US Stock IPO Outlook | Can Smart Cloud Library, with a mere 3.8% R&D ratio, break through intense competition despite impressive performance?

"Ne Zha 2" has topped the global animated film box office chart and is making a push towards the top five in global film box office. The explosive success of "Ne Zha 2" not only showcases the technical strength of China's animation industry to the world, particularly the stunning visual effects brought about by significant advancements in special effects production and 3D modeling, but also reflects the continuous improvement in the professionalization and standardization of the entire production process of animation in our country.

The strong capabilities of China's animation industry are inseparable from the continuous efforts of companies within the industry, including the recently launched journey to go public in the United States by Shuzhi Yunku. According to Zhitong Finance APP, the visual effects service provider Shuzhi Yunku officially submitted its initial public offering (IPO) application to the SEC on February 21.

According to the prospectus, Shuzhi Yunku is applying to list on NASDAQ under the code "DCR," planning to issue 2 million shares of Class A common stock at a price of $4 to $6 in the IPO, aiming to raise up to $12 million in funds.

In terms of performance, Shuzhi Yunku has achieved high growth. For the fiscal year 2024 (the 12 months ending June 30), Shuzhi Yunku's revenue was $15.8634 million, a year-on-year increase of 186.7%, with a net profit of $1.1931 million, a year-on-year increase of 199%.

Can the impressive Shuzhi Yunku leverage the global wave created by "Ne Zha 2" to achieve a high valuation on NASDAQ? The company's prospectus provides insights into this.

Strong Market Demand Drives Performance Growth, Serving 17 Clients in Fiscal Year 2024

Shuzhi Yunku has not been operating for long; the company was established in 2021 and has been in operation for less than four years. However, it has continuously focused on the field of visual effects production services, and its services now cover the entire visual content production process, from storyboard design and pre-visualization to final production.

In addition to traditional visual content production, Shuzhi Yunku has also expanded into the virtual reality content field to meet the growing demand for immersive experiences. To date, the visual effects production services provided by Shuzhi Yunku have covered multiple fields, including film and television, OTT video, gaming, animation, digital cultural tourism, advertising, and extended reality (XR).

To deliver visually stunning and technologically advanced content, Shuzhi Yunku has independently developed the production management ecosystem DCR Hub, and it has also developed a series of proprietary tools, software, and plugins to enhance production capabilities and workflow management.

At the same time, to optimize production processes and improve overall project efficiency, Shuzhi Yunku has strategically outsourced some work to third-party visual effects producers. This integrated approach ensures seamless execution of projects, meeting the strict requirements of clients.

Since its establishment in 2021, Shuzhi Yunku has served approximately 30 clients, including producers, production managers, and visual effects producers from various fields, with this client group consisting of well-known companies from various sectors, such as Nova Film (诺华视创电影科技股份有限公司) and Xixi Pictures. Shuzhi Yunku has executed multiple projects for these two clients In the fiscal year 2024, Shuzhi Cloud Library achieved impressive results with a revenue growth of 186.7% to USD 15.8634 million and a net profit growth of 199% to USD 1.1931 million, mainly due to the strengthening of market demand. Shuzhi Cloud Library stated that in the fiscal years 2023 and 2024, the company served 16 and 17 clients respectively. Although the number of clients did not show significant growth, the performance improvement was contributed by the further strengthening of the company's cooperation with existing clients, and a large portion of the business was generated from referrals by existing clients.

This indicates that the professionalism of Shuzhi Cloud Library has been recognized by the market, allowing the company to secure more projects from existing clients, and the number of new clients referred by existing clients has also increased. From a profitability perspective, Shuzhi Cloud Library's gross margins for the fiscal years 2023 and 2024 were 14.7% and 16.2% respectively, with corresponding net margins of 7.2% and 7.5%. The profitability is relatively stable, and there has been no situation of expansion through low pricing, which also indirectly verifies the high quality of Shuzhi Cloud Library's rapid growth.

Industry Opportunities and Market Challenges Coexist, R&D Proportion Only 3.8%

The high growth of Shuzhi Cloud Library is directly related to the sustained strong demand in various downstream segments, and the company's future development will continue to benefit from this.

According to the EMR report, the global VFX (Visual Effects) market size was approximately USD 35.59 billion in 2023, and it is expected to continue growing at a compound annual growth rate (CAGR) of 12.9% from 2024 to 2032, reaching a global market size of USD 106.04 billion by 2032, breaking the USD 100 billion mark.

As an important component of the global VFX market, China's VFX market is also expected to achieve sustained growth driven by various segments. According to PwC China's outlook report, the market size of China's OTT streaming video is expected to grow at a CAGR of 7.41% from 2022 to 2027, with China's total box office increasing from USD 4.54 billion in 2022 to USD 13.2 billion in 2027, a compound annual growth rate of 23.77%. At the same time, China's internet advertising reached a scale of USD 94.75 billion in 2022 and is expected to grow at a CAGR of 9% from 2022 to 2027. The continuous expansion of different segments will inject new vitality into the development of China's VFX market.

However, while enjoying the opportunities of industry development, Shuzhi Cloud Library also needs to face challenges. The visual content creation and visual effects industry in China is highly competitive, with leading enterprises occupying advantageous positions in market share and technology levels, often participating in the production of well-known domestic and international blockbusters, possessing high visibility and market influence. Small and medium-sized enterprises face significant competitive pressure and need to find survival space through flexible operational models and in-depth cultivation of niche markets, while international peers from regions such as Hollywood are also actively expanding into the Chinese market, further intensifying market competition.

If Shuzhi Cloud Library wants to continue growing in a technology-driven, highly competitive market, it is essential to keep up with the latest technological trends and continuously increase R&D investment. However, in the fiscal years 2023 and 2024, R&D expenditures accounted for only 2.9% and 3.8% of revenue, respectively, which is relatively low and not conducive to the long-term development of the company's core competitiveness In addition, the customer concentration of Shuzhi Cloud Library is relatively high. In the fiscal year 2023, three customers accounted for 27%, 15%, and 11% of the company's total revenue, totaling 53%. By the fiscal year 2024, five customers accounted for 22%, 13%, 11%, and 11% of the company's total revenue, totaling 57%. Although the customer concentration in fiscal year 2024 has decreased compared to fiscal year 2023, it remains at a relatively high level. If the demand from major customers weakens or they are lost in the future, it may impact the business operations of Shuzhi Cloud Library.

Overall, Shuzhi Cloud Library has achieved high growth in performance based on strong market demand and will continue to benefit from the development of the visual effects industry in the future. However, Shuzhi Cloud Library also faces the challenge of increasing market competition, and issues such as low R&D expenditure and relatively high customer concentration need to be addressed urgently. From the perspective of the capital market, Shuzhi Cloud Library's impressive performance and small market capitalization may trigger speculative trading when it goes public