquan Qianxiu is a partnership company set up by Li Jun, Luo Yongxiu, and Aqua Venture.
After the deals are completed, Starry Sky will become a subsidiary of Sunway, and Li Jun, Kong Jianping and Longquan Qianxiu will own a combined 15% stake in Sunway.
Stock exchange inquiry
Shortly after the announcement, Shanghai Stock Exchange sent a note of inquiry and asked Sunway to fully demonstrate the rationality of this high-premium acquisition.
“The company has never been engaged in e-commerce related businesses before and does not have any marketing experience, operations experience, talent or resources in that area. Please fully explain whether the company can truly control the company being acquired,” the stock exchange said in its letter.
The Exchange also asked Sunway to fully evaluate the sustainability of Starry Sky’s profitability and risks that may cause fluctuations in its performance.
The stock exchange suspected the share-swapping agreement was done with personal interests of Li Guangyuan, Li Jun and Luo Yongxiu, and said it might “hurt the company’s and small- and medium- investors’ interests”.
Luo, a serial entrepreneur
Luo Yonghao, whom Starry Sky is heavily dependent on, is a 48-year-old serial entrepreneur. He founded several start-ups including a blogging platform, an English training school, the smartphone maker Smartisan and the electronic cigarette company Vvild Technology.
Smartisan, once valued at over 2 billion yuan, failed and was sold to ByteDance. Luo left Smartisan and promised to be responsible for the company’s 600-million-yuan debt. Meanwhile, Vvild’s e-cigarette business never took off after the government’s clampdown on e-cigarette sales to minors.
In April, Luo had his livestream debut on Douyin, the Chinese counterpart of TikTok owned by ByteDance, and quickly became an online celebrity.
His first show generated transactions of 110 million yuan in three hours. Luo now has 14.8 million followers on Douyin and 17.3 million followers on Weibo. Many manufacturers have expressed an interest in working with him.
Luo said on a TV show in September that he had paid off 400 million yuan of debt thanks to income from live-streaming and another businesses he invested in.
Boom in live-streaming stocks
Sunway is not alone in tapping into the live-streaming buzz.
In January this year, Shanghai New Culture Media Group said it signed a Strategic Partnership Framework Agreement with the agency of “Lipstick King” Li Jiaqi. The company’s stock rose by the daily limit for the next four days, and its market cap rose by nearly 2 billion yuan.
In May, Hunan-based home textile maker Mendale signed former singer and “Live-streaming Queen” Viya (also known as “Wei Ya”). Mendale’s stock price soared for eight days after the news was released.
However, not all such deals have turned out well.
Mendale’s net profit decreased almost 70% in the first three quarters of this year. The company disclosed in a filing that it gained sales of merely 8 million yuan on fees of more than 2 million yuan to Viya.
The China Consumers Association says some retailers use livestreaming sales to sell poor-quality, counterfeit or restricted products.
The association looked into infringements of consumer rights by live-streaming programs, and said in a report on its findings that some retailers sell wild animals, fake medicine, or prescription medicine, illegally in live-streaming shows.
With China’s largest shopping event the Singles’ Day coming up, China Consumers Association published an article on its website last week, alerting consumers of poor-quality products, fabricated sales figures and buyer feedback, exaggeration about product benefits, and poor after-sales services from vendors featured by in these shows.